No One Ever Said Brexit Was Going to Be Easy

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

If you followed some of my posts from two years ago, you might recall that I was in favor of Brexit. I still am. One of British voters’ main grievances was the heavy burden of European Union (EU) regulations, many of which are decided by unelected bureaucrats in Brussels. Altogether, these regulations cost U.K. businesses an estimated 33.3 billion pounds every year. Voters should have the right to decide whether to abide by these rules, which hamper business, or choose a different path.

At the same time, I was realistic about the huge, unprecedented challenges this divorce presented—to the United Kingdom, but also to the EU and its main trading partners. “Global growth is unstable, especially in the EU, and Brexit will only add to the instability,” I wrote. “This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.”

No one said it was going to be easy.

Today was supposed to be the day when U.K. Members of Parliament (MPs) voted on Prime Minister Theresa May’s Brexit deal with the EU, capping off two and a half years since Britons elected to leave the 28-member bloc.

Yesterday, however, May postponed the vote in the face of certain defeat, thanks largely to disagreement over how best to deal with the border between Northern Ireland (part of the U.K.) and the Republic of Ireland (part of the EU).

The British pound sterling promptly lost as much as 1.25 percent against the U.S. dollar, falling to its lowest level in more than a year and a half as foreign investors halted nearly all trading of the currency, according to the Financial Times.

British stocks, as measured by the FTSE 100 Index, extended losses for the fourth time out of the past five trading days. Telescoping their uncertainty of May’s deal, investors sent London-listed stocks plummeting 3.15 percent last Thursday in the worst session since the day after the Brexit referendum in June 2016.

British pound and stocks slipped after delay of Brexit vote
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The question on everyone’s mind is: What happens now? 

Between a Rock and a Hard Place

As I see it, there are three main options: 1) leave the EU without a deal (the “hard” Brexit); 2) halt the entire Brexit process, leaving open the possibility of another referendum; and 3) go back to the drawing board and renegotiate.

By any measure, a hard Brexit would be disastrous. Thomas Verbraken, executive director of risk management research at MSCI, estimates that U.K. stocks could fall as much as 25 percent, European stocks at least 10 percent, if either Parliament rejects the deal or a “disorderly Brexit” is triggered. In such a scenario, according to Morningstar’s Alex Morozov, the British auto industry would fare the worst since its entire supply chain is highly integrated with the EU, including parts manufacturing and vehicle production. U.K. and EU aerospace and defense companies such as Airbus, Rolls-Royce and Meggitt are also highly exposed to Brexit risks.

As for the second option, May has already nixed the idea of bringing a halt to Brexit, even though the European Court of Justice (ECJ) just ruled that the U.K. can “unilaterally withdraw its notification to leave the European Union without the permission of other EU countries,” according to Politico.

May’s job may be in peril because of her handling of Brexit—Jeremy Corbyn, leader of U.K.’s Labour Party, could push for a vote of no confidence at some point—but here I think she made the right decision. The people of the United Kingdom spoke. Even though Britons’ approval of EU leadership has improved since the 2016 referendum, disapproval is still above 50 percent.  

More than half of britons still disapprove of european union leadership
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That brings us to option number three. The problem here is that the nearly-600-page agreement already required a year’s worth of back-and-forth. European Commission President Jean-Claude Juncker made clear today that Brussels will not reopen negotiations. “The deal we have achieved is the best deal possible—it’s the only deal possible,” Juncker said. “So there is no room whatsoever for renegotiation.”

What there is room for, according to Juncker, is clarification and reinterpretation of the deal.

So Where Does This Leave Things?

I don’t believe anyone knows the answer to this question. As of now, the U.K. is scheduled to leave the 28-member bloc on March 29 of next year. I hope that before that time, MPs can be convinced that the package May has delivered is the best possible solution to an impossible situation.

I urge investors to be cautious. Brexit isn’t the only geopolitical risk to stocks right now. Here in the U.S., Democrats will take control of the House in about a month, and although talk of impeaching President Donald Trump is premature, it’s certain we’ll see innumerable new investigations into this administration.

With a new year about to begin, it might be a good time to rebalance your portfolio and make sure you have a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks, mutual funds and ETFs. I also recommend short-term, tax-free municipal bonds, as they’ve performed well even in times of economic pullbacks and bear markets.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

 

A New Wrinkle in the U.S.-China Trade Dispute

Frank in Washington at the Senate Press room

Last week I had the opportunity to attend the Young Presidents Organization (YPO) parliamentary intelligence forum in Washington, D.C. More than 200 members of parliaments from as many as 60 European countries joined us to hear from such dignitaries as Congressmen Robert Pittenger (R-NC) and Mike McCaul (R-TX), chairman of the Homeland Security Committee.

While in D.C., I was very honored to be invited into the epicenter of power and decision-making. That includes the Senate Press Office, pictured above, and the west front of the U.S. Capital facing the National Mall, where every president since Ronald Reagan in 1981 has been inaugurated.

It was there that George H.W. Bush took the oath of office, exactly 200 years after George Washington did. Newly arrived to Texas from Canada, I remember watching Bush’s inauguration on TV and being moved by his testament to freedom: “We know how to secure a more just and prosperous life for man on Earth,” he said, “through free markets, free speech, free elections and the exercise of free will unhampered by the state.”

The memory was made all the most poignant by the flags flying at half-staff, and the fact that I was standing in the same building where, just 24 hours earlier, the former president’s remains lied in state.

Remembering the 41st President

President George HW Bush 1924-2018

The life of George Bush, son of a U.S. senator and father of two governors and a president, stands as a case study in sacrifice and service. On the same day that he graduated from high school in 1942, he enlisted in the United States Navy. The country’s youngest Navy pilot at the time, Bush went on to receive the Distinguished Flying Cross after completing a bombing mission despite his plane being engulfed in flames from Japanese fire.

And from there it only gets more interesting.

Founder of a successful oil and gas company, congressman in the House of Representatives, ambassador to the United Nations, special envoy to the People’s Republic of China (before the U.S. had diplomatic relations with the Asian country), director of the Central Intelligence Agency (CIA), two-term vice president—Bush was and remains to this day perhaps the most qualified and well-equipped chief executive ever to set foot in the Oval Office.

As the 41st president, he oversaw the collapse of the Soviet Union and reunification of Germany, putting him at odds with U.K. Prime Minister Margaret Thatcher and French President Francois Mitterrand, who favored a divided Germany. His decision to push back Iraqi forces from Kuwait, arguably the greatest defining moment of his one-term presidency, was both a military and political success.  

American voters ultimately denied him a second term, however, once they felt his pledge to create “no new taxes” went unfulfilled. As part of a compromise with the Democratic-controlled Congress, Bush agreed to raise taxes to help reduce the national deficit. The episode is a reminder of a time when politicians’ duty to country trumped duty to party, even if it jeopardized reelection.

That deep sense of duty sustained him for the rest of his 94 years. Bush was involved in a number of charities and humanitarian efforts, most notably the Bush Clinton Coastal Recovery Fund. The fund— spearheaded in cooperation with his former political rival and, some might say, unlikely friend Bill Clinton—raised tens of millions of dollars for families impacted by 2005’s Hurricane Katrina.

On behalf of everyone at U.S. Global Investors, I extend my gratitude and sympathy to the Bush family. May George Herbert Walker rest in peace and remain firmly in our memory.

Stocks Hit on Renewed U.S.-China Trade Concerns

On a very different note, global stocks last week plunged on concerns that trade negotiations between the U.S. and China are not running as smoothly as initially thought. The S&P 500 Index is not only having one of its worst quarters in years, but it could also end up in the red for the year for the first time since 2008.

Adding to the uncertainty was news of the arrest in Canada of the chief financial officer (CFO) of Chinese tech giant Huawei. Although no charges have been filed yet, the company has long been investigated by U.S. authorities, and more recently it’s been suspected of violating economic sanctions against Iran. The CFO, Meng Wanzhou, faces extradition to the U.S.

A Huawei smartphone

The name might not be known to most Americans, but Huawei is the world’s second-largest manufacturer of smartphones following Samsung, and the largest supplier of telecommunications equipment. Meng is not only a top executive but also the daughter of the company’s founder, Ren Zhengfei, a former officer in the People’s Liberation Army who has close ties to the Communist Party of China.

Imagine a foreign power arresting the daughter of Steve Jobs, and you might get some idea of how big a deal this is.

President Donald Trump has levied much of his criticism on China for “unfair” trade practices and stealing intellectual property from the U.S. As I told you back in March, China’s J-31 stealth fighter jet is believed to be a knockoff of Lockheed Martin’s F-35. (A 2014 whitepaper on Huawei, in fact, states that the tech firm got its start in 1987 by “reverse-engineering foreign products and using that as the foundation to develop more complex technologies.”) But America’s beef with Huawei, and its Hong Kong-listed rival ZTE, go back further than the start of this administration and rest on suspicions their phones and other telecomm products might be used for espionage.

In 2012, after investigating Huawei and ZTE, the House Permanent Select Committee on Intelligence concluded that the two firms could be seeking to “undermine core U.S. national-security interest.” Committee members recommended that the U.S. block any mergers and acquisitions involving the companies and that all U.S. governmental agencies not use their equipment. Earlier this year, officials with the CIA, National Security Agency (NSA), Federal Bureau of Investigation (FBI) and Defense Intelligence Agency (DIA) testified before the Senate Intelligence Committee that Huawei and ZTE’s phones posed a security risk to American consumers.       

In any case, Meng’s arrest last week rattled investors, convincing many of them that U.S.-China trade talks are deteriorating rather than improving. We saw a knock-on effect among a number of Huawei’s suppliers, including lens-maker Sunny Optical (down almost 5.5 percent last Thursday), data networking firm Inphi (off 9.25 percent) and California-based NeoPhotonics (down more than 16 percent).

U.S. Trade Deficit Just Widened Even More

Speaking of trade, the U.S. deficit with the rest of the world tumbled to a 10-year low in October. According to Zero Hedge, the “trade deficit was $55.5 billion in October (worse than the $55.0 billion expected and well down from the $54.6 billion revised print for September)… underscoring continued fallout from the trade dispute with China.”

As for the U.S.-China trade deficit—the difference between exports and imports—that measure widened to a new all-time low of $43.1 billion in October, down from $40.2 billion a month earlier. The fall in net exports is expected to weigh heavily on fourth-quarter gross domestic product (GDP) growth.

US trade deficit with China fell to a record low in October
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The trade report comes at a time when additional tariffs on goods coming into the U.S. are increasingly to blame for stock volatility this year. A new analysis by Bank of America Merrill Lynch suggests that worries about tariffs have trimmed some 6 percent off domestic stocks in 2018 alone.

What’s more, tariffs could be costing American households more than most realize. Last month a study conducted by consulting firm ImpactECON and commissioned by Koch Industries—an opponent of Trump’s trade policies despite its billionaire chief executive brothers, Charles and David, being top Republican donors—estimated that tariffs would cost each U.S. household nearly $2,400 in 2019, or $915 per person. GDP growth could be reduced 1.78 percent next year, with losses close to $2.8 trillion between now and 2030, if current trade actions were allowed to stay in place, the study says. As many as 2.75 million American workers “are likely to become unemployed” in 2019 “if all trade actions are implemented concurrently.”

Gold Price Rises on Weaker-Than-Expected Jobs Report

Speaking of employment, the U.S. added 155,000 jobs in November, falling far short of expectations. The U.S. dollar pulled back slightly as a result, prompting gold to trade at a five-month high of more than $1,255 per ounce. Earlier in the week, the price of palladium briefly overtook gold’s on tightening supply and increased automobile demand. (The silvery white metal is used to manufacture catalytic converters). But if economic uncertainty continues to weigh on the dollar, we could see gold lift even higher and safely retain its spot as the most valuable precious metal.

Palladium briefly became most precious metal for first time in 16 years
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As I reminder, I recommend that investors maintain a 10 percent exposure to gold in their portfolio—half of that in gold coins, bars and jewelry; the other half in high-quality gold mining stocks, mutual funds and ETFs. Remember to rebalance at least once a year.

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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 09/30/2018: Sunny Optical Technology Group Co.

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

One of the most reliable indicators of an economic slowdown just flashed a warning sign this week. On Monday, the yield curve between the five-year Treasury yield and three-year Treasury yield inverted, or turned negative, for the first time since 2007. What this means is the shorter-maturity bond now pays more than the longer-maturity bond, suggesting investors believe the government is less likely to service the debt it owes in three years than in five years. Such an inversion has historically portended a recession sometime in the next six to 24 months.

Spread Between 5-Year and 3-Year Treasury Yield Turned Negative for First Time Since 2007
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Meanwhile, the more closely watched spread between the 10-year yield and two-year yield, though positive, sat at a lowly 15 basis points on Monday, the flattest it’s been in more than 11 years. All nine recessions since 1955 have been preceded by an inversion of the 10-year and two-year Treasury yields.

I believe the flattening yield curve is just one among a number of signs that we’re entering a more risk-off investing environment (one in which investor appetite for riskier assets, such as stocks, decreases). The recent trade war ceasefire between the U.S. and China is encouraging, but challenges still persist, including rising U.S. interest rates, Brexit, skyrocketing debt and a purchasing manager’s index (PMI) that’s steadily weakened over the past eight months.

All things considered, I think it might be time for investors to consider getting more defensive as we proceed further into the later stages of this business cycle, one of the longest in U.S. history. That means making sure you have exposure to assets that have historically done well during slowdowns in the economy and capital markets. Among my favorite are precious metals, particularly gold, and short-term, tax-free municipal bonds.

Municipal Bonds Have Outperformed Higher-Risk Corporate Bonds

Municipal bonds might have a reputation for being “boring,” but personally I don’t find anything boring about potentially limiting losses in my portfolio. That’s precisely what munis managed to do lately as stocks tumbled, many of them entering correction and even bear market territory. Short-term state and local debt, as measured by the Barclays Capital 3-Year Municipal Bond Index, delivered 0.3 percent in the two months ended November 30, while high-yield and investment-grade corporate debt lost 0.2 percent and 0.4 percent, respectively. Even the riskiest munis gained, according to Bloomberg data, helping investors staunch some of the declines they might have felt in their equity allocation.

Muni Bonds Outperformed Corporate Debt on Stock Volatility
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Speaking of risk, munis have historically had a much lower rate of default than corporate bonds. Between 1986 and 2016, the muni default rate was only 0.04 percent, whereas corporates had one 50 times higher at 2.03 percent, according to Moody’s. On top of that, munis provide income that’s tax-free at the federal and often state levels, unlike corporate securities, which are subject to taxes.

Consider the Near-Term Tax Free Fund (NEARX)

Two months is admittedly a small sample size, so let’s take a longer view of munis’ performance using our Near-Term Tax Free Fund (NEARX). As you can see below, if you had invested $100,000 in NEARX and in an S&P 500 Index fund back in 1999, it would have taken more than 13 years for the S&P fund to catch up to and surpass NEARX.

U.S. Global Investors Near-Term Tax Free Fund vs. S and P 500 Index
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See standardized performance by clicking here.

While the market lost as much as 40 percent on two separate occasions, during the tech bubble and financial crisis, our short-term muni bond fund stayed relatively stable. That’s because munis, unlike stocks, favor safety and liquidity over growth—a strategy I believe investors should really consider now that there are signs of a looming equity slowdown.

I like to call this strategy “no drama” investing.

Even in a rising interest rate environment, I think NEARX can help investors avoid volatility in the stock market. And remember, this allocation should evolve as you age to contain a greater weighting toward bonds and lower weighting toward equities.

Learn more about NEARX and how you might diversify your portfolio with municipal bonds as we approach the late stages of the business cycle.

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment advisor.

Past performance does not guarantee future results.

Bond funds are subject to interest rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

The chart illustrates the performance of a hypothetical $100,000 investment made in the fund during the depicted time frame. Figures include reinvestment of capital gains and dividends, but the perofrmnace does not include the effect of any direct fees described in the fund’s prospectus (e.g. short-term trading fees) which, if applicable, would lower your total returns.

The Barclay’s Capital 3-Year Municipal Bond Index consists of a broad selection of investment grade general obligation and revenue bonds of maturities ranging from one year to four years. The S&P U.S. High Yield Corporate Bond Index is designed to track the performance of U.S. dollar-denominated, high-yield corporate bonds issued by companies whose country of risk use official G-10 currencies, excluding those countries that are members of the United Nations Eastern European Group (EEG). The S&P 500 Investment Grade Corporate Bond Index seeks to measure the performance of U.S. corporate debt issued by constituents in the S&P 500 with an investment-grade rating. The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

The Purchasing Managers' Index (PMI) is an indicator of economic health for manufacturing and service sectors. The purpose of the PMI is to provide information about current business conditions to company decision makers, analysts and purchasing managers.

A basis point is one hundredth of one percent, used chiefly in expressing differences of interest rates.

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

This Holiday Season, Make It Silver and Gold

 

Yesterday evening marked the beginning of Hanukkah. The Jewish festival of lights commemorates the reclamation of the Holy Temple in Jerusalem from the Syrian-Greeks in the second century BCE. According to accounts, after Judah and his forces liberated the temple, he found only one jar of oil, good for a single day’s lighting at the most. Miraculously, though, the oil lasted for an incredible eight days, which is why Hanukkah is celebrated for eight days and nights to this day. To all of my Jewish friends around the world, I wish you a Hanukkah Sameach!

Among many of the holiday’s well-known traditions, at least here in the U.S., is to give children chocolate coins. This arose from the centuries-old practice of parents giving real coins, or Hanukkah gelt, to their kids, who in turn were expected to give them to their teachers.

I believe this is a beautiful custom. Whether you observe Hanukkah, Christmas, Eid al-Fitr, Diwali or any number of other religious holidays around the world, gifting your children and grandchildren coins of precious metals such as gold or silver could be made into a tradition in your own family. I encourage you to see the unique gifts that Kitco Metals offers in both silver and gold.

Holiday Deals at Your Local Coin Dealer

Take a look at silver. The white metal is on sale right now, trading at a little more than $14 an ounce. That’s the most affordable it’s been in three years. Not only does a silver coin cost quite a bit less than, say, a video game, it lasts much, much longer. And unlike a video game, it has the potential to rise in value.   

Silver at Its Most Affordable in Three Years
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Gold is admittedly more expensive, trading just under $1,240 as of today. But there again, if you’re already planning to go all out on gift shopping this holiday season, you might as well make it something that’s truly memorable, holds it value and lasts forever.

It need not be a coin. Pure, 24-karat gold jewelry holds its value just as well as a coin, and it has the added bonus of being wearable. I’ve told you about Menë, the newcomer that aims to disrupt the fine jewelry industry. The Toronto-based company just announced that it surpassed 10,000 orders from customers in more than 50 countries, all less than a year since going public in January 2018. 

Speaking of holding its value, notice how the price of gold has held up well against stock market volatility this year. Gold sentiment among some investors is room temperature right now, but it’s important to put things in perspective. Compared to some popular internet stocks, the metal’s losses have not been nearly as sharp or deep. From its 2018 peak in early April to today, gold has declined around 10 percent. Facebook, meanwhile, has dropped close to 40 percent since its peak at the end of July; Netflix, as much as 36 percent since June.

Gold Has Outperformed FAANG Stocks
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Has the U.S. Dollar Peaked?

With less than a month left to go in 2018, gold is down around 6 percent. If it stays in this range, gold will log its first year of negative returns since 2015. This is largely thanks to the U.S. dollar, which has strengthened on additional interest rate hikes.

Although it’s probably too early to call a peak, there are some indications that the dollar might be set to cool in 2019. This would allow gold, silver and other metals not only to appreciate in price but also potentially outperform stocks.

Among the most compelling signs that the dollar is close to a top comes from Dutch financial services group ING. According to its analysts, the ballooning U.S. twin deficit—which combines the government budget balance and the current account balance—is projected to weaken the U.S. currency as it did in past cycles.

U.S. Dollar Projected to Weaken on Ballooning Deficit
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As I’ve shared with you before, the government is set to run trillion-dollar deficits for the next four years, and this will likely prove to be a heavy burden on the dollar. “Unlike the dollar rally seen in the late-1990s, when a productivity boom helped deliver a budget surplus, this year’s dollar rally has been built on unfunded tax cuts,” ING’s strategists write. The group adds that it “expects funding these deficits to become more difficult.”

ING isn’t alone in its view. Bloomberg Intelligence Commodity Strategist Mike McGlone believes that the “trade-weighted broad dollar is near a peak and silver a bottom… and the potential for mean reversion should outweigh continuing-the-trend risks. Silver, among the most negatively correlated to the dollar and positively to industrial metals, appears ready for a potential longer-term recovery.”

Not One Ivy League Endowment Beat a Simple 60-40 Portfolio Over 10 Years

On a final note, a study last week showed that eight Ivy League endowments were unable to beat the 10-year annualized returns of a simple 60-40 portfolio, with 60 percent in U.S. stocks, 40 percent in bonds.

Markov Processes International (MPI), a quantitative analytics research firm, has been assessing the performance of endowment funds managed by some of the top universities in the U.S. Although all eight funds beat the 60-40 benchmark in fiscal year 2017, none managed to beat it on an annualized basis over the past 10 years. In fact, the 60-40 portfolio—one of the most common asset allocation structures, available to retail investors through a simple S&P 500 Index fund and fixed-income fund—outperformed the bottom university fund, Harvard’s, by 360 basis points.

Ivy League Endowments Were Unable to Beat a Simple 60-40 Portfolio
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The “Ivies” not only lagged the benchmark but were also accompanied by much higher risk. Over the past 10 years, the 60-40 portfolio had a standard deviation of 9.1 percent, whereas the riskier endowment funds had one as high as 13.8 percent (in the case of Yale and Cornell) and 13.6 percent (in the case of Harvard).

The implication, I believe, is you don’t necessarily need access to the fanciest, most sophisticated tools and strategies to maximize your investments. MPI shows that a basic portfolio, composed of high-quality domestic equity funds and short-term Treasury and municipal bond funds—all of which we’re proud to provide, I might add—is suitable for most retail investors seeking attractive risk-adjusted returns.

Curious to learn more? Watch my comprehensive interview with Kitco News’ Daniela Cambone by clicking here!

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Standard deviation is a quantity calculated to indicate the extent of deviation for a group as a whole. A trade-weighted dollar is a measurement of the foreign exchange value of the U.S. dollar compared against certain foreign currencies. A basis point is one hundredth of one percent, used chiefly in expressing different of interest rates.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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 09/30/2018: Mene Inc.

Talking Tech With Pulitzer Prize Nominee Michael Robinson

Michael Robinson, chief technology strategist of Money Map Press, is a lot of things: devoted son and father, technologist, avid skier and gun enthusiast, accomplished blues guitarist, Pulitzer Prize nominee.

Readers of his popular newsletters know him for his mantra, "The road to wealth is paved with tech.” As editor of Strategic Tech Investor, Nova-X Report and Radical Technology Profits, Michael has helped curious investors get in early on small-cap and micro-cap names involved in biotech, defense, cannabis research and more.

I got to see Michael’s presentation at the Black Diamond Investment Conference in October and was impressed by his energy, interesting life story and deep knowledge of niche markets.

Below are snippets from our recent discussion, which touches on topics ranging from trap shooting to cannabis legalization to blockchain technology.

Tell us about your start in military tech and biotech.

I grew up in a military household. My dad was a Marine Corps officer, and later he became the senior military editor at Aviation Week & Space Technology. He was among the earliest to write about the Strategic Defense Initiative (SDI), popularly known as Star Wars. So as a high schooler, I was exposed to all of these exotic defense technologies—materials, sensors, warheads and the like—which really gave me a leg up.

My dad and I ran a high-tech military newsletter in the 1980s. This put me in a position to visit Silicon Valley pretty regularly and talk with scientists and CEOs about cutting edge tech—materials that made battleships and submarines quieter, for example.

As a young auto analyst and reporter, I managed to break some big tech stories because I was willing to look away from the mainstream. The biggest story I did actually led to the firing of two executive vice presidents, which cost the bank close to $80 million. The New York Times and Wall Street Journal ended up having to cover the story, so that helped put me on the map.

I got involved in biotechnology later through my work at what was then the Oakland Tribune. The biotech sector was brand new in the mid-80s, and I was in California where it was all happening. While there, I did a five-part series on Betaseron, the first FDA-approved biotech drug to treat multiple sclerosis (MS).

How did you make the leap to the financial world?

That just felt like the natural next step. Every time I left a Silicon Valley presentation on some new tech, I would think: "That's really cool, but how can you make money off of it?" So even though I consider myself a technologist, I'm always looking at the financial angle.

What’s more, I served on the advisory board of a venture capital company. The experience gave me a different way of evaluating startups than a standard financial analyst, who might be trained only to do ratio analysis and things like that. There's nothing wrong with ratio analysis, but it's not going to give you the kinds of insights and instinct you need to figure out which companies really have it together and which don’t.

You’re known to have a strong interest in guns and shooting. Did that come out of your dad’s military background?

I never really thought of it that way. I just love shooting guns. Mostly these days I shoot trap and skeet. I joined the National Rifle Association (NRA) because I wanted to qualify as a Triple Distinguished Expert in pistols, rifles and shotguns. Shotgun was the most difficult, I thought.

The amount of concentration that's required to shoot at a high level really appeals to me. You have to block out all distractions. In that respect, shooting is a lot like investing. One of the things I remind readers and clients is to separate the signal from the noise. You can't become a good shot if you can't block out all the external distractions and things. Similarly, investors must learn to block out short-term market noise before they pull the trigger, so to speak.

Who would you say are your biggest influences?

Besides my dad, I would have to say the renowned economist Milton Friedman. I had the great pleasure to interview him once for the American Enterprise Institute (AEI). I remember he had a portrait of himself done, but his wife wouldn’t let him hang it up on the wall in their Nob Hill condo. It’s funny—here’s one of the world’s greatest economic thinkers, a Nobel Prize winner, and he had his portrait just sort of propped up in a corner somewhere.

In any case, Friedman was a huge influence on the way that I think about economics. In my freshman year when I was signing on to be an economics major, I remember reading about how iconoclastic he was, how out of step he was with the rest of the economics community, which was very Keynesian at the time. I learned the true value of contrarianism from studying him and looking at things like freedom to choose. Ayn Rand was another huge influence in that respect.

Michigan just voted to legalize recreational cannabis, making it the first Midwest state to do so. Is this a tipping point?

I think the tipping point probably occurred in 2016, when as many as nine states had cannabis legalization on their ballots. That year is also when we launched our investment report, the Roadmap to Marijuana Millions. All 30 of the stocks we recommended made money. The reason I say that is not to brag about our track record, but to point out that we saw large numbers of new investors coming in, willing to take the risk, wanting to be early and understand the industry.

Michigan, for me, was an affirmation of this critical mass. It’s also a reminder of what we need more of to attract institutional investors: initial public offerings (IPOs), mergers and acquisitions (M&As), up-listings to major exchanges.

Obviously the biggest catalyst would be something out of Washington—an effort to reclassify marijuana off of Schedule I, for instance. I would love to see that happen, as would my dad, the Marine Corps officer, but I don’t believe the support is there right now.

You recently argued that blockchain technology should not be used for voting, for reasons involving secrecy and anonymity. In what industries do you see its application making the most sense?

Literally everything. Supply chain management is a huge area that could benefit from blockchain. Look at the oil industry, which still uses this old paper-based system. Companies that have already shown interest in blockchain are British Petroleum (BP) and Royal Dutch Shell, among others.

Counterfeit goods is a problem that runs in the hundreds of billions of dollar every year. Blockchain can help with that. You can use it to tag and identify goods early on, and then they can be tracked with some kind of a distributed ledger.

Or look at financial services. Frank, you’ve pointed out a number of times before that JPMorgan Chase CEO Jamie Dimon has criticized cryptocurrencies, and yet the bank was quietly investing millions upon millions.

Speaking of cryptocurrencies, they’re down significantly this year. Do you think now is a good time to buy, or is more pain ahead?

I fear about jumping in right now. Are we at the bottom of bitcoin? I don't know. One thing I do know is that this crypto selloff may be healthy in the long-term. There’s been an insane number of initial coin offerings (ICOs), which have really hurt bitcoin and Ethereum. We need to sweep out some of the smaller coins because 2,000 cryptos is more than the world can possibly absorb. There has to be a shakeout.

Total currency market capitalization
click to enlarge

You work on several newsletters. Can you describe them for our readers and explain what value they bring?

The main value they bring is making our readers a lot of money. For starters, we have Strategic Tech Investor, which is our free service. The idea is to give investors the rules they need to succeed and not be so emotionally-driven. Because it's free and it's open format, we want to educate investors, and hopefully they'll develop an interest in my investing style and decide to subscribe to one of our paid services.

That brings us to the Nova-X Report and Radical Technology Profits.

Nova-X focuses on mid-cap stocks and the lower end of large-caps. We feel that's a good comfort zone for entry-level investors who are looking for big trends and ways to make money that aren't necessarily household names. We try to get to market early.

Radical Tech is our premium service. It’s designed for much more savvy, much more aggressive people. We swing for the fences more than we do with Nova-X. The focus is on any kind of cutting-edge technology—small-caps and even some micro-caps.

As long as my readers make money, I know I'll do well. I take breaks from time to time, but for the most part I'm up well before dawn screening charts and looking at articles—anything to make our readers as much money as I can.

I want to thank Michael for his time and enthusiasm. Be sure to check out his newsletters!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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 9/30/2018: BP PLC, Royal Dutch Shell PLC.

 

What Thanksgiving Cranberries and Bitcoin Have in Common

What Thanksgiving Cranberries and Bitcoin Have in Common

Football is as much a part of Thanksgiving as turkey and family are, and nearly as old as the holiday itself. It was President Abraham Lincoln who proclaimed Thanksgiving a national holiday in 1863, saying that he hoped all Americans would carve out some time to bless the “widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged.”

In 1876, a little more than a decade after the end of that “civil strife,” students from Yale and Princeton met in Hoboken, New Jersey, to play what is believed to be the first football game held on Thanksgiving Day. Yale ended up besting its fellow Ivy League competitor, two “goals” to zero.

At the time, “football” still more closely resembled rugby than the sport we enjoy today. But a tradition was born. On subsequent Thanksgivings, the Yale-Princeton matchups generated so much cash in ticket sales that they funded the two universities’ athletic programs for the rest of the year.

The model was such a success that the National Football League (NFL) made sure to carry on the tradition upon its founding in 1920. Professional football has been played on Turkey Day ever since, except for those in the years from 1941 to 1945.

Touchdown, Yale vs. Princeton, Thanksgiving Day, Nov. 27, 1890, Yale 32

The Cost of Thanksgiving Just Came Down for the Third Straight Year…

For most families, football comes second to the real Thanksgiving pastime—eating. But unlike ticket prices for an NFL game, which have gone up about 50 percent in the past 10 years, the cost of enjoying a Thanksgiving meal got slightly cheaper in 2018.

to support prices, U.S. cranberry growers withheld as much as 25 percent of their harvest this season

According to the American Farm Bureau Federation (AFBF), the cost of a typical Turkey Day feast for 10 people deflated about $0.22 from last year to $48.90. That’s the third straight year of declines, and the lowest level since 2010.

More affordable energy and an oversupply in the turkey market contributed to lower food prices, as did the trade dispute between the U.S. and China. You would think that tariffs on Chinese products would raise prices, but as the Wall Street Journal explains, “China’s retaliatory moves are having the opposite effect.”

“Tariffs on U.S. agricultural products have dampened Chinese demand, boosting supplies of some staples of the Thanksgiving table,” writes the WSJ’s Justin Lahart. Because of the supply glut, cranberry growers in particular have seen prices fall below the cost of production, estimated at $35 per barrel—which is bad for the farmers, obviously, but good for American consumers. As much as 25 percent of the U.S. supply of cranberries had to be dumped this season in order to support prices.

…But Christmas Continues to See Inflation

Cranberries are one thing, a partridge in a pear tree is another.

Every year for the past 35 years, PNC Financial Services has priced out all the items listed in the holiday song “The 12 Days of Christmas.” The cost of all 364 gifts, from turtle doves to pipers piping, rose 1.2 percent this year to $39,094.93. That’s almost double what the same items cost back in 1984.

cost of all items in the 12 days of christmas rose for 16th straight year
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Interestingly, just as the U.S. Bureau of Labor Statistics excludes food and energy from its “core” consumer price index (CPI) because they tend to be more volatile than the other items, PNC excludes the price of swans from its Christmas index for the very same reason.

The gift that rose the most from Christmas 2017 was the six geese a-laying. They’ll set you back $390 this year, 8.3 percent more than last year.

The gift that fell the most, meanwhile, was the five gold rings. They cost $750, down 9.1 percent from $825 in 2017. That’s good news for jewelers such as newcomer Menè, which prices its merchandise based on the gold and platinum weight value. 

Bitcoin Miners Await a Recovery in Prices

Like the cranberry growers, many bitcoin miners are choosing to limit supply as prices right now are lower than operating costs. Bitcoin fell below $5,000 last Saturday, then below $4,000 on Saturday. These are levels we haven’t seen in over a year. The average cost of mining a single bitcoin, meanwhile, is estimated to be between $6,000 and $7,000, meaning miners are operating at a loss.

The global bitcoin hash rate, therefore, is rolling over as smaller miners shut down rigs and await a recovery in prices. The hash rate, which measures how much power the bitcoin network is consuming, is now at August levels. It’s worth pointing out, though, that the rate is still up sharply this year, even as the world’s largest cryptocurrency has struggled to find the momentum that carried it to nearly $20,000 last December.

bitcoin hash rate is rolling over as smaller miners shut down operations
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This should be good news for the bigger players in the industry, most notably HIVE Blockchain Technologies, since they’ll control a larger share of the market.

HIVE blockchain technologies and leading cryptocurrencies are highlight correlated
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Vancouver-based HIVE, the first publicly listed blockchain infrastructure company, is a pure play blockchain and Ethereum investment for the capital markets. As such, many investors trade HIVE as an easy proxy for those digital coins. In the chart above, you can see that its share price shares a very strong correlation with both bitcoin and Ethereum. For 2018, HIVE had a correlation coefficient of 0.92 with those two coins. A correlation of 1.0 would mean that the two assets trade perfectly in sync. When cryptocurrencies begin to recovery, then, it seems logical to expect that HIVE would follow suit.

For more on blockchain and bitcoin, be sure to subscribe to our award-winning Investor Alert by clicking here!

 

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.

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Effective 8/31/2018, Frank Holmes serves as interim executive chairman of HIVE. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly. Investing in crypto-coins or tokens is highly speculative and the market is largely unregulated.

The Christmas Price Index is a tongue-in-cheek economic indicator, maintained by the U.S. bank PNC Wealth Management, which tracks the cost of the items in the carol "The Twelve Days of Christmas."

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 9/30/2018: Mene Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

 

Freezing Temperatures Could Heat Up Natural Gas Prices

Midterm Elections Gridlock Was the Best Possible Outcome

Here in San Antonio, the temperature hit a bone-chilling low of 27 degrees last Wednesday, breaking a 102-year-old record for mid-November. An out-of-state visitor, Cornerstone Macro’s Head of Portfolio Insights Stephen Gregory, speculated that the Central Texas temperature, ordinarily mild this time of year, was down more than three standard deviations. I didn’t make the calculation, but my guess would be about the same.

With temperatures so low, it’s perhaps no surprise that natural gas had one of its best days in years. Its price popped almost 18 percent last Wednesday—before falling nearly as much on Thursday. The Energy Information Administration (EIA) reported that natural gas storage in the lower 48 states was below the five-year average as of October 31. This, combined with a stronger-than-expected start to winter, prompted traders to push prices to a four-year high of $4.84 per million British thermal units (MBtu). Meanwhile, natural gas futures trading hit an all-time daily volume record of 1.2 million contracts, according to CME Group.

Natural gas prices exploded
click to enlarge

Freezing temperatures increase demand for heating, much of which is provided by natural gas. In January of this year, when temperatures fell below the average in many parts of the U.S., demand reached a single-day record of 150.7 billion cubic feet, according to the EIA. I can’t say we’ll beat this record again in the coming months, but forecasts for more freezing weather this Thanksgiving week and beyond should support additional moves to the upside.

What kind of moves? Says Jacob Meisel, chief weather analyst at Bespoke Weather Services, the price could get to $7 or $8 per MBtus, levels we haven’t seen since 2008. “This looks like a capitulation move today, but if cold weather really takes off, the sky is the limit,” Meisel told CNBC.

Oil Selloff Steepest in Three Years, “Overdone”

Natural gas wasn’t the only commodity that broke records last week. On Tuesday, West Texas Intermediate (WTI) crude oil ended an extraordinary 12 straight days of losses, settling at a 2018 low of $55.69 per barrel, down more than 27 percent from its 2018 high in early October. Triggered by concerns of a global demand slowdown, the plunge is oil’s steepest in three years, and a stunning reversal from last month’s calls for $100-per-barrel crude.

The bears appear to have overreacted, though. “Crude-oil-position liquidations have never been this extreme, indicating the purge in WTI futures is overdone,” writes Business Intelligence strategist Mike McGlone, adding that petroleum markets have “never experienced a comparable decline over a similar period.” 

World Needs the Equivalent of Another Russia’s Worth of Crude

Again, the oil selloff halted last Tuesday, the same day the International Energy Agency (IEA) announced its estimate that U.S. shale will need to add the equivalent of Russia’s entire oil production by 2025 to prevent a global shortage. In its flagship “World Energy Outlook 2018,” the Paris-based group says that world oil consumption will increase significantly in the coming decades due to “rising petrochemicals, trucking and aviation demand.”

“U.S. shale production, which has already been expanding at record pace, would have to add more than 10 million barrels a day from today to 2025, the equivalent of adding another Russia to global supply in seven years—which would be an historically unprecedented feat,” according to the IEA.

Jets fyling high

The U.S. produced 11.7 million barrels of crude per day in the week ended November 9. That means shale producers would need to ramp up output to at least 21 million barrels in seven years, if the IEA’s estimates are accurate.

I think this would be a challenge, but a real possibility. The reason I think this is because the U.S. fracking industry continues to prove it can produce more with less. According to a recent report by the EIA, U.S. crude oil and natural gas production increased in 2017, despite there being fewer wells. This is thanks in large part to horizontal wells, which “contact more reservoir rock and therefore produce greater volumes” of oil and gas. Although more expensive to drill, horizontal wells are growing faster than traditional vertical wells. In 2017 they accounted for 13 percent of total well drills, up from only 10 percent three years earlier.

Also in the IEA’s outlook: By 2040, emerging markets, led by China and India, will account for 40 percent of global energy demand, up from 20 percent in 2000. Below, note how the European Union is expected to be displaced by India and Africa in terms of energy demand within the next couple of decades.

Emerging markets will account for 40 percent of global energy demand by 2040
click to enlarge

I believe only the U.S. fracking industry would be able to meet this demand. Russia and Saudi Arabia are pumping at record levels right now, but production cuts of as much as 1.4 million barrels per day are being discussed among members of the Organization of Petroleum Exporting Countries (OPEC) to firm up prices. If cuts do go into effect, U.S. producers can be expected to fill in the supply gap.

“It can happen but would be a small miracle,” said Fatih Birol, the IEA’s executive director.

U.S. Shale “More Profitable Than Ever”

Normally, ever greater supply would weigh on prices and weaken profitability. Based on new data, it looks as if the U.S. fracking industry has changed the game.

According to Reuters, “U.S. shale firms are more profitable than ever after a strong third quarter,” according to the agency’s analysis of 32 independent producers. “These companies are producing more efficiently, generating more cash flow and consolidating in a wave of mergers.”

Nearly a third of these 32 companies “generates more cash from operations than they spent on drilling and shareholder payouts, a group including Devon Energy, EOG Resources and Continental Resources. A year ago, there were just three companies on that list,” Reuters writes.

Thanksgiving Travel to Hit 13-Year High

On a final but related note, this week is Thanksgiving, the busiest travel season of the year in the U.S. The American Automobile Association (AAA) predicts that the number of travelers on Thanksgiving Day, by auto and air, will top 54.3 million people, an increase of almost 5 percent from last year, and the highest volume since 2005.

Similarly, Airlines for America (A4A) believes U.S. Thanksgiving air travel demand between last Friday and November 27 will climb to an all-time high of 30.6 million passengers. “It is thanks to incredibly accessible and affordable flight options that more travelers than ever before are visiting loved ones, wrapping up year-end business or enjoying a vacation this Thanksgiving,” commented A4A Vice President and Chief Economist John Heimlich.

Thanksgiving 2018 US air travel demand estimated to rise 5 percent from last year
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While I’m on the topic of aviation, A4A also reported that U.S. airport revenues have grown faster than the consumer price index (CPI) as well as the number of air passengers and aircraft departures. From 2000 to 2017, airport revenues rose 87 percent, double the pace of U.S. inflation. Increased growth came thanks to a number of resources, from taxes and fees to the Passenger Facility Charge (PFC) and Airport & Airway Trust Fund (AATF).

US airport revenues have grown faster than flights passengers and inflation
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According to Fitch Ratings, “strong overall performance for U.S. airports should continue undeterred for the foreseeable future.” Over 90 percent of the airports Fitch currently rates have a “Stable Rating Outlook,” signifying continued stability deep into 2019.

Curious to learn more? Explore our latest slideshow, “How Do Airports Make Money?”

 

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

 

Here’s How We Discovered This Disruptive Gold Stock… Before It Went Public

If you’ve run into difficulties lately finding the best gold stocks to invest in, you’re not alone. Sentiment has been down. But there are still some very attractive opportunities out there in the goldfields, one of which I want to share with you.

First, a quick recap: The price of gold tested support of $1,200 an ounce on Monday as the U.S. dollar strengthened to a 16-month high, propelled by expectations of additional interest rate hikes. A stronger greenback, remember, weighs on gold as well as a number of other commodities, including oil, since they’re priced in dollars. I’ve inverted the dollar’s values in the chart below so it’s easier to see this relationship.

A strengthening U.S. Dollar has been a headwind for gold
click to enlarge

Gold miners have felt the pressure, too. In the 12-month period as of November 12, the FTSE Gold Mines Index, which reflects the stock performance of producers from around the world, lost 17.66 percent.

This may have made it challenging for some gold investors to find promising stocks. As such, assets have dropped. Gold and precious metal ETFs in North America saw net outflows of 58 metric tons in 2018 through October 31, according to the World Gold Council (WGC).

But selling now is the wrong move, I believe. Gold stocks appear to be highly undervalued relative to the S&P 500 Index, and a sharp drop in the market could strongly boost demand for the yellow metal. This means it might be time to consider accumulating.

Meet Menē, Gold Jewelry Disruptor

For investors who wish to increase their exposure to gold, I believe our Gold and Precious Metals Fund (USERX) is an attractive option with a history of strong performance. USERX is actively managed, meaning we rely on fundamentals and on cultivating relationships with management teams to decide which companies go in and out of the fund.

One of those companies, the one I hinted at earlier, is a newcomer to the industry—Menē Inc.

You might not have heard the name Menē yet, but you could soon enough, especially if you’re in the market for fine jewelry.

Founded in 2017 by Roy Sebag, co-founder of gold financial services firm Goldmoney, and Diana Widmaier-Picasso, granddaughter of—you guessed it—Pablo Picasso, Menē ’s mission is to disrupt the gold jewelry market by selling directly to the consumer and pricing its merchandise fairly and transparently. Unlike traditional sellers like Tiffany & Co. and Cartier, which sometimes have high premiums, Menē prices its jewelry based on the changing value of gold. It then charges a 15 percent to 20 percent design and production fee on top of that.

What also sets the company apart is that its jewelry—from earrings to necklaces, bracelets to charms—is made of 24-karat gold or platinum. No alloys, no insets of diamonds or other stones. That’s done to help the pieces retain their value over time.

Here at U.S. Global Investors, we believe gold is money and a timeless investment. Menē , which takes its name from the Aramaic word for “money,” has clearly run with that idea, going so far as to trademark the phrase “investment jewelry.”

It’s a business model that seems to have resonated with consumers and investors alike. In its first 10 months of operation, Menē did as much as $7 million in sales in more than 53 countries, as of October 2018.

Active Management Can Help You Invest in Attractive Companies Before the Street Does 

The reason I tell you this is to highlight our potential ability to find and invest in little-known yet promising companies before they become overvalued. In the case of Menē , we managed to get in even earlier, before shares in the company were made available to the public.

Menē went public on the Toronto Stock Exchange (TSX) earlier this month. But thanks to active management and our industry relationships, we were able to buy shares privately seven months ago. So even before its stock was available to retail investors, Menē accounted for 2.46 percent of the Gold and Precious Metals Fund (USERX) as of September 30.

For the one-year, five-year and 10-year periods, USERX beat its benchmark, the FTSE Gold Mines Index, as of September 30, 2018. You can see its performance here.

USERX holds an incredible four-star rating overall from Morningstar as of September 30 in the Equity Precious Metals category. It also holds four stars for the three-year, five-year and 10-year periods, based on risk-adjusted returns.

Learn more by visiting the Gold and Precious Metals Fund (USERX) now!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Total Annualized Returns as 9/30/2018
Fund One-Year Three-Year Five-Year Ten-Year Gross
Expense
Ratio
Gold and Precious Metals Fund -16.56% 11.45% -1.43% -2.83% 1.86%
FTSE Gold Mines Index -21.33% 12.38% -4.34% -5.47% n/a

Expense ratios as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Morningstar Rating

Overall/67
3-Year/67
5-Year/65
10-Year/46

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 9/30/2018

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The FTSE Gold Mines Index encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund as a percentage of net assets as of 9/30/2018: Menē Inc. 2.46%.

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

Midterm Elections: Gridlock Was the Best Possible Outcome

Midterm Elections Gridlock Was the Best Possible Outcome

Celebrated value investor Benjamin Graham, who mentored a young Warren Buffett, liked to say that the market is a voting machine in the short term, a weighing machine in the long term. Last week the market voted to reward stocks in the aftermath of the midterm elections, which gave Democrats control of the House and left the Senate in the hands of Republicans. This all but guarantees that gridlock will be the status quo in Washington, at least for the next two years.

A divided Congress might very well be the only time gridlock is a positive. Corporate gridlock can hold a company back from growing, and there’s not a soul alive who enjoys sitting in bumper-to-bumper traffic. The congestion in Austin, just north of our headquarters, is legendary, costing commuters as much as 43 hours a year. (This congestion could be improved with better infrastructure, which I’ll get to in a second.)

The truth is that markets favor divided government. Both Republican and Democratic presidents have had the greatest effects on stocks when Congress was split and gridlock prevailed, according to Bank of America Merrill Lynch data. Granted, such leadership makeups are rare, occurring for only a combined 11 years in the past 90, so I’ll be curious to see if the trend holds true.

Stock markets have generally thrived under a divided government
click to enlarge

But in the short term, markets showed a lot of enthusiasm. The S&P 500 Index advanced more than 2 percent on Wednesday, marking the best post-midterm rally since 1982. Stocks got slammed only after the Federal Reserve announced more rate hikes were forthcoming.

I want to remind you that we’ve already entered the three most bullish quarters for stocks in the four-year presidential cycle. Average returns in the fourth quarter of year two have historically been 4 percent, followed by 5.2 percent in the first quarter of year three and 3.6 percent in the second quarter.

Record Votes, Record Campaign Spending

Voter turnout was abnormally high for a midterm election. Here in Texas, nearly 53 percent of registered voters cast ballots—a very strong showing thanks in large part to the much-publicized and heavily funded Senate race between Senator Ted Cruz and Congressman Beto O’Rourke.

Indeed, a whole lot of cash passed hands this cycle. For the first time in U.S. history, more than $5 billion was spent during a midterm election by candidates, political parties and other groups, according to the Center for Responsive Politics (CRP). That’s up almost 40 percent from spending levels in 2014. The biggest independent donor was billionaire Sheldon Adelson, founder and CEO of Las Vegas Sands, and wife Miriam, who shelled out more than $113 million in support of Republican candidates.

More than 5 billion was spent on midterm elections far surpassing previous totals
click to enlarge

Because it’s such a massive amount, it might help to put $5.2 billion into perspective. An estimated 113 million Americans participated in the midterm election, a new record, meaning roughly $46 was spent on each voter.

Here’s another way to look at it. Between the House and Senate, 470 seats were up for grabs. That comes out to an incredible $11 million per seat.

Big Winners: Infrastructure and Cannabis

Like every election cycle, this one is sure to have some huge consequences—not least of which is House Democrats’ pledge to turn up the heat on President Donald Trump. Representatives Maxine Waters, Adam Schiff, Elijah Cummings and other staunch critics of the president are expected to lead key oversight and intelligence committees that could open investigations into Trump’s finances and handling of White House personnel changes as soon as this January.

My hope is that Democrats and the president can agree to come together on areas of common interest. That includes infrastructure. Remember the $1 trillion infrastructure plan? Remember “Infrastructure Week”? It’s possible we could finally see a spending bill of some kind, as both the Democrats and Trump support the idea. This would be a massive tailwind for raw materials, commodities and energy.

Materials and construction services stocks—including Vulcan Materials, Martin Marietta Materials, Quanta Services and AECOM—jumped in response to the election outcome.

Can the new congress make infrastructure stocks great again
click to enlarge

As I’ve shared with you before, U.S. infrastructure is badly in need of a spit shine. Last year, the American Society of Civil Engineers (ASCE) gave the country’s roads, bridges and waterways a D+ while noting that there’s a $2 trillion infrastructure funding gap between now and 2025. Because this affects all Americans, it shouldn’t be turned into a partisan issue.

Another winner last week was the U.S. cannabis industry, which is expected to be worth some $75 billion by 2030, according to Cowen & Co. Michigan voted to legalize recreational marijuana, the 10th state to do so, while Missouri and Utah voters approved medical marijuana. Pot stocks, led by Canadian grower and distributor Tilray, surged on the news.

Tilray jumped nearly 6 percent last Tuesday, another 30 percent on Wednesday following the ouster of now-former Attorney General Jeff Sessions. As the head of the Department of Justice, Sessions strongly opposed legalization. Industry advocates hope the next permanent AG will be more open to relaxing federal law.

Oil Notched a 10th Straight Day of Losses

As recently as last month, it didn’t look as if anything could stop oil from heading even higher. Friday, however, marked the 10th straight day of losses for West Texas Intermediate (WTI), as inventories continue to build and the U.S., Russia and Saudi Arabia produce at record or near-record levels.

Oil slipped into bear territory
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Down more than 20 percent from its recent high of $76 in early October, oil was trading below $60 a barrel friday and is now considered to be in a bear market.

Although bad news for producers and refiners, lower oil prices are good for nearly everyone else, including net importer countries and airlines. As I told CNBC Asia’s Akiko Fuijita last week, when oil prices have fallen below their 50- and 200-day moving averages, quant traders especially have poured money into airlines.

Jets fyling high

It’s important to note, too, that demand remains very strong, outpacing capacity growth. According to a report by the International Air Transport Association (IATA) dated October 19, airline passenger load factor climbed to a 28-year high in August. Global load factor, a measure of an airline’s capacity usage, rose to 85.3 percent for the first time since 1990.

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India’s Booming Economy Expected to Firm Up Gold Demand

Gold and Diwali

Starting today, the five-day festival known as Diwali—literally, “a row of lights”—will be observed by millions of Hindus, Sikhs and Jains worldwide. A celebration of good triumphing over evil, the festival typically coincides with the Hindu new year. Regular readers of Frank Talk should know that Diwali is also an auspicious time to buy gold coins and jewelry as gifts for loved ones, and in the past the increased demand has been enough to move gold prices to the upside.

This year, however, demand for coins and jewelry was muted leading up to the fall festival on account of a weaker rupee relative to the U.S. dollar. This made the precious metal less affordable for some buyers. By the end of October, gold prices were at their highest level since September 2013, according to Reuters. Gold ordinarily goes for a premium in anticipation of Diwali, but this year many retailers reported trying to attract customers by offering discounts.

Price of gold surged in India on weaker rupee denting Diwali demand
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And there could be more rupee pain ahead. In a recent note to investors, UBS forecast that the Indian currency will likely remain under pressure as global oil prices stay elevated. India is a net importer of crude oil, which has risen more than 20 percent in the 12-month period, thanks to supply disruptions in Venezuela, Libya and elsewhere.

U.S. sanctions on major oil state Iran—India’s third largest supplier of crude following Iraq and Saudi Arabia—have also lifted prices. Those sanctions went into effect this week.

India’s Economy to Grow Faster Than China’s

Nevertheless, India’s economy is advancing at the world’s fastest pace right now. I believe this should have a positive effect on gold demand in the long term as the size of the country’s middle class expands. The International Monetary Fund (IMF) recently predicted the Indian economy this year to grow 7.3 percent, or 0.7 percentage points over China’s anticipated growth rate and an incredible 2.6 percentage points over emerging and developing economies on average. Next year India is expected to grow even faster, at 7.4 percent.

India projected to be fastest growing economy this year and next
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What’s more, India’s billionaire wealth increased 36 percent in 2017, according to a recent report by UBS. The number of billionaires in India rose by 19 to 119 in total. Again, I expect this to have a noticeable impact on gold demand, the greater this wealth builds.

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