What Brexit Is All About: Taxation Without Representation

Author: Frank Holmes
Date Posted: June 17, 2016 Read time: 47 min

I want to continue the Brexit conversation from last week. With only six days left before U.K. voters head to the polls, expectations of which side might win are beginning to shift toward the "Brexiteers," while betting markets are still putting money on the "stay" campaign

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Eurosceptical Brits are fed up with taxation without representation. Will they prevail in next week's Brexit referendum?

I want to continue the Brexit conversation from last week. With only six days left before U.K. voters head to the polls, expectations of which side might win are beginning to shift toward the “Brexiteers,” while betting markets are still putting money on the “stay” campaign. However, the probability of victory for those who favor keeping their European Union membership has weakened rather remarkably in the last month, falling from over 80 percent in mid-May to around 62 percent today, according to BCA Research.

Probability of a stay Brexit vote outcome
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One of the main grievances is the burden of EU regulations, which are decided by unelected officials in Brussels with little to no cost-benefit analysis. These rules, which regulate everything from the number of hours someone can work (48 hours) to vacuum cleaner power, ultimately stifle growth and innovation.

Consider the so-called FANG stocks—Facebook, Amazon, Netflix and Google. These four tech behemoths, not to mention Apple, rank among the most disruptive, transformative companies the world has ever seen. They also happen to be American. Nothing like them exists in Europe—or, for that matter, anywhere else across the globe.

Where's the European Equivalent of these transformative american companies?

When’s the last time a major scientific or technological breakthrough was made in France? In Germany? Where’s Europe’s answer to Silicon Valley?

It’s not that these countries lack capable thinkers and entrepreneurs. Far from it. Europe was once at the center of everything, from science to music to business. But now that Piketty-style “envy economics” reign supreme in the EU, innovation has increasingly shifted west toward the U.S.

These are the questions and concerns Brexiteers and Eurosceptics are bringing to the fore. And no matter the referendum’s outcome next week, they’re not likely to go away any time soon. In fact, this could very well be the beginning and should serve as a wakeup call to EU policymakers. Just as American colonists protested taxation without representation over 240 years by dumping an entire shipment of English tea into Boston Harbor, many Brits today are staging their own taxpayers’ revolt by demanding control over their own economy, budgeting, immigration policies and more.

This is more broadly a debate over common law (the U.K.) and civil law (the Continent). Under common law, there’s greater protection of wealth and intellectual property. You’re presumed innocent until proven guilty. Why are real estate prices higher in London, New York City and Hong Kong than in Rome, Paris and Berlin? Common law.

I invite you to watch Brexit: The Movie, a Hollywood-caliber documentary that spells out the many reasons why it’s in the U.K.’s best interest to consider leaving the EU. When London financial markets were deregulated in the 1980s under Prime Minister Margaret Thatcher, it led to what is known as the “Big Bang,” named for the skyrocketing growth in market activity, and the same could very well happen to the U.K.’s economy post-Brexi.

The High Cost of Indirect Taxation

The U.K.’s EU club membership, so to speak, varies year-to-year, but it averages between 8 and 10 billion pounds—the equivalent of $11 billion and $14 billion—making the kingdom the third largest net contributor after Germany and France. But the costs don’t stop there. Towering above the contribution to the EU’s budget are costs associated with the bloc’s endless regulations—what I refer to as indirect taxation.

According to Open Europe, a nonpartisan European policy think tank, the top 100 most expensive EU regulations set the U.K. back an annual 33.3 billion pounds, equivalent to $49 billion. This amount exceeds what the U.K. Treasury collects in Council Tax (a tax on domestic property) on an annual basis.

33.3 Billion Annual Cost of the EU's Top 100 Regulations on U.K. Businesses

And remember, that’s just the top 100. The “acquis communautaire,” the EU’s body of rules, directives and regulations, is a mammoth 170,000 pages long. Among the costliest regulations are the Renewable Energy Strategy (4.7 billion pounds a year), the Working Time Directive (4.2 billion a year) and the EU Climate and Energy Package (3.4 billion a year).

Tim Congdon, a prominent British economist and businessman, shows that such regulations—again, passed by unelected officials, similar to agencies here in the U.S.—have been a significant detriment to EU growth. Writing for the pro-leave group Economists for Brexit, he states: “It is obvious that the economies of EU member states are falling behind those of other high-income countries, falling behind consistently, and by a significant amount. Too much regulation must be the main explanation.”

Euro area lags behind other high-income societies
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Of course, these rules won’t disappear overnight if the U.K. chooses to leave. But it would be a step in the right direction toward repatriating a level of autonomy over the country’s own laws.

In the meantime, investors are bracing for the referendum with gold, which has rallied 7 percent this month, breaking above $1,300 an ounce . The yellow metal has historically been favored as a “safe haven” investment during times of political and economic uncertainty. Read my latest gold commentary on Forbes.

And with interest rates at near-zero or negative levels, droves of European fixed-income investors are abandoning government debt for American municipal bonds. The German 10-year government bond yield fell to subzero levels this week for the first time ever, spurring additional European flight into munis, which still offer attractive yields, relatively low volatility and diversification.

Let’s Not Forget to Clean House Here in the U.S.

The EU is hardly the world’s only offender when it comes to passing onerous regulations. The U.S. government continues to add to the already-bloated Federal Registry, which now stands at 80,260 pages as of the end of 2015. That year, federal regulations cost U.S. businesses a staggering $1.885 trillion, or $15,000 per household, according to the Competitiveness Enterprise Institute (CEI). If U.S. regulations were its own economy, in fact, they would be the world’s ninth largest, sandwiched in between India and Russia.

U.S. regulation costs would be the ninth-largest economy in the world
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This is something our next president will have no choice but to address. 2015 was a record year for adding new regulations. We can’t keep going down this path. The problem is that I haven’t seen either Donald Trump or Hillary Clinton make a serious commitment to streamlining rules and laws that affect businesses, especially small to medium-size businesses. According to a 2015 National Small Business Association (NSBA) survey, “regulatory burdens” was near the top of the list of challenges small business owners said threatened growth and the survival of their companies. I’m convinced that the candidate with the strongest economic and deregulatory plan has the best chance at winning the election in November.

Will Wall Street rally behind Donald Trump for President?


For whatever it’s worth, a poll in Institutional Investor found that large-scale investors appear to favor Clinton for president right now by a pretty wide margin. When asked if Wall Street will rally behind Trump, a whopping 84 percent said no.

Happy Father’s Day!

President Richard Nixon with daughters Julie (left) and Tricia in 1969. Father's Day received federal recognition during his administration.

As you’re no doubt aware, Father’s Day is coming up this Sunday. I hope everyone has the opportunity this weekend to spend some quality time with your father(s) and child(ren).

I was interested to read today that the first Father’s Day was celebrated in Spokane, Washington, in 1910—around the same time as the first Mother’s Day. But whereas Mother’s Day received official federal recognition in 1914 under President Woodrow Wilson, it wasn’t until President Richard Nixon’s administration that fathers got their due respect. Before that time, it was even proposed that both Mother’s and Father’s Day be rolled into a single Parents’ Day.

Have a blessed weekend!

What's Gold's Touchdown Pass this Week?

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost -1.06 percent. The S&P 500 Stock Index fell -1.19 percent, while the Nasdaq Composite fell -1.92 percent. The Russell 2000 small capitalization index lost -1.65 percent this week.
  • The Hang Seng Composite lost -3.49 percent this week; while Taiwan was [down -1.69 percent and the KOSPI fell -3.18 percent.
  • The 10-year Treasury bond yield fell 3 points to 1.61 percent.

Domestic Equity Market

S&P 500 Economic Sectors
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  • Telecommunications was the best performing sector for the week, increasing by 1.39 percent versus an overall decrease of -1.17 percent for the S&P 500.
  • Symantec Corp was the best performing stock for the week, increasing 15.43 percent. The company purchased Blue Coat Systems Inc. in a deal that will expand its clientele to 385,000. BTIG raised the rating to buy from neutral.
  • Microsoft announced it would acquire professional networking site LinkedIn for $26.2 billion in the biggest company-for-company tech buy since HP and Compaq merged back in 2001. The deal is expected to see Microsoft and LinkedIn mostly operate as independent entities and is expected to be completed this calendar year.


  • Health care was the worst performing sector for the week, decreasing by -2.08 percent versus an overall decrease of -1.17 percent for the S&P 500.
  • Synchrony Financial was the worst performing stock for the week, falling -16.33 percent. The stock fell after the company announced that it is expecting a 20-30 basis point increase in its net charge-off rate over the next 12 months and is setting aside more money for loan losses.
  • According to Bank of America Merrill Lynch’s latest fund manager survey, the amount of cash being held by those surveyed by the bank is at the highest level in about 15 years (since November 2001). Markets are concerned about the U.K. voting to leave the European Union, China slowing more than official data says, the potential for the Federal Reserve to raise interest rates and/or make a policy mistake, all while labor is beginning to eat into capital’s profits in the U.S.


  • Evidence is materializing that media companies are through the worst. While value has been restored to the S&P movies & entertainment index, consumers continue to demonstrate a healthy appetite for content consumption. Personal spending on recreation and electronics has reaccelerated as a share of total outlays.
  • Many Wall Street analysts are reading Microsoft’s acquisition of LinkedIn as a sign that the technology space could be ready for some serious M&A activity.
  • The latest retail sales report shows that pharmacies are enjoying a boom in top-line growth, while hypermarkets are finally regaining traction.


  • On Monday, the latest poll from The Guardian showed the ‘leave’ camp is up 53-47 on the ‘remain’ camp, bucking conventional wisdom that has long held the ‘remain’ would eventually win the day. A decision to leave the European Union would have a big impact on financial markets.
  • The latest wage tracker from the Atlanta Fed shows that wages are going up. The tracker follows median worker pay in the U.S., which has risen 3.5 percent year-over-year, as of May. Note that the 2.5 percent year-on-year increase in the May jobs report brought average hourly earnings gains for 2016 to a tracking rate of 3.2 percent, not far off the Atlanta Fed’s measure. This latest wage indicator also came after the latest NFIB Small Business Optimism report, which showed optimism in May ticked up slightly to 93.8. More significantly, however, the report shows the labor market continues to be squeezed. This upward pressure on wages could lead to lower margins and profits if companies are unable to pass on wage inflation to the consumer.
  • The current tight correlation between the 2-year Treasury yield, a good proxy of Fed funds rate expectations, and U.S. equities suggests that higher share prices require better economic/profit growth rather than simply a less hawkish Fed. Also, history shows that P/E multiples get squeezed on a sustained basis once monetary conditions tighten courtesy of the Fed. Thus, a sustainable advance in U.S. equities from current levels requires a new profit up-cycle. For this to happen, it is critical for the rest of the world to demonstrate an internal demand impulse. That seems unlikely given present global conditions.

Uncover the Patterns in Commodity Returns

The Economy and Bond Market



  • The May report on retail sales showed they were up 0.5 percent over the prior month, more than the 0.3 percent increase that was expected. The report suggests consumer spending is gaining steam despite the slowdown in job creation.
  • Prices for imported goods rose in May at their fastest pace in over four years, a sign that rising oil prices and the fading strength of the dollar are contributing to firming domestic inflation. This is a welcome sign amid global deflationary pressures.
  • Month-over-month housing starts in the U.S. came in better than expected on Friday, falling only 0.3 percent, better than analysts’ expectations for a drop of 1.9 percent.


  • Industrial production for May came in at negative 0.4 percent, down from prior growth of 0.7 percent and below expectations of negative 0.2 percent. The report highlighted the factory sector’s continued struggles.
  • The U.S. Supreme Court rejected Puerto Rico’s bid to let its public utilities restructure bonds over the objection of creditors, leaving the island’s $70 billion debt crisis squarely in the hands of Congress. The Supreme Court case focused on the federal law that bars Puerto Rico and the District of Columbia from doing what U.S. states are entitled to do: authorize bankruptcy filings by public utilities and other municipalities. Puerto Rico sought to get around that provision in 2014 by passing a local law that offered an option similar to bankruptcy.
  • The Federal Reserve’s specific reference this week to “Brexit” considerations further underscores the recent global angst over the upcoming U.K. referendum.


  • According to BCA Research, following its recent decline, the 10-year U.S. Treasury yield appears to be fairly valued. Accordingly, the group advocates a benchmark duration stance on a 6 to 12-month horizon.
  • While consumer spending contributed only 1.66 percent and 1.29 percent to GDP growth in the fourth quarter 2015 and first quarter 2016, this weakness was driven entirely by spending on goods. Consumer spending on services remained robust. Spending on durable goods, which subtracted 0.09 percent from GDP in the first quarter, is very sensitive to changes in interest rates. The lower Treasury yields of the past few months should lead to a rebound in this segment of GDP.
  • If a "yes" vote for Brexit were to materialize, the ensuing drop in yields could provide an opportunity for a short-term tactical long duration position.


  • The disappointing payroll report is in sync with a number of other measures showing that the U.S. labor market is softening. The share of U.S. workers involuntarily stuck in part-time jobs has risen while the hiring rate has decreased and the rate of people quitting has come off its highs, suggesting workers are becoming less confident about the employment outlook. This is consistent with a decline in online job advertising and waning consumer optimism about the job market outlook. Reflecting these trends, the Fed’s Labor Market Conditions Index has fallen for five straight months. The big risk is that the softening labor market is foreshadowing sharply weaker growth ahead.

U.S. labor market has softened
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  • The yield on the 10-year German bund fell below zero for the first time in history and joined Japan and Switzerland’s in the “negative yield club.” Tuesday’s drop below zero came amid a renewed demand for safety assets as fears of a slowing global economy and the possibility of a British exit from the European Union weigh on investor confidence.
  • The International Energy Agency (IEA) says the oil market will rebalance in the second half of 2016 but will return to surplus in 2017. “At halfway in 2016, the oil market looks to be balancing; but we must not forget that there are large volumes of shut-in production, mainly in Nigeria and Libya, that could return to the market, and the strong start for oil demand growth seen this year might not be maintained," the IEA said.

Gold Market

This week spot gold closed at $1,299.00, up $25.10 per ounce, or 1.97 percent. Gold stocks however, as measured by the NYSE Arca Gold Miners Index, lost 0.87 percent. Junior miners outperformed seniors for the week as the S&P/TSX Venture Index traded off just 0.03 percent. The U.S. Trade-Weighted Dollar Index slipped with a 0.40 percent loss.

Date Event Survey Actual Prior


China Retail Sales YoY





U.S. PPI Final Demand YoY





FOMC Rate Decision (Upper Bound)





Eurozone CPI Core YoY





U.S. Initial Jobless Claims










U.S. Housing Starts





Germany ZEW Survey Current Situation




Germany ZEW Survey Expectations




U.S. Initial Jobless Claims




U.S. New Home Sales




U.S. Durable Goods Orders





  • The best performing precious metal for the week was gold; with a 1.97 percent rise in what was a volatile week of trading. As gold prices head for a third straight weekly gain, reports Bloomberg, at least one measure shows that bullion could have even further to run. Open interest, which is a tally of contracts in Comex futures, reached a one-month high as traders remain bullish.
  • Investors continue to add money to precious metal funds, even as the gold rally shows signs of slowing, reports Bloomberg. Assets in gold-backed ETFs have risen every day in June due to the increased geopolitical stress caused by the U.K. referendum. Similarly, at Sharps Pixley, a gold showroom in London’s Mayfair district, the demand for bullion bars and coins is rising, as investors seek a safe haven metal in case of a British exit from the EU.
  • Gold jumped this week as fewer Federal Reserve officials expect the central bank to hike interest rates more than once this year. According to Bloomberg, projections from the FOMC show the number of officials who see just one increase rose to six from one in the previous forecasting round in March.



  • The worst performing precious metal for the week was platinum; with a loss of 2.18 percent. The platinum price to gold price ratio has hit its lowest point since 1982. Historically, platinum has traded at a premium to gold. While platinum may look like a bargain relative to gold, the future acceptance of electric cars could be a game changer.
  • On Thursday, the British pound erased losses against the U.S. dollar following the killing of a U.K. lawmaker, reports Bloomberg. The tragedy fueled speculation that the nation’s voters will be more likely to favor remaining in the EU in next week’s referendum, continues the article, sending gold down from near two-year highs after it surged post the FOMC meeting.
  • Sabina Gold and Silver Corp. received a report from the Nunavut Impact Review Board (NIRB) this week relating to its Back River Gold Project in Nunavut, Canada. In the report, the NIRB recommended that the project not proceed to the licensing and permitting regulatory phase, noting the need for further consideration concerning caribou and climate change. Sabina’s share price was down 38 percent for the week.


  • On Sunday, George Ogilvie resigned as CEO from Kirkland Lake Gold and won’t stand for election as a director at the company’s annual meeting, reports the Canadian Press. Former CEO of Lake Shore Gold, Anthony Makuch, will step in as CEO. We have great respect for George Ogilvie as he was the catalyst that turned Kirkland Lake around. He accepted the CEO position in November of 2013, and as you can see in the chart below, during Ogilvie’s time at Kirkland, you would have never known this was a gold company that he was managing. Under Ogilvie’s tenure the share price of Kirkland Lake rose 262.46 percent while the S&P/TSX Global Gold Index only gained 41.29 percent. The gains for the index really only came over the last six months when the gold price started to rise. We wish George further successes in his future endeavors.

Big move seen in Kirkland Lake gold stock
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  • Brexit or not, James Steel of HSBC believes that gold can still rise to $1,400 an ounce, Barron’s reports. If Britain chooses to stay, Steel says the precious metal is likely to fall, but to no more than $1,220 an ounce, or a 7 percent downside. And if the Brexit campaign succeeds? According to a Bloomberg survey of 22 traders and analysts, gold prices could rise to the highest in more than two years – potentially reaching $1,350 an ounce within a week of the vote.
  • Under new proposed regulations, India is looking to open up mining of gems and precious metals, reports Bloomberg, in order to cut reliance on imports. Mines Secretary Balvinder Kumar said in an interview that the country is set to auction about 50 blocks for diamond and gold exploration in the fiscal year starting April 1, aided by changes in the national mineral exploration policy to be unveiled by month end. Historically, it has been extremely difficult for any company to move a mining project forward. Rio Tinto Group has been trying to get approvals for its Bunder diamond mine site since 2004. If India’s new mineral policies provide an economic path to production, then watch this space for potential new discoveries in the future.


  • The current ratio between gold and copper is showing a “recession-era fear level,” Bloomberg reports. Gold jumped to the most expensive relative to copper since 2009 this week. The price of copper (seen as an economic bellwether), has slumped over Brexit worries, while the low interest rate outlook has fueled demand for bullion – driving the ratio between the two farther apart
  • India’s monsoon season could be reduced by the receding El Nino, reports Bloomberg Intelligence, leading to a poor harvest in the country, and thus, rising food prices. This could lead the world’s largest consumer of silver, and second largest in gold, to spend more on food this year than jewelry, ultimately undermining demand for precious metals in the country.
  • Jeff Rhodes, CEO of Zee Gold in Dubai, added color to India’s situation this week during an interview on Bloomberg TV. Rhodes said there is no demand for the metal now in India due to the monsoon, adding that kilo bars are even selling at a $30 discount in the country. The price of gold, according to Rhodes, could fall to $1,100 an ounce if the U.K. votes to stay in the EU, but has the potential to climb to $1,600 an ounce if the U.K. leaves.

In the News

June 16, 2016
The Fed Stays Put As Gold Pushes Higher

June 15, 2016
Negative Rates Continue to Be Positive for Gold

June 3, 2016
Frank Holmes: Energy, Gold and Short-Term Debt

Energy and Natural Resources Market


  • The U.S. oil rig count rose for a third consecutive week. The rig count is viewed as a proxy for activity in the sector, and recent strength suggests that market conditions have improved to a level where producing companies are comfortable redeploying cash into exploration and development.
  • The best performing sector for the week was the TSX Capped Metals and Mining Index. The index of base metal mining companies rose 3.9 percent for the week led by a small rebound in copper prices, and positive read-through following takeover speculation of index-leader Turquoise Hill Resources.
  • Turquoise Hill Resources, a Canadian major base metals producer was the best performing stock in the broader natural resource space after rallying 16 percent for the week. The stock rallied on renewed speculation that Rio Tinto may bid for Turquoise Hill in order to consolidate its ownership of the Oyu Tolgoi mine in Mongolia.


  • WTI crude prices dropped 1.9 percent for the week as fears of a “Brexit” event weighed heavily on investors’ minds. The commodity reached a one-month low on Thursday before recovering much of its weekly drop on Friday supported by a weaker dollar.
  • The worst performing sector for the week was the S&P 500 Oil & Gas Refining and Marketing Index. The index dropped 4 percent for the week as oil prices nearing $50 per barrel erode refining margins.
  • The worst performing stock for the week in the S&P Global Natural Resources Index was Petrochina. The Beijing-based integrated oil producer dropped 8.3 percent for the week as data showed China’s oil output dropped the most since 2001 as companies, including Petrochina, struggle to maintain output volumes at current oil prices.


  • The gold bull market is likely just beginning. A recent article by the team at Red Cloud KS shows that the gold price ratio to the S&P 500 Index has started to turn, suggesting that precious metals and related equities may continue to outperform other asset classes. In addition, the current ratio of 0.6 is far below the 1.2 historic average ratio, which suggests that gold is significantly undervalued relative to the overall market.

Gold to S&P ratio since 1990
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  • Global crude oil demand expectations may be understated. The International Energy Agency (IEA) revised its global demand forecast higher for crude oil this year. The agency now expects oil demand globally to grow by 1.3 million barrels per day in 2016, leading to the conclusion that the oil market will reach a supply demand balance in the second half of 2016.
  • China, the world’s top consumer of base metals, will boost stockpiles according to a Bloomberg story. The nation will increase its reserves and study a program for companies to build stockpiles in addition to inventories, resulting in a demand boost for base metals (which have seen weak demand amid a global economic slowdown).


  • China’s growth in fixed asset investment (FAI), a proxy for construction and infrastructure spending, slumped to a 16-year low in May. While government sector spending remained strong, the private sector continues to slow at a worrisome pace, suggesting that the property sector has peaked. China’s infrastructure investment and property sector construction are key demand sources for global commodities.
  • Monetary stimulus in China has stalled. China M2 Money Supply dropped to a growth rate of 11.8 percent, the lowest pace of expansion since the turn of the century. In addition, total social financing, a broader measure of credit availability in the country slumped to RMB 660 billion in May, down 12.1 percent since last month, and down 37.2 percent on a yearly basis. The resulting environment puts huge pressure on small- and medium-sized companies putting a sustained recovery in jeopardy.
  • The divergent paths of gold and copper prices are reminiscent of a recession era. The spread between the prices of the two major commodities reached its highest since 2009, and displays similar characteristics to those seen during the global financial crisis, leading some market commentators to suggest we may be nearing a crisis event.

China Region


  • The Philippine Stock Exchange Index continues to be one of the region’s strongest-performing indices in recent months. The index capped another positive week post-elections and is once again approaching 52-week highs.

Philippine stock exchange index holds up well following elections
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  • TCL Communication Technology Holdings rose some 29 percent this week as TCL Industries Holdings proposed to take the communications company private for 7.5 Hong Kong dollars a share.
  • Continued strength in the Japanese yen may prove useful to Chinese exporters. Yen strength hit a 52-week highs this week, as the dollar-yen cross fell below 104.


  • MSCI announced it would not include China’s A-shares in its global emerging markets index, which, while perhaps short-term negative, had at least been well-telegraphed and may well spur additional and necessary reform in China.
  • Renhe Commercial Holdings was the worst performer in the Hang Seng Composite Index over the last five days, falling nearly 17 percent in that time. S&P Global Ratings continues to assess the company’s leverage and liquidity as the underground mall operator plans a sale of assets.
  • The risk-off surge in the Japanese yen this week dwarfed movement in Asia ex-Japan currencies this week, though the Malaysian ringgit, Korean won and Philippine peso all declined between 0.6 and 0.7 percent over the last five trading days.


  • The $5.5 billion Shanghai Disneyland Resort officially opened its doors to visitors on Thursday. Although Disney holds only a minority position in the park, reports the New York Times, analysts believe the profit potential for the company remains nothing short of spectacular.
  • On Thursday, the State Council of China posted guidelines on its website indicating the nation will increase metals reserves, accelerate the closure of excess capacity and provide tax breaks for producers, reports Bloomberg News. The Asian nation is struggling with a raw-materials glut “amid the slowest growth in decades,” continues the article. “The guidelines have boosted market sentiment,” Li Wei, an analyst with Huatai Futures said. “Increasing stockpiles, especially state reserves, will support prices.”
  • Wealthy Chinese consumers have increasingly turned to Western sports brands like Adidas and Nike, reports Bloomberg, shifting their preference from luxury brands. Catherin Lim, an analyst in Singapore with Bloomberg Intelligence, believes that Chinese consumers concerned about flaunting their lavish spending want to buy products that are obviously expensive, but not excessively glitzy. Last year, sales in Greater China for Adidas grew 38 percent, and Nike sales were strong too—orders are up from September 2015 to April 2016.


  • On Tuesday, index provider MSCI announced its decision not to allow Chinese A-shares into its emerging markets index, reports Reuters, citing the need for Beijing to do more work to liberalize its capital markets. Although markets tumbled following the news, losses were reversed Wednesday as investors shrugged off the decision.
  • According to a survey of Chinese CFOs regarding their expectations for the climate of China moving forward, particularly as the country settles into its “new normal,” or slower growth, many have a pessimistic view of the future. According to the China Business Review, the survey done by Deloitte China, shows that CFOs are less optimistic in the medium to long term, citing further economic turmoil and detrimental governmental policies and regulations as the basis for their outlook.
  • Despite accelerating home sales in China, stocks of developers on the mainland have lagged their counterparts in Hong Kong where prices are going the other way, reports Christopher Langner of Bloomberg News. Even though companies on the mainland are much bigger, shares of the 10 biggest publicly traded Chinese developers by revenue are down, on average 15.8 percent this year. One explanation, in addition to the overall bleak view of China’s economy, points to Chinese developers steadily increasing their amount of debt since given access to local bond markets.

Emerging Europe



  • Romania was the best performing country this week, gaining 1.2 percent. Central Emerging Europe (CEE) countries sold off this week on increasing fear of a Brexit, however Romania managed to outperform. It could be the most resilient country within the CEE during the Brexit, given the powerful fiscal stimulus injected by the government starting last year.
  • The Russian ruble was the best performing currency this week, gaining 50 basis points against the U.S. dollar despite Friday’s announcement that EU sanctions are being extended for another year over Russia’s annexation of the Crimean peninsula. The announcement came one day after the EU Commission President Jean-Claude Juncker met with Russian President Vladimir Putin in St. Petersburg. Brent crude oil declined 2.4 percent and closed below $50 per barrel.
  • The energy sector was the best performing sector among Eastern European markets this week.


  • Greece was the worst performing market this week, losing 5.2 percent. The Athens Stock Exchange sold off at the beginning of the week along with other markets, but gained 5.4 percent on Friday after Eurogroup approved the release of EUR 7.5 billion to Greece. The year-to-date government budget was reported at a surplus of EUR2.3 billion, way ahead of the EUR.8 billion deficit target.
  • The Polish zloty was the worst performing currency this week, losing 1.2 percent against the U.S. dollar. Poland is vulnerable to a U.K. exit, as it may curb the subsidies Warsaw receives from the bloc’s common budget. Also, the vote to leave the eurozone may question the existence of the EU as a whole and lead to a weakening of countries that have not adopted the euro, Erste Bank Group said.
  • The consumer discretionary sector was the worst performing sector among Eastern European markets this week.


  • More than $2 trillion have been wiped from global equities in the past week on speculation that the U.K. will vote to leave the eurozone. The latest polls show the “leave” camp gaining votes but it is still too close to call. Should the U.K. vote to stay in the eurozone, markets will likely rebound sharply.
  • Poland received its first commercial liquefied natural gas from Qatar, and another shipment from Norway is scheduled to arrive in the Polish port on the Baltic Sea later this month. Poland relies on Russian gas for two-thirds of its needs and is seeking to lower prices under a long-term contract with Gazprom that expires in 2022.
  • The pace of Russia’s GDP contractions slowed to 1.2 percent year-over-year in the first quarter of this year, from 3.8 percent year-over-year contraction in the fourth quarter of last year. HSBC’s global research team believes that the recession in the economy appears to be coming to an end; the Russian economy will hit bottom in the second quarter, and annual growth will turn positive in the third quarter.


  • Germany’s 10-year bond yield dropped below zero for the first time as the odds of a U.K. exit from the European Union are increasing, boosting demand for safe havens. Investors who buy and hold the securities until the due date will get back less than what they paid

Germany 10-year yields fall below zero
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  • Raffaella Tenconi from Wood & Company, in her latest publication “CEE macro: preparing for Brexit,” said that if the U.K. exits the eurozone, the EU funds will shrink. On a positive note, Tenconi commented that if Great Britain votes to leave the EU next week it may take a few years to actually accomplish this due to long processes of negotiations. She expects the EU to face the drop in funds from 2021 onward. The U.K. is the third largest net contributor to the EU budget as the chart below illustrates.

Net Contributors to European Union Budget by Country
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  • Sberbank’s CEO Herman Gref, in an interview with Bloomberg, said the Brexit will have a very negative influence on the Russian economy along with the country’s currency, potentially shaving off 1 percent of GDP. Banks’ shares declined about 10 percent during the past week and the announcement of the U.K. leaving the EU could cause an even further decline.

Can you guess which movies feature gold?

Leaders and Laggards


Weekly Performance
Index Close Weekly
DJIA 17,675.16 -190.18 -1.06%
S&P 500 2,071.22 -24.85 -1.19%
S&P Energy 500.82 -0.33 -0.07%
S&P Basic Materials 296.73 -2.48 -0.83%
Nasdaq 4,800.34 -94.21 -1.92%
Russell 2000 1,144.70 -19.23 -1.65%
Hang Seng Composite Index 2,740.40 -99.08 -3.49%
Korean KOSPI Index 1,953.40 -64.23 -3.18%
S&P/TSX Canadian Gold Index 232.21 +0.45 +0.19%
XAU 90.34 -0.05 -0.06%
Gold Futures 1,301.50 +25.60 +2.01%
Oil Futures 48.13 -0.94 -1.92%
Natural Gas Futures 2.64 +0.09 +3.40%
10-Yr Treasury Bond 1.61 -0.03 -1.95%


Monthly Performance
Index Close Monthly
DJIA 17,675.16 +148.54 +0.85%
S&P 500 2,071.22 +23.59 +1.15%
S&P Energy 500.82 +11.61 +2.37%
S&P Basic Materials 296.73 +9.68 +3.37%
Nasdaq 4,800.34 +61.22 +1.29%
Russell 2000 1,144.70 +41.74 +3.78%
Hang Seng Composite Index 2,740.40 +30.65 +1.13%
Korean KOSPI Index 1,953.40 -3.33 -0.17%
S&P/TSX Canadian Gold Index 232.21 +16.77 +7.78%
XAU 90.34 +6.66 +7.96%
Gold Futures 1,301.50 +24.40 +1.91%
Oil Futures 48.13 -0.06 -0.12%
Natural Gas Futures 2.64 +0.64 +32.08%
10-Yr Treasury Bond 1.61 -0.25 -13.26%


Quarterly Performance
Index Close Quarterly
DJIA 17,675.16 +72.86 +0.41%
S&P 500 2,071.22 +21.64 +1.06%
S&P Energy 500.82 +27.47 +5.80%
S&P Basic Materials 296.73 +11.52 +4.04%
Nasdaq 4,800.34 +4.69 +0.10%
Russell 2000 1,144.70 +43.03 +3.91%
Hang Seng Composite Index 2,740.40 -76.89 -2.73%
Korean KOSPI Index 1,953.40 -38.72 -1.94%
S&P/TSX Canadian Gold Index 232.21 +43.43 +23.01%
XAU 90.34 +19.16 +26.92%
Gold Futures 1,301.50 +44.90 +3.57%
Oil Futures 48.13 +8.69 +22.03%
Natural Gas Futures 2.64 +0.74 +38.59%
10-Yr Treasury Bond 1.61 -0.27 -14.14%


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This commentary should not be considered a solicitation or offering of any investment product.

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 03/31/2016:
Kirkland Lake Gold Corp.
Lake Shore Gold Corp.
Apple Inc.
Gazprom PAO
Sberbank of Russia PJSC

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.

S&P 500 Oil and Gas Refining and Marketing Index compares the performance of the component stocks in the oil and gas refining and marketing industry.
The S&P Global Natural Resources Index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across 3 primary commodity-related sectors: Agribusiness, Energy, and Metals & Mining.
M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. S&P/TSX Capped Diversified Metals and Mining Index is an index of companies engaged in diversified production or extraction of metals and minerals .
S&P 500 Movie and Entertainment Index is comprised of stocks in the movie and entertainment subindustry of the S&P 500.
The Federal Reserve Labor Market Conditions Index measures the strength of US job market. The index is derived from 19 labor market indicators, with unemployment rate and private payrolls being the most important. It also includes the labor force participation rate, data on wages, hiring and dismissals. A reading above 0.0 indicates improving labor market activity, below indicates deteriorating activity.
S&P/ TSX Global Gold Index provides an investable index of global gold securities. The Philippine Stock Exchange Composite Index (PSEi) is a major stock market index which tracks the performance of the most representative companies listed on The Philippine Stock Exchange. It is a free-float, capitalization-weighted index .