Holmes

Gold’s golden cross as negative interest rates help boost price

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By Frank Holmes, CEO and Chief Investment Officer for US Global Investors

'Golden Cross' for Gold
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Last Friday, gold experienced a “golden cross,” a technical indicator that occurs when an asset’s 50-day moving average crosses above its 200-day moving average. It’s the first such movement in nearly two years and is a sign that gold might have further to climb.

But there’s more exciting news involving gold. On the same day that New Jersey Governor Chris Christie endorsed Donald Trump for president, the precious metal received its own high-profile endorsement. In a note to investors, Deutsche Bank said it’s time to buy gold, writing: “Buying some gold as ‘insurance’ is warranted.” The bank also stated its opinion that gold “deserves to be trading at elevated levels versus many other assets.”

The metal is already up 15 percent so far in 2016, its best start to the year in decades. But it started 2015 strong too, if you remember, before prices began to collapse in February.

Inflation consumes the return on your five-year Treasury bond.So what’s the difference between then and now?

Gold owes a lot of its success this year to negative real interest rates, something it didn’t have on its side in early 2015. As I’ve mentioned many times before, the metal has historically done well when real rates turned negative (because then you essentially end up paying the government to hold on to your money). To get the real rate, you subtract the consumer price index (CPI), or inflation, from the five-year Treasury yield. If it’s positive, investors will be more likely to put their money in Treasuries, and if it’s negative, they’ll seek out other stores of value—including gold.

In January 2015, the five-year Treasury yield averaged 1.37 percent, while inflation, less food and energy, posted a tepid 0.2 percent. This resulted in an overall real rate of 1.35 percent—a headwind for gold.

But here we are a year later, and real rates have gone subzero. With the five-year yield at 1.51 percent and inflation at a healthy 2.2 percent—its strongest reading since June 2012—real rates have dropped to negative 0.69 percent. This has helped make gold much more attractive to investors. For the month, as of February 24, the precious metal has risen nearly 10 percent.

How Real Interest Rates Drive Gold

There’s another way of looking at inflation, though—the ShadowStats Alternate Consumer Inflation index. For years, economist John Williams’ site ShadowStats.com has reported actual, or “real,” economic data that often tell a very different story from the official government numbers.

Williams argues that at one time, the official CPI was useful in determining changes in consumer prices year-to-year. But government officials continued to tinker with their methodologies, in effect “moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”

Below you can see the actual inflation rate, according to ShadowStats, based on 1980 methodologies. Whereas the official CPI is 2.2 percent, “real” inflation is running closer to 9 percent, adding to gold’s allure.

Official Inflation vs. ShadowStats Inflation
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Oil Rallies Following S&P 500’s Best Week of 2016

Following the S&P 500 Index’s best week of 2016, oil prices are strengthening on news that Russia and Saudi Arabia, the world’s two largest producers, are scheduled to meet next month to discuss possible production cuts. This, along with rising gasoline demand in the U.S., seasonality trends and supply disruptions in Iraq and Nigeria, has helped push both Brent and West Texas Intermediate crude comfortably above $30 per barrel. It was oil’s best week since August 2015.

The rally has given investors renewed confidence in domestic stocks after one of the largest equity selloffs earlier in the year. The correlation between crude and S&P 500 stocks is currently at levels not seen since 1990, according to the Wall Street Journal.

Brent Oil and Domestic Stocks Began to Decouple…But Have Been Trading Closely Together Year-to-Date
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Oil’s gain arrives at a time when President Obama announces plans to impose a $10.25 “fee” on every barrel of crude sold in the U.S. The details are fuzzy at this point, but the revenue would reportedly go toward clean energy initiatives such as electric cars, charging stations, public transit and high-speed rail.

These are all admirable goals, but charging oil companies what’s essentially a tax is the wrong way to go about it. The proposal has already been met with strong criticism from analysts and think tanks, who estimate that, if enacted, it would push up production costs, hurt employment and capital formation and lead to slower growth. The Congressional Research Service (CRS) concludes that oil and gas prices would rise, while the Tax Foundation writes:

[T]he annual level of GDP would be 0.3 percent less than otherwise (an annual loss of $48 billion in terms of the 2015 economy), private business capital stocks (e.g., equipment, structures) would be 0.6 percent lower, and 137,000 full-time jobs would be lost.

Again, affordable and reliable clean energy is a noble pursuit, but in the case of the $10.25 tax, the costs far outweigh the benefits. A much better and possibly more consequential strategy can be found in private sector efforts such as Bill Gates’ recently-founded Breakthrough Energy Coalition. Together with a couple dozen other billionaire businessmen and executives—including Richard Branson, George Soros, Mark Zuckerberg, Amazon CEO Jeff Bezos, Bridgewater Capital founder Ray Dalio and Alibaba CEO Jack Ma—Gates plans to invest billions into clean energy innovations over the next several years.

Cheniere Energy becomes the first-ever U.S. company to export liquified natural gas (LNG).

We’re encouraged by the fact that the U.S. just launched its first-ever shipment of liquefied natural gas (LNG) for export. The LNG, sold by Houston-based Cheniere Energy, left the Sabine Pass terminal in Louisiana last week and headed for market in Brazil.

This historic event confirms the U.S. as a major energy superpower, with the potential to be the world’s top supplier, and it should help support LNG demand around the world. The industry has a bright future.

Trans-Pacific Partnership the Cure for Sagging Global Trade

Here at U.S. Global Investors, we follow government policy closely because it’s a precursor to change. The political party matters little. It’s the policies that have the most significant ramifications, and both major American parties are capable of creating both good and truly awful policies.

Having said that, I might disapprove of Obama’s 10 percent oil tax, but I applaud him for continuing to put his weight behind the ratification of the Trans-Pacific Partnership (TPP). The TPP, as I’ve pointed out numerous times before, would help global trade by eliminating 18,000 tariffs among the 12 participating Pacific Rim countries. Last week the president said he planned to send the agreement to Congress for a vote sometime this year, and when that day comes, I urge our senators and representatives from both sides of the aisle to make the right choice.

Now more than ever, global trade needs a boost. According to the CPB Netherlands Bureau for Economic Policy Analysis, the value of goods traded across the globe, in dollar terms, fell a whopping 13.8 percent in 2015 after falling 2 percent the previous year.

Meanwhile, world trade volumes grew only 2 percent in 2015, the slowest year since the financial crisis, according to a recent report by the Organization for Economic Cooperation and Development (OECD).

Significant Slowdown in Global Trade Growth
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The OECD additionally trimmed its 2016 growth outlook to 3 percent, down 0.3 percentage points from its November projection.

Joining the OECD in downgrading growth projections is the International Monetary Fund (IMF), which lowered its forecast 0.2 percentage points to 3.4 percent. To strengthen growth, G20 countries should “reduce overreliance on monetary policy,” the IMF writes in a report ahead of the meeting among finance ministers and central bank governors in Shanghai past weekend. Further, “credible and well-designed structural reforms” are needed to “lift potential output” and provide some “coordinated demand support.”

I second the IMF’s calls for G20 nations to rebalance their monetary and fiscal policies and to reform rules and regulations that stand in the way of global trade. The TPP, which will involve countries that represent 40 percent of the world’s GDP, is a step in the right direction. But for synchronized growth to be achieved, more will need to be done.

Is this gold surge the real deal?

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 Frank Holmes, CEO and Chief Investment Officer for US Global Investors gives us three reasons why he thinks the current gold price surge is sustainable, and perhaps the start of something bigger.

If you don't own gold, you know neither history nor economics. Ray Dalio. usfunds.com

Gold prices peaked at $1,900 per ounce in September 2011. It was the end of a spectacular, decade-long bull market, during which the precious metal’s value increased a phenomenal 645 percent.

Since then, gold has struggled to regain momentum as an ever-climbing stock market has drawn more and more affection from investors. But after posting three straight years of losses, it looks ready to shake off this trend.

Not only is the metal trading at seven-month highs, it’s also on course for its longest winning streak since the glory days of 2011. What’s more, it’s broken clean through its 200-day moving average, a key indicator of growth.

Breakout! Gold Rallies Above Its 200-Day Average
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In a recent report, HSBC suggests that we could be in the early stages of a new gold bull market, one that will “probably” usher the yellow metal back up to at least $1,500. This “forthcoming market,” says the bank, “has the potential eventually to exceed the speculative frenzy seen in 2011.”

Bold claims indeed, but there are signs that this gold rally is “stickier” than previous ones.

Stocks Are Making Investors Nervous

Historically, gold has had a very low correlation with stocks, meaning that in times of equity pullbacks, the metal has tended to hold its value well.

We’re seeing this unfold right now. While S&P 500 Index stocks have slumped nearly 10 percent so far this year, gold is shining bright at 12.7 percent. Even normally reliable tech stocks, including Netflix, Facebook and Amazon, have disappointed in 2016 so far.  [Ed: Since Frank penned this article, gold has surged further and is currently up around 16% year to date]

In addition, the number of companies trimming or altogether suspending dividends surpassed 2008 levels last year, according to Bloomberg. Nearly 100 more dividends were cut in 2015 than in 2008, suggesting further trouble could be brewing. Goldman Sachs reports that in the last three months alone, at least 20 oil companies have adjusted payouts down as crude prices continue to drag.

Dividend Cuts in 2015 Surpassed 2008
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The same pain is being felt in China, one of the two largest gold markets, alongside India. With the Shanghai Composite Index having lost 46 percent since June 2015, many investors are rotating back into gold.

Global Demand Is Scorching Hot

Speaking of China and gold, 2015 was a red-letter year for demand. Physical delivery from the Shanghai Gold Exchange reached a record 2,596 tonnes, representing more than 90 percent of total global output for the entire year.

Physical Gold Delivered from Shanghai Gold Exchange (SGE) vs. World Mining Output
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The country’s central bank also continues to buy gold at an impressive pace. Kitco News reports that the People’s Bank of China added 16.44 tonnes, or 580,000 ounces, to its official reserves in January as it seeks to support its currency, the renminbi.

In 2015, and so far in 2016, sales of gold coins in both the U.S. and Europe have been nothing short of breathtaking. Sales of American Eagle gold bullion coins reached 124,000 ounces in January, up 53 percent from a year ago. And last year at the Austrian Mint, one of Europe’s largest, consumers bought up 1.75 million coins, four times the volume sold in 2008 before the financial crisis.

I always say to follow the money, and right now American money managers and hedge funds are increasing their bets that gold prices will continue to climb. According to data from the Commodity Futures Trading Commission (CFTC), as of February 2, net long positions on the metal are at a three-month high of 100,566 after rising by 4,821 contracts in only a week’s time. Short bets, on the other hand, declined by 7,412 contracts during the same period.

Negative Interest Rates in the U.S.?

In December, the Federal Reserve bumped up interest rates 0.25 percent, the first time it had done so in nearly a decade. But that doesn’t mean it can’t reverse course, and there’s growing speculation that rates could be dropped below zero into negative territory.

We’ve already seen this occur elsewhere, most notably in Sweden, Switzerland, Denmark and Japan.More than a fifth of global GDP—23.1 percent, to be precise—is now produced in countries governed by a central bank with negative interest rates, according to the Wall Street Journal. In a world where you’re charged interest to put your cash into government bonds, holding gold as a store of value suddenly becomes much more attractive.

I’ve discussed many times in the past that the yellow metal shares an inverse relationship with real interest rates, which is what you get when you subtract inflation from the federal funds rate.

Real Interest Rates and Gold Share an Inverse Relationship
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Negative nominal rates in the U.S. might seem like a far-fetched idea, but the Fed has already hinted that banks should prepare for such monetary policy. (And JP Morgan suggests rates could fall to as low as negative 1.3 percent.) It would be prudent for investors to do the same.

For more, make sure to watch my interview this week with Alix Steel of Bloomberg Television.

10 key statistics for China’s New Year

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Happy Chinese New Year! 2016: Year of the Fire Monkey

For decades now, China has been the leading driver of global growth, consuming unfathomable amounts of raw materials and commodities.

Today, the Asian giant is undergoing dramatic changes, as its government deepens reforms and opens the country’s economy up to foreign investment. The size of its middle class is rapidly expanding in size, giving a huge boost to domestic consumption. And with the creation of the Asian Infrastructure Investment Bank (AIIB) and the renminbi’s inclusion in the International Monetary Fund’s (IMF) reserve currency, China’s role in global financial markets is growing in importance.

No one can deny that challenges lie ahead, but opportunities are still abundant.

With this in mind, I’ve put together 10 figures to know as China enters a new year.

9th

As the ninth animal in China’s 12-zodiac cycle, the monkey is considered confident, curious and a great problem-solver. But 2016 is also the year of the Fire Monkey, which adds a layer of strength and resilience.

2.9 Billion

It’s been called the world’s largest annual human migration. “Chunyun,” or the Spring Festival, refers to the period around the Chinese New Year when people travel by plane, train and automobile to visit friends and family. Between January 21 and March 3, nearly 3 billion trips will be made, exceeding the number of Chinese citizens. Close to 55 million of these trips are expected to be made by air.

Chinese Tourists will take 2.9 billion domestic trips during this year's spring festival - U.S. Global Investors

For the third straight year in 2015, China topped the list of international outbound travelers, with 120 million people heading abroad. Collectively, they spent $194 billion across the world.

6 Million

Not all destinations are within China’s borders, however. According to CTrip, a Chinese online travel service, Spring Festival tourists have booked a record 6 million outbound trips. As many as 100 different countries will be visited, with the farthest region being Antarctica.

180 Tonnes

A shaky stock market, depreciating renminbi and low global prices have spurred many Chinese consumers to turn to gold. Imports of the yellow metal are way up. Last month I wrote that 2015 was a blowout year, with China consuming more than 90 percent of the total annual global output of gold. In December, the country imported 180 tonnes from Switzerland alone, representing an 86 percent increase over December 2014. This news supports the trend we’ve been seeing of gold moving West to East.

The Great Tectonic Shift of Physical Gold From West to East

The precious metal is currently trading at a three-month high.

49.4

For the month of January, the Chinese government purchasing managers’ index (PMI) eased down from 49.7 in December to 49.4 in January, indicating further contraction in the country’s manufacturing sector. The reading remains below its three-month moving average. More easing from China’s central bank, not to mention liberalization of capital controls, could be forthcoming this year to stimulate growth and prop up commodities demand.

Chinese Manufacturing Sector Continues to Shrink
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$6.5 Trillion

Although manufacturing has cooled, domestic consumption in China is following a staggering upward trajectory. In 2015, total retail sales touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.5 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum.

By 2020, Chinese Private Consumption Will have Grown $2.3 Trillion
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109 Million

One of the main reasons for this surge in consumption is the staggering expansion of the country’s middle class. In October, Credit Suisse reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durable and luxury goods, vehicles, air travel, energy and more.

109 Million for the first time, the size of China's middle class has overtake the U.S., 109 million compared to 92 million.

But middle-income families aren’t the only ones growing in number. The World Economic Forum estimates that by 2020, upper-middle-income and affluent households will account for 30 percent of China’s urban households, up from only 7 percent in 2010.

$1.6 Trillion

China's e-commerce consumption Set to Grow Over 160% Between 2015 and 2020

Consumption has also benefited from the emergence of e-commerce. Not only are younger Chinese citizens spending more than ever before, they’re doing it more frequently, as e-commerce allows for convenient around-the-clock spending. Such sales could grow from $0.6 trillion today to a massive $1.6 trillion by 2020.

Mobile payments will continue to play a larger role as well. Purchases made on a smartphone or tablet are expected to make up three quarters of all e-commerce sales by 2020.

24.6 Million

With a population of more than 1.3 billion, China is the world’s largest automobile market. The country certainly retained the title last year, selling 24.6 million vehicles, an increase of 4.7 percent over 2014. The U.S., by comparison, sold 17.2 million. According to China’s Ministry of Public Security, the Asian country added a staggering 33.74 million new drivers last year, which is good news for auto sales going forward.

6.5 Percent to 7 Percent

Many China bears point out that GDP growth in the Asian country has hit a snag. There’s no denying that its economy is in transition, evidenced by the government’s 2016 growth range of between 6.5 and 7 percent, a demotion from 2015’s target of 7 percent. But it’s important to acknowledge that China is still growing at an enviable rate.

Here’s one way to look at it, courtesy of Jim O’Neil, the commercial secretary to the British Treasury and the man who coined the acronym BRIC (Brazil, Russia, India, China). O’Neil calculates that even if China grows “only” 6.5 percent this year, the value is still equivalent to India growing 35 percent or the United Kingdom growing 22 percent.

For this reason and more, China remains a long-term growth story, and “there are many reasons to expect that in 10 or 15 years, China will be a greater, not a lesser, power than it is today,” says Stratfor Global Intelligence.

To all of my friends and readers both here and abroad, I wish you copious amounts of happiness, health and prosperity this Chinese New Year!

 

Gold holding its ground: Frank Holmes’ SWOT analysis for last week

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Strengths

  • The best performing precious metal for the week was spot gold, up 0.84 percent. Gold held its ground, despite a second half of the week surge in the broader equity markets.
  • Gold climbed higher as the week progressed on the back of global market turmoil spurring demand for the safe haven asset, reports Bloomberg. Weaker-than-expected Chinese economic data in December added to market uncertainty, with Citigroup even raising its forecast for gold prices in 2016.
  • Data released from the Russian central bank on Thursday implies that the country added around 208 metric tonnes to its official gold reserves in 2015. This number is 21 percent higher than the 186.6 metric tonnes reported in 2014, according to a Platts news article this week.

Weaknesses

  • The worst performing precious metal for the week was platinum, still up 0.21 percent, but likely weaker due to the slack Chinese data that set the tone for trading action.
  • Greece’s top administrative court announced the annulment of the government’s decision in 2015 to revoke Eldorado Gold’s mining license. Although this news is positive for Eldorado, the root of the issue still exists. It seems the real problem here is the Greek’s belief that they own the land where the mining project is planned, along with all the gold in it, and they don’t seem keen on letting a private company exploit the state’s assets.
  • A prolonged gold slump has forced Barrick Gold Corp. to revise its price assumptions for 2016, Bloomberg reports. The company announced it may book as much as $3 billion in impairment charges, though this should come as no surprise during a challenging commodity market. In contrast to this news, Barrick became Canada’s most valuable gold miner last week for the first time in 19 months, and taking the mantle from Goldcorp as their largest gold company by market capitalization.

Opportunities

  • As a supply crunch takes hold this year, we could see the price of gold rise substantially. Thomson Reuters reports that global gold production is expected to fall 3 percent in 2016. This would end a seven-year streak of rising gold supplies (which peaked in 2015 at 3,155 tonnes), according to a Business Insider article.
  • Citigroup has raised their gold price forecast to $1,070 per ounce for 2016, up 7.5 percent, according to a January 19 report from the group. Citi analysts cite “ongoing global macro concerns” lending support this quarter, along with a “modestly more benign U.S. dollar outlook.”
  • Canadian gold companies (that have labor costs in Canadian dollars and revenue in U.S. dollars) should profit from the rising U.S. dollar, according to a Bloomberg interview with 1832 Asset Management’s Robert Cohen. Canadian-based gold companies like Claude Resources, Richmont and Agnico Eagle are performing well during this gold bear market.

Threats

  • Last year marked the fifth consecutive year of negative returns and underperformance for gold stocks versus the S&P, reports Goldman Sachs. Gold miners (GDX) were down 25 percent in 2015. Goldman doesn’t expect any positive catalysts for gold over the next 12 months, but says one key indicator will be the Federal Reserve’s pace of future rate hikes.
  • Wal-Mart finished 2015 down 30 percent, yet another sign of U.S. economy weakness. The store recently announced 269 store closures, with at least 10,000 employees being laid off. ZeroHedge uses Wal-Mart’s woes as evidence of the U.S. being “at the center of the global economic meltdown” – this might be a good time to own gold.
  • Price action in the North American gold stocks lagged behind the performance of bullion most of the past week.  It was as if someone was forced to exit their gold equity exposure (or a large player was overcome with frustration and told the street to just get them out of their position now), as gold stocks started the year strong but are now losing momentum.  Sales desk noted that Canadian generalists were seeing a pickup in shareholder redemptions.

Frank Holes is CEO and Chief Investment Officer for U.S. Global Investors

Gold: getting back into the groove?

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By Frank Holmes, CEO and Chief Investment Officer, US Global Investors

Gold begins 2016 with the right moves

Who says gold lost its appeal as a safe haven asset?

After five straight positive trading sessions last week, the yellow metal climbed above $1,100, its highest level in nine weeks, on a weaker U.S. dollar.. The rally proves that gold still retains its status as a safe haven among investors, who were motivated by a rocky Chinese stock market, North Korea’s announcement that it detonated a hydrogen bomb last Wednesday and rising tensions between Saudi Arabia and Iran.

Here in the U.S., gold finished 2015 down 10.42 percent, its third straight negative year. Until the new year, sentiment appeared poor, and many gold bulls were finding it hard to stay optimistic.

But after the price jump last week, large exchange-traded gold funds saw massive inflows, confirming a shift in investors’ attitude toward the precious metal.

It’s worth remembering that about 90 percent of physical demand comes from outside the U.S., mostly in emerging markets such as China and India. In many non-dollar economies, buyers are actually seeing either a steady or even rising gold price. The metal is up in Russia, Peru, South Africa, Canada, Mexico, Brazil and many more.

Note the differences in returns between gold priced in U.S. dollars and gold priced in the Brazilian real, Turkish lira, Canadian dollar, Russian ruble and Indonesian rupiah.

In 2015, Gold Performed Better in Non-Dollar Currencies
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Gold demand in China was very robust last year. A record 2,596.4 tonnes of the yellow metal, or a whopping 80 percent of total global output for 2015, were withdrawn from the Shanghai Gold Exchange. As for the Chinese central bank, it reported adding 19 more tonnes in December, bringing the total to over 1,762 tonnes. Precious metals commentator Lawrie Williams points out, though, that China’s total reserve figure is widely believed to be “hugely understated,” meaning the central bank might very well have much more than we’re being told.

Forget Interest Rates—Real Rates Are the Key Drivers of Gold

Despite all the talk of rising interest rates in connection to gold, they’re not a dominant driver of prices. Sure, rising nominal rates have tended to make the metal less attractive, since it doesn’t pay an income, but the larger driver by far are real interest rates. When real rates drop into negative territory, gold has historically done well.

As a reminder, real rates, important for the Fear Trade, are what you get when you subtract the consumer price index (CPI), or inflation, from the 10-year Treasury yield. As of January 6, the 10-year yield was 2.18 percent, while the 12-month CPI for November—December data will be released later this month—came in at a barely-there 0.50 percent. Real rates, therefore, are running at a positive 1.68 percent, which is a headwind for gold.

That’s why we need inflation to pick up, because then gold would be more likely to rally.

Regardless, the World Gold Council (WGC) writes in its 2016 outlook that gold’s role as a diversifier remains “particularly relevant”:

Research shows that, over the long run, holding 2 percent to 10 percent of an investor’s portfolio in gold can improve portfolio performance.

The reason for this is that gold has tended to have a low correlation to many other asset classes, making it a valuable diversifier. During economic contractions, for example, gold’s correlation to stocks actually decreased, according to data between 1987 and 2015.

Since 1987, Gold Has Had a Low Correlation to Other Assets
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For the last three years, gold has disappointed many because other investments, specifically equities, have seen such huge gains. But with global markets hitting turbulence, the yellow metal is looking more attractive as insurance against the currency wars.

I always recommend 10 percent in gold: 5 percent in gold stocks or an actively-managed gold fund, 5 percent in bullion and/or jewelry. It’s also important to rebalance every year.

This should be the case in both good times and bad, whether gold is rising or falling. As highly influential investment expert Ray Dalio said last year: “If you don’t own gold, you know neither history nor economics.”

USGI Among the First to Discuss the Significance of PMI as a Forward-Looking Indicator

Aside from real interest rates, gold prices are being challenged by weak manufacturing data around the world. China’s purchasing managers’ index (PMI) fell to 48.2 last month, down 0.4 points from the November reading. The Asian giant’s manufacturing sector spent a majority of 2015 in contraction mode, managing to rise above the key 50.0 level only once last year, in February.

China Manufacturing Still in Contraction Mode
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Although fears of a Chinese slowdown are real, they’re largely overdone. Consulting firm McKinsey & Company’s Gordon Orr calls these fears a distraction, writing that “the country’s economy is still massive—as are its potentional opportunities.”

Something to keep in mind is that China recently approved a new five-year plan, its 13th since 1953. Although we won’t know exactly what’s in it until March, we do know that these plans have been good for economic growth in the past. It’s likely that interest rates will be trimmed even more to stimulate business, with more funding diverted to infrastructure and “green” initiatives.

Manufacturing around the world showed signs of deterioration in December as well. The JP Morgan Global Manufacturing PMI declined to 50.9 from 51.2 in November. The sector is still in expansion mode, but just barely.

Global Manufacturing Cools in December
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The reading also fell below its three-month moving average in December, which, as I’ve shown many times before, can have a huge effect on materials and energy three to six months out.

We were one of the earliest investment firms to monitor this important economic indicator closely and bring it into public, everyday discourse. (From what I can find, the first time we wrote about it was inJanuary 2009, as it applied—wouldn’t you know?—to China.) Today, I hear and read about the PMI on the radio and in newspapers as often as I do more common economic indicators such as GDP and unemployment rates.

That’s a testament to the sort of cutting-edge analysis we do and pride ourselves on here at U.S. Global Investors.

Looking Ahead in the New Year

Until we see global synchronized growth with rising PMIs, we remain cautious going forward. A constant source of hope is the Trans-Pacific Partnership (TPP), which, when ratified sometime this year, will eliminate 18,000 tariffs for 25 percent of global trade.

We also anticipate more stimulus programs this year around the world. Lately we’ve experienced strong fiscal drag as more and more regulations and taxes impede progress that not even cheap money has been able to offset. A 2014 report by the National Association of Manufacturers (NAM) revealed that federal regulations in the U.S. alone cost businesses more than $2 trillion a year. To ignite growth, G20 nations should commit themselves to cutting red tape.

Burdensome regulations around the globe have led to massive fiscal drag

A good model for such a task is Canada’s “One-for-One Rule,” introduced in April 2012 during former Prime Minister Stephen Harper’s administration. The rule mandates that when a new or amended regulation is introduced, another must be removed.

However it’s accomplished, regulatory burdens placed on businesses must be reduced.

For more in-depth analysis, consider subscribing to our award-winning newsletter, the Investor Alert.

The Holmes Gold SWOT: Safe haven assets being sought out

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Frank Holmes of US Global Investors‘ latest Gold SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis for last week

Strengths

  • Gold opened the year with very a strong gain, climbing 4.02 percent, as rising sectarian tension between Saudi Arabia and Iran ratcheted up; North Korea announced the testing of its first hydrogen bomb; and twice on separate trading days, Chinese markets fell 7 percent, the maximum amount Chinese authorities allowed them to decline.  This sent shock waves through financial markets leading investors to seek out safe haven assets once again. In 2015 gold fell 10 percent, putting in three consecutive years of negative returns, its longest losing streak since 2000. Billionaire George Soros reiterated the precious metals’ status on Thursday by stating, “Global markets are facing a crisis and investors need to be very cautious.”
  • This week ZeroHedge pointed out a move in gold that many sell-side experts previously warned would never be able to happen again. On Thursday the publication shared a chart showing the precious metal finally broke out above the $1,100 resistance level, an encouraging sign going against a deluge of predictions calling for nothing but lower gold prices.
  • U.S. imports of gold jewelry rose to a seven-year high in October of last year, while platinum jewelry surged by more than 60 percent after precious metals prices dropped to multi-year lows, according to calculations from Thomson Reuters.

Weaknesses

  • The worst performing precious metal for the week was palladium, falling 12.11 percent, likely on weak manufacturing data out of China and its prospects for car sales to grow at a slower rate.
  • In Paradigm Capital’s 2016 Gold Sector Outlook, the group reviews 2015 share price performance by tiers – developers, seniors, and royalty companies.  They noted the “biggest surprise” came from the royalty companies. The report states that royalties didn’t have the best 2015, going on to explain that the recent poor performance has only happened during three out of the last 12 years. 
  • Top gold forecaster Bernard Dahdah, of French investment and bullion bank Natixis, predicts that the yellow metal will drop through $1,000 per ounce in the first three months of 2016, according to an article on BullionVault. He states the move will primarily be driven by the “expected path of interest rate hikes” from the Federal Reserve, and even believes the price could gradually decline to end 2016 at $950 per ounce.

Opportunities

  • According to HSBC’s analysis of the Federal Open Market Committee’s (FOMC’s) minutes, the median Fed projections show total PCE inflation and core PCE inflation expected to rise to 1.6 percent by the end of the year. The FOMC inflation target is at 2 percent, as seen in the chart below. The Globe and Mail outlines four specific investment regimes defined by growth and inflation: 1) In high growth and high inflation, real estate and resources do best, 2) In high growth and low inflation, growth stocks outperform, 3) In low growth and low inflation bonds shine, and 4) In low growth and high inflation most stocks underperform, but gold does best!  With so many central banks targeting higher inflation, to deflate their debts, be careful what you ask for.
  • Looking back on their 2015 strategy, UBS says last year’s rise in volatility was just the beginning of a dramatic rise in cross-asset volatility. In the group’s macro-view this week, UBS stated that the large cap-driven U.S. indices, as well as Japan and European small and mid-caps, are “the last men standing” at 2015’s close. In 2016 UBS expects these markets to top out also, falling into a full-size bear market which, worst-case-scenario, would last into early 2017. UBS noted with equities predicted to roll over, investors should consider owning gold for better diversification.
  • Over the past two years, nearly 50 percent of global gold demand has come from Chinese and Indian markets – with particular buying strength on dips in the renminbi or the rupee, according to RBC Capital Markets. The group continues to look to increasing global market volatility to allow gold to regain its safe haven status. In addition, lack of exploration and capital investment spending should lead to a reduced supply.

Threats

  • This year began with a rocky start, points out BMO Private Bank, as Chinese policymakers struggled to stabilize the Shanghai Composite after disappointing manufacturing data showed economic contraction in China. According the BMO’s current market update, as we move further into 2016 “investors increasingly believe that central bank ‘puts’,” are not as effective as they once were.
  • ZeroHedge points out that 2016 marks a presidential election year (which usually have a bullish track record), but also marks the eighth year of president Obama’s term. A closer look at this cycle shows a divergence between a normal election year and the eighth year of a term – since 1920 (more or less) all eighth years of a term were amongst the worst for market performance.
  • Julien Garran of MacroStrategy Partnership believes that deteriorating private debt conditions, tightening liquidity, declining returns and slowing growth have now entered a “self-reinforcing cycle in the U.S.” As credit and returns deteriorate, Garran says corporates will no longer be able to justify gearing up to do buybacks. In 2013, 60 percent of Garran’s sample could justify buybacks, and now only 35 percent make the grade.

Number of Bearish SPDR Gold Shares Options Fall

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Frank Holmes of US Global Investors‘ latest SWOT analysis for gold

Strengths

  • The best-performing precious metal this week was platinum, climbing 3.03 percent.  Absent any real market moving news, the lift was likely from short covering as platinum prices have been off as much as 30 percent this year.
  • After the losses seen in gold following the Federal Reserve’s rate hike last week, Bloomberg reports that some traders closed their bearish positions on the metal before year-end on speculation that physical purchases may pick up. Further, Bloomberg notes that the put-to-call ratio on SPDR Gold Shares has reached its lowest level since 2008, perhaps indicating that investors who were betting on further declines in gold prices are losing enthusiasm for this trade. Hedge funds reduced bets for a third week that the dollar would advance, according to Bloomberg. The currency is headed for its biggest monthly decline since April. According to Shane Oliver of AMP Capital Investors: “The bet is over for the U.S. dollar.”

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  • Finland’s foreign minister, Timo Soini, announced that his country should never have joined the euro, according to a Brown Brothers Harriman report. Soini announced during a press conference that Finland could have weakened its currency had it not adopted the euro, adding that organizing a referendum on the currency means that the debate “will gather steam.”

Weaknesses

  • The worst-performing precious metal this week was palladium, recording just a 0.09 percent gain. Bloomberg noted that car sales in China, which rebounded in October due to a tax cut, have not led to any price strength in palladium.
  • Three months after announcing its interest in redeveloping a gold mine in Ghana, Randgold Resources has pulled out of the Obuasi plan. Following the completion of a due diligence exercise into the mine, the company decided not to go through with its planned joint venture with South African firm AngloGold Ashanti. Randgold determined that the development plan doesn’t satisfy its internal investment requirements.
  • Yamana Gold announced its decision to suspend the monetization of its Brio Gold subsidy, based on the context of current market conditions. In November, Yamana had announced it commenced a private placement of Brio common shares, according to a Canaccord Genuity report, which consisted of a primary offering by Brio and a secondary offering by Yamana. Cannacord’s valuation assessment of Yamana’s suspension reasons that “the lower multiple reflects the inability to conclude the monetization of Brio Gold.”

Opportunities

  • The mine supply issue is coming to a head, according to Credit Suisse’s 2015 Year-End Preview report. Reserve life has fallen from 14 to 10 years since 2011, and grades processed are 9 percent above reserve grade in 2015. The report continues by noting that gold is positioned to outperform the commodity complex next year as two more Fed hikes are priced in, physical demand should continue to be a source of strength and central banks will continue buying.
  • HSBC Research says there are two catalysts for gains in platinum in 2016, after touching seven-year lows: improved automobile and investment demand. Both platinum and palladium should benefit from limited supply growth and a weaker U.S. dollar, according to HSBC’s report, as ample stockpiles may curb rallies.
  • Both Scotiabank and Paradigm Capital released initiation reports this week for Klondex Mines, following the company’s announcement last week of its acquisition of the Rice Lake Mine near Bissett, Manitoba. Paradigm’s report calls Klondex a “Four G Winner,” highlighting grade, growth, geology and geopolitics, and concluding with a “buy rating” for the company. Scotia noted that investors can “Weather the Storm with This High-Grade Gold Producer” and went with a “Sector Outperform” rating.

Threats

  • In its analysis of the broad U.S. equity market this week, BCA Research explains that deflation now plagues more than half of the groups that they cover. An update on industry group pricing power shows that 32 out of 60 industries have had to cut selling prices, up from 26 in BCA’s last update.  To further illustrate the underperformance of the economy, BCA provided a chart that shows each successive real GDP forecast made in the Conference Board Budget Outlook from 2007 through 2015 compared to actual real GDP.

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  • According to Financial Post data, 2015 could go down as the biggest year ever for metal streaming deals, as miners have raised $4.2 billion from 11 stream sales this year. This is almost double the amount raised in 2013, $2.2 billion, which was the second biggest year on record. One argument surrounding the dark side of metal streaming deals is that streams can eliminate exploration upside from a mine. In addition, John Ing, president and gold analyst at Maison Placements Canada, believes streaming is reminiscent of hedging. (This was all the rage in the gold industry in the 1990s, but has since become a huge liability).
  • Bank of America Merrill Lynch released a report on the high-yield gold industry, starting with its overview of select high-yield gold credits: Eldorado Gold, IAMGOLD and New Gold. After its consideration regarding production, asset quality, credit and financial strength, along with relative value, BAML says it is “hard to get excited about any of the names we discussed.” The report continues by stating that, “given our BAML Commodity Team’s view of headwinds facing gold prices, we do not find a compelling reason to own any gold miners’ debt heading into 2016.”

The Fed rate increase: An historical perspective

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

What were you doing in June 2006?

That’s when the Federal Reserve last raised interest rates, just a year after the last Star Wars flick hit theaters. The biggest movie at the time was Adam Sandler’s “Click,” the hottest song, Shakira’s “Hips Don’t Lie.” The best-performing S&P 500 Index stock for the month was C.H. Robinson Worldwide. And as for Janet Yellen, she was president of the Federal Reserve Bank—of San Francisco.

Up to a third of money managers working today are more likely to have attended a midnight screening of the last Star Wars movie than experienced rising interest rates.

If June 2006 doesn’t seem that long ago, consider this: Up to a third of asset managers working today have never experienced a rate hike professionally.

On Wednesday, Chair Yellen announced that, for the first time in seven years, easy money will become slightly less easy. The target rate will be set at between 0.25 and 0.50 percent, which doesn’t sound like much, but it’s important that the Fed ease into this cycle cautiously and gradually. Plus, this comes at a time when fellow industrialized nations and economic areas around the globe are considering further monetary easing measures.

Effects and Possible Ramifications: Keep Calm and Invest On
Up to a third of money managers working today are more likely to have attended a midnight screening of the last Star Wars movie than experienced rising interest rates.

Rising rates, of course, have a noticeable effect on mortgages, car loans and other forms of credit. Savers will finally start earning interest again.

The question on investors’ minds, though, is what effect they might have on their investments. After all, the last couple of days have been challenging for stocks, with the S&P 500 dropping 1.5 percent on Friday alone. Is the Fed decision to blame?

To answer this, CLSA analyzed what happened to the U.S. dollar and stocks in the S&P 500 Index 60 trading days before and after the initial rate hike in past cycles and then calculated the averages. It’s important to keep in mind that, aside from rising interest rates, a multitude of unique factors—from geopolitics to economic conditions to the weather—played roles in influencing the outcomes. Nevertheless, CLSA’s research is instructive.

The group finds that, on average, the U.S. dollar peaked 10 trading days before the rate hike, and then afterward slid lower for four to five weeks. This created an agreeable climate for gold and other precious metals and commodities, as their prices typically share an inverse relationship with the dollar.

Opportunity for Commodities: U.S. Dollar Average Performance Around Time of First Rate Hike
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As for equities, they traded up for 60 trading days following the initial rate hike, 70 percent of the time.

S&P 500 Index Has Historically Risen for 60 Trading Days Following First Rate Hike
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But CLSA’s analysis looks only at possible near-term scenarios. What about the long-term?

In the past, the results were just as reassuring—most of the time. Barron’s records S&P 500 returns 250 and 500 days following the initial rate hike in six monetary tightening cycles going back to 1983. The findings suggest that the market went through an adjustment period, with average returns falling from 14 percent before the rate hike to 2.6 percent 250 days afterward. But by 500 days, returns returned to their pre-hike average of around 14 percent.

Equities Survived Previous Fed Rate Hikes
S&P 500 Index Returns Before and After Rate Increases
Performance Before/After Initial Rate Hike
Date of Initial Hike 250 Days Before 250 Days After 500 Days After
5/2/1983 36.60% -1.10% 12.20%
12/16/1986 19.10% -5.90% 11.20%
3/29/1988 -11.40% 11.70% 30.60%
2/4/1994 5.30% 0.60% 34.10%
6/30/1999 19.70% 6.00% -10.70%
6/30/2004 14.80% 4.40% 9.10%
Average 14.00% 2.60% 14.40%
Past performance does not guarantee future results.
Source: Barron’s, U.S. Global Investors

Again, many other factors besides interest rates contributed to market behavior in each instance. And this time is especially different, as the market was given an unusually long runway, allowing it to price in the full effects of the liftoff before it finally happened.

I can’t say whether the same trajectory will be taken this time as before, but what CLSA, Barron’s and others have found should be encouraging news for commodities and stocks.

I should also point out that according to the presidential election cycle theory developed by market historian Yale Hirsh, markets do well in a presidential election year.

The consumer price index came out this week and, with an inflation rate of 2 percent, the 5-year Treasury yield is now negative. (The real interest rate is what you get after subtracting inflation from the 5-year government bond.) This bodes well for gold. Also, the 10-year bond yield is lower than it was six months ago.

Investors Flee Junk Bonds and Defaulting Energy Companies, Find Comfort in Tax-Free Muni Bonds

In 2008, the Fed trimmed rates to historically-low levels in response to the worst financial crisis since the 1930s. Most people would agree that this helped put the brakes on the U.S. slipping further into recession.

But low rates were also partially responsible for driving many investors into riskier investments over the last few years—corporate junk bonds among them—as they sought higher yields.

Junk bonds, or high-yield bonds, are known as such because they have some of the lowest ratings from agencies such as Moody’s and Standard & Poor’s. Because they carry a higher default risk than investment-grade bonds, they offer higher yields.

But with corporate default rates nearing 3 percent for the year, and at least one large high-yield bond fund cutting off all redemptions, investors are facing liquidity problems and learning the hard way why these equities are commonly called “junk.”

The week before last, it was announced that a high-yield bond fund—whose assets under management were worth $2.5 billion as recently as 2013—would be closing after suffering nearly $1 billion in outflows this year. This sent the junk bond market into panic mode, with several similar funds experiencing near-record outflows. Fears intensified when legendary investor Carl Icahn tweeted: “Unfortunately I believe the meltdown in High Yield is just beginning.”

To make matters worse, high-yield bonds have fallen into negative territory, giving investors little reward for the risk.

Corporate High-Yield Collapses, Short-Term Munis Climb
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Energy companies, highly leveraged since oil began to spill value in the summer of 2014, top the default list for the year. JPMorgan estimates that the industry’s overall default rate might hit 10 percent next year.

“Junk bonds will likely be dead money for at least several years,” says Tony Daltorio, writing for Wyatt Investment Research. “Put your money elsewhere.”

But where, exactly, is “elsewhere”?

With rates now on the rise, many investors have turned to investment-grade, short-term municipal bonds, which have seen inflows at the fastest pace since January.

U.S. Investors Pile into Muni Bonds Despite Rate Hike
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Savvy investors know that bond prices move in the opposite direction of interest rates, but shorter-term munis are less sensitive to rate fluctuations than longer-term bonds. Put another way, bonds that are more sensitive to changes in the interest rate environment will have greater price fluctuations than those with less sensitivity.

“As municipal bonds head toward the strongest returns in the U.S. fixed-income markets this year, investors say the end of near-zero interest rates will do little to knock state- and local-government debt off its stride,” Bloomberg writes.

Over the past seven years, low rates certainly contributed to one of the strongest bull markets in U.S. history. Now that easy money is coming to an end, we can expect to see more volatility. But as the CLSA and Barron’s data show, there’s still plenty of room for growth.

It’s important, therefore, to stay diversified. Focus on high-quality, dividend-paying stocks; investment-grade, short-term municipal bonds; and, as always, gold—five percent in gold stocks, the other five percent in bullion.

China’s Money Supply Could Indicate Additional Room for Gold Demand

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Frank Holmes’ of U.S. Global Investors’ latest weekly SWOT (Strength, Weakness, Opportunity, Threat) analysis of what’s been going on in the global precious metals sector

Strengths

  • Palladium followed by platinum was the best performing precious metals this week, up 2.87 percent and 2.23 percent, respectively.  The platinum group metals responded positively to news that automobile demand continues to be strong globally, boosting platinum and palladium prices. The European Automobile Manufacturers Association reported over 1 million more car listings in November. The number of vehicle sales in China rose nearly 20 percent.
  • It seems that bullish gold investors may be able to breathe a little easier after the Fed finally made its decision to raise rates 25 basis points earlier this week. Bob Haberkorn, a senior market strategist at RJO Futures in Chicago, commented that sentiment has shifted, and traders are seeing less downside potential in the gold price.
  • Goldcorp CEO Chuck Jeannes also said that he thinks the increase in rates will be a net benefit for the gold mining company, now that the uncertainty around the Fed’s action is behind us.  Newsletter writer Dennis Garman was interviewed by ETF.com and he opined that we have likely seen the low in gold prices now.

Weaknesses

  • With the hike in interest rates and the ensuing strength in the dollar the next day, it is not too much of a surprise that gold came in at the bottom in terms of price performance last week.  What is nice is that this is the third Fed meeting in row that gold was stronger on the day of the announcement.  Absent was the manipulative middle of night plus $1 billion dumping trades of gold bullion to push gold down on the Fed meeting dates.  Fortunately for the perpetrators, the regulators were asleep.
  • More rate hikes could be on the way, warn some analysts. Macquarie analyst Matthew Turner said that if the economy continues to strengthen after this rate increase, then the Fed may go ahead with further tightening. Historically, gold doesn’t perform well in periods of tightening monetary policy with rising real interest rates.
  • Gold is headed for the third annual loss, according to BloombergBusiness. Societe Generale’s Alain Bokobza said bullion will likely drop to $955 per ounce by the end of the year.

Opportunities

  • Klondex Mines announced this week its acquisition of the Rice Lake Mine near Bissett, Manitoba. For the total purchase price of $32 million, Klondex is acquiring a fully operational mine, mill and fleet of equipment that was recently put on care and maintenance as the property went into receivership earlier in the year.  Over $375 million of capital improvements have been made on the property since 2007 and the mobile equipment fleet was appraised at close to $20 million. Klondex plans to calculate a new resource for the operation and design a new mine plan for developing the ore in a profitable manner.  It will likely be fourth quarter of 2016 before they start production back up.  In our opinion, the prior operator had oversized the mill and dropped the cutoff grade to try and grow the number of ounces produced.  To accomplish this they also got overextended on the debt side.   Klondex has a great opportunity here to do the proper work and right size the operation so it can be profitable.  Klondex Mines still offers investors an attractive opportunity to participate in the turnaround of Rice Lake.
  • According to research from Cornerstone Macro, the dollar has historically appreciated before the first hike and typically has depreciated afterwards. If the historical pattern is any indication, the dollar will not strengthen further as many of the flapping mouth airheads have pontificated, of course without looking at the facts.

swot 2115 1

  • China’s money supply far exceeds that of other developed nations. Bloomberg Intelligence noted this presumed spending power seems to indicate that China still has plenty of room for additional gold demand.

swot 2115 - 21 - 2

Threats

  • Commodity headwinds continue, as the Bloomberg Commodity Index closed at the lowest level in 16 years on Monday. The slowing commodities demand from China continues to affect the diversified mining companies, as China shifts to a service-driven economy.
  • Former U.S. Treasury Secretary Lawrence Summers and economist Nouriel Roubini said earlier this week that the Fed policymakers may be making a mistake if the rate hike was premature. There is still much uncertainty in the global markets about the prospects of growth and stalling growth rates in the U.S.
  • Deutsche Bank views gold miners as a possible hedge against global uncertainty. DB notes that the combination of deficit spending, poor merger & acquisition decisions and the China commodity demand slowdown have resulted in “toxic” levels for balance sheets. Markets have been watching these disturbing credit conditions, as Goldman Sachs noted that “U.S. corporate credit quality has deteriorated to the weakest level in a decade.” In this environment, DB favors a defensive posture in companies with stronger balance sheets and non-integrated names.

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Some currencies which have dived along with key commodities

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In the following article, Frank Holmes looks specifically at the performances of five major global currencies which are very closely tied to (mostly) specific commodities which have been falling dramatically in US dollar terms.  There are obviously a number of others which have been similarly affected in the global commodities crash and, although not specifically mentioned in most cases, gold is also a significant contributor to the economies of all five and while the currencies noted may not track gold as closely as they do iron ore, oil and gas and copper, gold prices in all of these have performed hugely better than they have in the US dollar.

5 World Currencies That Are Closely Tied to Commodities

By Frank Holmes, CEO and ChiefInvestment Officer, US Global Investors

5 World Currencies That Are Closely Tied to Commodities

For more than a year now, commodity prices have been under pressure from the strong U.S. dollar and slowing global demand. This has made a huge dent in the balance sheet of many net exporters of resources, in turn weakening their currencies.

This should come as a shock to no one, but what most people don’t realize is just how closely some currencies track certain commodities. When I presented at the International Mining and Resources Conference in Melbourne, Australia, earlier this month, I shared several charts that show this correlation. Many attendees were astounded—and we’re talking professional economists, money managers and CEOs here.

With that said, I think it’s important that you see this correlation as well. Below are five world currencies that have been impacted by lower commodity prices.

1. Australian Dollar

Australia now accounts for around a third of global iron ore production, according to the country’s budgetary office. This means that its income is very sensitive to price changes. As demand from China, the world’s largest consumer of iron ore, has softened, so too has the Australian dollar.

Australian Dollar Tracks Iron Ore Prices
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2. Canadian Dollar

The sixth-largest oil producer in the world is Canada, about a quarter of whose exports is oil. The Conference Board of Canada, a not-for-profit economic research group, estimates that sales for the country’s energy sector will recede a sizable 22 percent this year. In Alberta, where revenue from oil sand exports had until recently helped the province become the fastest-growing in Canada, GDP is expected to contract 1 percent. And in September, the country’s economy shrank for the second straight quarter. As for the Canadian dollar, it’s fallen around 15 percent against the dollar for the one-year period.

Canadian Dollar Tracks Oil Prices
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3. Russian Ruble

Compared to Canada and Australia, Russia’s export mix isn’t nearly as diversified: About half of its exports in terms of value are a combination of oil and natural gas. (Russia sits atop the third-largest oil reserves in the world, the number one natural gas reserves.) It should come as no surprise, then, that its currency is highly influenced by Brent oil. Where oil went starting in July 2014, so went the ruble.

Russian Ruble Tracks Oil Prices
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4. Colombian Peso

The same story can be found in Colombia, where oil exports are responsible for about 20 percent of government revenue. Officials estimate, however, that oil sales will total $1.1 billion in 2016, compared to $6.7 billion in 2014. With prices lingering just above $41 per barrel, the Colombian peso has retreated 30 percent against the U.S. dollar for the one-year period.

Colombian Peso tracks Oil Prices
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5. Peruvian Sol

Besides gold, copper is Peru’s most important mineral export by value. With around 13 percent of the world’s copper reserves, it’s the third-largest producer after Chile and China. As such, the Peruvian sol has declined in tandem with the red metal.

The Peruvian Sol Tracks Copper Prices
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Commodity liftoff?

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Get Ready for Commodity Liftoff: Global Manufacturing Just Made a HUGE Move!

By Frank Holmes – CEO and Chief Investment Officer, US Global Investors

Global PMI Just Crossed Above Its Three Month Moving Average

By most standards, October was an explosive month, with domestic equities recording their biggest monthly gains in four years.

But the most exciting news was that the global purchasing managers’ index (PMI) reading for the month of October rocketed up to 51.4, almost a point higher than September’s 50.7. Not only does this represent the strongest monthly surge in nearly two years, but the index shot above its three-month moving average for the first time since March.

As Donald Trump might say: This is going to be huge.

Global-Manufacturing-PMI-Crosses-Above-Its-Three-Month-Moving-Average
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We monitor the global PMI very closely because in the past it has reliably anticipated how commodity prices might behave in later months. Our own research shows that when a PMI “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has signaled a possible spike in certain commodities, materials and energy. Three months following previous breakouts, copper had an 81 percent probabilty of rising approximately 7 percent, while crude oil jumped 7 percent three quarters of the time.

Commodities-And-Commodity-Stocks-Historically-Rose-Three-Months-After-PMI-Cross-Above-Cross-Below
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Indeed, oil prices have tended to track the global PMI pretty closely. With manufacturing exploding off the launch pad, could oil be very far behind?

Upturn-In-Global-Manufacturing-PMI-Could-Be-A-Tailwind-For-Crude-Oil
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What’s more, domestic equities are strongly correlated with global PMI readings. Investment research firm Cornerstone Macro shows that in five separate incidences since 2001, a PMI liftoff after hitting a bottom was soon followed by a rally in the S&P 500 Index.

A-Bottom-In-The-Global-PMI-Has-Marked-An-Inflection-Point-for-Domestic-Equities
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A similar trend can be observed in world equities. In the past, the MSCI World Index has rallied when the global PMI turned up.

The-Beginning-Of-An-Emerging-Market-Rally-Starts-With-An-Improvement-In-The-Global-PMI
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Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), agrees that the PMI reading is promising.

“It’s definitely constructive for commodities going forward,” he said.

One of our holdings in PSPFX, by the way, had a huge jump this week. British Columbia-based Sunridge Gold announced that it would be selling its 60 percent interest in the Asmara Mining Share Company, holder of the Asmara Project in northeastern Africa, to Sichuan Road & Bridge Mining Investment Development, a Chinese company, for $65 million. Sunridge jumped 41 percent this week alone and for the year is up 71 percent.

Did I mention that U.S. Global Investors is the largest holder of Sunridge stock (by a very wide margin)? That’s the power of active portfolio management.

So When Will Liftoff Occur?

As exciting as this news already is, we believe the real commodity liftoff should occur when the U.S., Europe, China and global PMIs all score above a 50.0, with the one-month readings above the three-month trends.

Of those regions, China is the only one whose reading still trails below the 50.0 level. For the month of October, it came in at 48.3, up from 47.2 in September.

But like the global PMI, the China PMI crossed above its three-month moving average, suggesting that manufacturing activity is contracting at a slower pace and preparing to reverse course into expansion mode.

It’s crucial that China’s PMI move above 50.0, as the Asian giant is the top driver of global commodities demand. We believe that once purchases, new orders and exports gain further momentum, commodities might have the fuel they need to skyrocket.

Fed uncertainty and its impact on gold

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By Frank Holmes – CEO and Chief Investment Officer US Global Investors

Federal Reserve Chair Janet Yellen last week blinked in the face of—as she described it—global uncertainty, low inflation, and a still-low U.S. labor force participation rate. I’ve written on the emerging markets slowdown numerous times in recent months, so her reasoning is not at all surprising.

Although interest rates could still be hiked in one of the two remaining times the Federal Open Market Committee (FOMC) meets this year, I’m inclined to think they’ll stay near zero until at least 2016.

Janet-Yellen-interest-rate-liftoff-delayed-again

The decision is a welcome one for both gold demand and new home purchases. When rates rise, gold becomes less attractive for some investors, who are encouraged to exchange their no-yielding gold for income-producing assets.

As for loans on new or existing homes, they don’t necessarily rise and fall in perfect correlation with interest rates—they’re more directly related to the 10-year Treasury bond yield—but there’s a strong psychological connection in many potential homebuyers’ minds.

An interest rate reprieve, then, might encourage borrowers to act before it’s “too late,” helping home sales. This could speed up the multiplier effect, or what occurs when there’s an increase in spending that increases income and consumption greater than the initial amount spent. When people buy a home, they also put carpenters to work, purchase new furniture, hire landscaping companies and more.

The same is true when taxes are lower. It creates less friction in the flow of money.

A Record-Setting Year for Chinese and Indian Gold Demand?

Following Yellen’s announcement, I told JT Long of the Gold Report that the Fed’s decision is a wash for precious metals, oil and gas prices. A rate hike would have likely caused the U.S. dollar to strengthen even further, which in turn would have put additional pressure on commodities.

I’ll be watching China’s purchasing managers’ index (PMI) numbers very closely in October and November to see if manufacturing activity will start to turn up. Since China is such an important consumer of metals and other raw materials, it’s crucial that its manufacturing sector break out of the recent slowdown.

A recent article by Oxford Club Resource Strategist Sean Brodrick points out that China’s gold demand, as tracked by deliveries out of the Shanghai Gold Exchange (SGE), is much healthier than many people believe. So far this year, demand has been 36 percent higher than around the same time in 2014, and 13.5 percent higher than in 2013—which was a record year.

(See also: Yet another massive gold delivery week on the SGE)

Shanghai-Gold-Exchange-Withdrawals-as-of-August
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Chinese gold demand also tends to increase near the end of the year as the Chinese New Year approaches, so it’s possible 2015 could hit a new record.

Demand out of India is likewise surging, reaching 120 tonnes in August, compared to 50 tonnes this time last year. With important Indian fall festivals quickly approaching such as Diwali, the gold Love Trade is in full swing.

China: QE, Depreciation and Gold

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By Frank Holmes

CEO and Chief Investment Officer
U.S. Global Investors

Renninbi

First it was the U.S. Federal Reserve. Then, in 2013, Japan launched what became known as Abenomics. The European Central Bank (ECB) followed suit in 2014. And now the People’s Bank of China has joined the parade.

All of them in some way stimulated economic growth by initiating monetary quantitative easing (QE) programs.

The media and politicians applauded them for their QE plans. All of them, that is, except for China. Instead, we’ve only seen a flurry of negative headlines.

I often tell investors to follow the money, which currently is cheap to borrow. Cheap money is good for stock prices, but not for retired folks who have most of their savings in term deposits with low interest yields.

Most important for commodity investors is the powerful correlation between China’s money supply and commodity prices. The money supply peaked in 2011 and has been falling along with commodity prices.

On Monday, China unexpectedly trimmed the value of its currency, the renminbi, 2 percent, the most in two decades. In the days since, many analysts and “experts” have irrationally turned sour on the Asian country, similar to the extreme bearishness toward gold in the last month.

But investors last week came home to the yellow metal after China announced it had increased its gold reserves by an additional 19 tonnes in July, boosting its total holdings to 1,677 tonnes (nearly 54 million ounces). This helped prices rally 1.4 percent on Wednesday to reach $1,124.46, a three-week high.

Investors should likewise return to China when they realize that the global reaction to the renminbi devaluation has been hugely overblown. I agree entirely with my friend Addison Wiggins, who writes in his Daily Reckoning newsletter:

The market is up in arms about this currency move. And frankly most things that I read from the market have it all wrong…

They make China out to be the big, bad villain—calling this move manipulation or a “currency war.” And while EVERYTHING that central banks do is indeed manipulation or a “currency war”—why don’t we hear those terms thrown around the ECB or the U.S. Fed?

To help cut through the noise and get a more balanced picture of devaluation’s causes, effects and possible ramifications, I chatted with our resident Asia expert Xian Liang, portfolio manager of our China Region Fund (USCOX). Below are some of the highlights.

As you know, we follow currencies very closely in our investment team meetings because we’re aware that government policy is a precursor to change. Having said that, why did China decide to devalue the renminbi?

There are several possible reasons, the first one being economics—specifically, to stimulate economic growth and ease liquidity in the financial sector. A weaker renminbi can help make Chinese exports cheaper for foreigners and imports dearer for locals, creating the incentive for a “net inflow” of money. July data shows that economic activity remains worse than expected. China’s purchasing managers’ index (PMI) reading for the month is one example, but fixed-asset investments, power generation and exports were all down.

chinas-manufacturing-pmi-falls-to-two-year-low-in-july
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Deflationary pressure also intensified in July, and the renminbi in trade-weighted terms—that is, against a whole basket of major trading partners’ currencies, not just the dollar—has soared to record highs. This is because of a de facto peg to the dollar, making Chinese goods and services uncompetitively priced to world customers.

Another reason is domestic politics. Chinese policymakers want to resurrect their reformist image among domestic intellectuals and the middle class by yielding more power to market forces to determine its currency exchange rate, which offers some compensation for July’s aggressive, command-and-control intervention in the A-Share market.

And then there’s international politics. It’s well known that China wishes its currency to be included in the International Monetary Fund’s special drawing rights basket, along with the U.S. dollar, euro, British pound and Japanese yen. Chinese policymakers are actively demonstrating to the IMF their commitment to “a more market-determined exchange rate,” a critical step toward eventual renminbi internationalization.

Many countries have devalued their currencies lately—Japan, Germany, France and others. Business Insider, in fact, just shared a Goldman Sachs chart showing how miniscule the renminbi’s depreciation really is compared to other emerging countries’ currencies. And yet China gets singled out in the media! Why is everyone so hard on China?

Renminbi-depreciation-not-nearly-significant-as-other-emerging-markets-currencies
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What’s usually not mentioned in all the news and editorials we’ve seen is that China hasn’t resorted to currency devaluation in 20 years. For the last decade, the renminbi was largely moving in a single direction—up—because China was tired of being dubbed a currency manipulator and it would like to foster consumerism.

As the second-largest economy in the world, China is interested in transforming its growth model from investment-driven to consumer-driven, and some investors might wonder how the devaluation will affect consumption. Today, the richer Chinese middle class is made up of big spenders, both home and abroad, and a weaker renminbi translates to weaker purchasing power for them. It might also have larger implications for global tourism, global consumer goods and global property. So the difference between China and, say, France is pretty significant.

Chinas-Central-Bank-Trims-the-Renminbi-2-After-10-years-of-Gains
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A lot of people think the Federal Reserve will hike interest rates this year—maybe even as early as September—though I’ve expressed doubts about that. Will the devaluation have any effect on the Fed’s decision?

To the extent that it weakens its own currency, China exports deflation to the U.S. and can help the dollar’s strength. Lower inflation and a stronger dollar reduce the incentive or rationale for any imminent Fed rate hike. So yes, you can almost say this is China’s silent protest against the widely anticipated September hike. China seems to be reminding Janet Yellen that in today’s interconnected world, unilateral monetary policy action by the U.S. without first considering global dynamics might not be the smartest thing to do. In effect, it’s saying: “Here’s a preview of what could happen if you insist on hiking rates this year.”

Is this a sign of further reforms? What else can we expect?

The devaluation does indeed herald back to the days of major Chinese reform. In fact, it occurred one day after China approved a comprehensive plan to reform its state-owned enterprises to make them more market-driven, similar to those in Singapore. So at least the government welcomes the perception that the devaluation has more to do with long-term structural reform and less to do with short-term expediency.

Investors are being bombarded with bad news about China right now. There have been some very negative headlines. Where’s the good news in all this?

Here’s the simple answer: A weaker currency not only helps Chinese exporters but also U.S. consumers. Whether you buy things made in China or are planning your next vacation there, you’ve got money to save now. Opportunities have also been expanded for U.S. retailers and manufacturers that source from China, not to mention U.S. airlines. And if you’re in the camp that believes this devaluation is the start of a new “currency war,” then it might be time for gold to shine.

Gold’s Safe Haven Status Never Disappeared
Countries with largest gold holdings

Indeed, gold tends to benefit the most when there are global currency fluctuations. Last week was no exception, as the metal had its best week since June. Many analysts, it seems, prematurely declared that gold has lost its safe haven status because it fell to five-year lows during the height of Greece’s and Puerto Rico’s debt crises.

But as I explained last month, gold is behaving this way not because it’s lost anything. Instead, there are external forces at work here, including the strong U.S. dollar, fears of rising interest rates and a slowing global economy, not to mention possible price manipulation. Despite these powerful headwinds, gold managed to hold strong the week before last as media giants’ stock plummeted, erasing $60 billion in stock value.

Speaking of gold and mining, I’ll be in Lima, Peru during the first week in November to attend the Mining & Investment Latin America Summit, where I’m scheduled to deliver the opening keynote address. I’ll be speaking on mining around the world, macro trends and opportunities and challenges in the upcoming year. For those of you interested in attending, you can register here. I’d love to see you there!

Gold Holds Its Own While Media Darlings crash

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

There’s no other way to put it: Commodities took it on the chin last month.

July was the seventh worst performing month for the S&P Goldman Sachs Commodities Index, going back to January 1970. Crude oil saw its steepest monthly loss since October 2008. Both copper and aluminum touched their lowest levels in six years. And on July 19, possibly as a result of deliberate price manipulation, gold experienced a mini flash crash, sending it down to five-year lows.

Have Commoditeis Hit a Bottom?
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Regardless, several commodities are beating the exchange-traded funds that track them for the one-year period, according to the Wall Street Journal. Our Gold and Precious Metals Fund (USERX) is over 1,900 basis points ahead of the Market Vectors Gold Miners ETF (GDX) year-to-date.

But that hasn’t stopped many gold bears from using this as an opportunity to disparage the yellow metal. A recent Bloomberg article points out that the gold rout has cost China and Russia $5.4 billion, an amount that would sound colossal were it not for the fact that U.S. media companies such as Disney and Viacom collectively lost over $60 billion for shareholders in as little as two days last week.

Below are the weekly losses for just a handful of those companies. Compared to many other asset classes, gold has held up well, even after factoring in its price decline.

Media Stocks Collapse, Gold Holds Its Own
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And isn’t it funny that the Federal Reserve doesn’t keep other countries’ currencies, but it continues to hold gold—and in larger amounts than any other central bank? China and Russia have two of the biggest gold reserves in the world—and have added to them recently—but they don’t come close to the Fed’s holdings, even when combined. What’s more, the U.S. Treasury’s Office of the Comptroller of the Currency just classified gold as money by placing gold futures in the foreign exchange derivatives classification.

Countries with largest gold holdings

Indeed, central banks all over the world continue to add to their gold reserves. If the metal were as valueless as a pet rock, as one Wall Street Journal op-ed recently claimed, why would they bother to do this? A few weeks ago, China disclosed the amount of gold its central bank holds for the first time in six years. Global markets reacted negatively that the country increased its reserves “only” 57 percent. But the World Gold Council (WGC) saw this as positive news:

We believe the People’s Bank of China’s confirmation of its revised gold holdings is supportive for the gold market. It reiterates how China, along with other central banks, views gold as a key resource asset as it continues to seek diversification away from the U.S. dollar.

As I’ve said before, China is the 800-pound commodities gorilla. This has largely been the case since 2000.

Half a Trillion Dollars a Year in Commodities

Between 2002 and 2012, China was growing fast at an average annual pace of around 10 percent. The country was responsible for nearly all of the net increase in global metals consumption between 2000 and 2014, according to the World Bank. Over the same time period, its share of metals consumption tripled, eventually reaching an astounding 47 percent.

China's Share of Metal Consumption Reached 47 Percent in 2014
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The year 2014 was a standout for Chinese commodity imports. Compelled by low prices, the country, which accounted for 12 percent of worldwide imports, brought in record volumes of crude oil, iron ore, copper and other raw materials.

Because China is a trading partner with practically every other country, and because it imports over $500 billion a year in commodities, its importance in global trade cannot be stressed enough. BBVA Research writes that “any reduction in its level of [purchasing] activity places significant downward pressure on the prices of [commodities], such as oil or copper.”

And yet we’re seeing that reduction now. For the past five months, China’s purchasing managers’ index (PMI) has remained below the neutral 50 mark, indicating that its manufacturing sector has been in contraction mode for the better part of this year so far.

China's Manufacturing PMI Falls to a Two-Year Low in July
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It’s important to keep in mind that China is still the number one importer of many key materials, including coal, iron ore and crude oil. The country’s import growth of these commodities continues to rise, but at a slower pace than in years past.

This isn’t necessarily the case with gold, however.

Demand Still Higher Than the Five-Year Average

According to the WGC, the decline in Chinese gold demand has been overstated.

Although China’s jewelry demand in the first quarter of 2015 was down from the record level the previous year, it was 27 percent higher than its five-year average. And consumer demand—jewelry plus bar and coins—in the first quarter was the fourth best on record, surpassed only by the surge in demand triggered by the price fall in 2013.

The WGC also points out that gold has a low correlation with and different demand drivers than commodities. Whereas commodities, as expressed by the Bloomberg Commodities Index, have returned to 2001 levels, gold is still up significantly for the period shown in the chart below.

Gold has Outperformed the Commodities Complex
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As many of you know, I call gold’s drivers the Fear Trade and the Love Trade. I recently had the pleasure to describe these drivers to Mike Gleason of Money Metals Exchange.

The Fear Trade, dominant in the psyche of North America, involves money supply growth and real interest rates. Whenever the U.S. has negative real interest rates, gold starts to rise in dollar terms, and whenever we have positive real rates of return, it starts to decline. If you go back to 2011, we had negative real interest rates off 3 percent on a 10-year government bond, and the average gold price that year was around $1,500 per ounce. But now that rates are positive 2 percent, the metal’s been depressed.

The Love Trade includes the purchase of the precious metal due to cultural affinity and rising GDP per capita in Asia and the Middle East. This includes gift giving of bullion and gold jewelry in anticipation of upcoming festivals such as Diwali, Christmas and the Chinese New Year. Historically, the Love Trade has begun to pick up around this time of the year.

Gold is a long-term investment with long-standing tradition. This remains true even now that prices have declined. As always, I recommend a 10 percent weighting: 5 percent in gold stocks, 5 percent in bullion or jewelry, then rebalance every year.

Gold’s flash crashes – what should be done?

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There’s a Huge Disparity Between How Regulators Deal with Gold and Stock Market Manipulation

By Frank Holmes – CEO and Chief Investment Advisor, U.S. Global Investors

Gold futures were going bonkers in the fall of 2013 and early 2014.

On a weekly and sometimes daily basis, unbelievably massive gold contracts were coming on the market at non-peak trading hours, only to be withdrawn almost instantaneously. In one particularly alarming instance in January 2014, the yellow metal plummeted $30, from $1,245 an ounce to below $1,215, in as little as 100 milliseconds.

The GOld Futures "Flash Crash" of January 6, 2014
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Whatever the cause of this behavior—“fat finger” errors, as some people suggested, or “quote stuffing,” as others suspected—markets were effectively shaken.

From the very beginning, we reported on these anomalies in a series of commentaries that read now like notes from a foxhole. In the September 13, 2013 edition of our Investor Alert, the USGI investments team wrote:

The bullion plunge this week sent the yellow metal breaking below the 100- and 50-day moving averages. Strange dealing patterns are adversely affecting the gold price. These dealings revolve around the “flashing” of massive gold contracts for sale to traders, at a time of day that there is normally little or no activity in the markets, and no news story being released.

Then, on October 25:

You can see massive trading volumes every day of over 5,000 contracts, all around the same time. On the first of October, as well as on October 10, there were massive trades of over 20,000 contracts. This amount represents well over two million ounces, or around $2.6 billion. It’s safe to say nobody has that amount of physical gold, apart from the big central banks, so these trades are being done by entities trading gold they do not have in a manner designed primarily to trigger stop loss orders.

Unusual Gold Trades Triggering Sharp Swings in Gold Price
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And again, on December 20, 2013:

In recent weeks, there have been concerns among market participants and regulators that the process for establishing the price of gold may lend itself to insider trading and other forms of unfair dealing. The spot price of gold tends to drop sharply around the London evening fixing, or 10:00 a.m. Eastern. A similar, if less pronounced, drop in price occurs around the London morning fixing. For both commodities, there were, on average, no comparable price changes at any other time of the day. These patterns appear to be consistent with manipulation in both markets.

Although these “strange dealing patterns” eventually tapered off, it remained a mystery who or what was behind them.

Until now.

Last week, the CME Group officially accused Mirus Futures, a now-defunct brokerage firm, of failing to “adequately monitor the operation of its trading platform,” which resulted in “unusually large and atypical trading activity by several of the Firm’s customers.” This is what allegedly led to the disruption in price discovery in the gold futures market.

The Partyallegedly behind the gold "flash crashes" in 2013 and 2014 has been identified.

What’s unclear is how culpable Mirus Futures really was in all of this. At the very least, it acted carelessly. Did its trading platform have a glitch, and if so, when did Mirus become aware of it? Was it deliberately trying to manipulate the gold markets? There’s no way we can know the answers to these questions. That Mirus has since been acquired by another brokerage firm would make any investigation into its intentions—if there were any to begin with—even more challenging for authorities.

What I find especially notable, though, is that the firm settled with the CME by paying a fine of only $200,000.

This is already a pretty paltry amount, considering how far-reaching its actions (or inactions) were. But when you compare the $200,000 penalty to what Navinder Sing Sarao faces, a huge disparity in the enforcement of such white collar crimes emerges.

Flashing the Stock Market

You might not be familiar with the name Navinder “Nav” Sarao, but it’s likely you’ve heard of the event he’s accused of orchestrating, thanks largely to Michael Lewis’s bestselling book Flash Boys. On May 6, 2010, Sarao, a 36-year-old British day trader, allegedly spoofed American markets using a familiar technique: mammoth-size orders were placed, only to be withdrawn right before execution. Price discovery broke down. In the brief timespan of five minutes, the Dow Jones Industrial Average was taken on a wild 1,000-point ride. Shares of Procter & Gamble fell to as little as a penny. Altogether, nearly $1 trillion in value vanished from U.S. stocks.

Down Jones Industrial Average on May 6, 2010
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Two months after being arrested by Scotland Yard, Sarao now sits in a British prison on bail set at $7.5 million, his assets completely frozen. He awaits extradition to the U.S., where he will face multiple charges, including several counts of market manipulation, commodity fraud, wire fraud and more. According to the Department of Justice, “Sarao’s alleged manipulation earned him significant profits and contributed to a major drop in the U.S. stock market.”

The maximum sentence for all charges is 380 years in jail. Next to that, a $200,000 fine seems more reward than punishment.

You could argue that the upheaval that Sarao contributed to, if not singlehandedly caused, is more significant than the series of gold flashes that occurred in 2013 and 2014. Or that Sarao demonstrated nefarious intentions more unambiguously than Mirus Futures did. Still, the discrepancy is colossal and hard to ignore.

“Apparently regulators care much more about manipulation of the stock market than gold,” commented Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

This could be a problem. As long as rogue traders are convinced that their actions will go unchecked, the gold market could continue to be a target and the metal’s fair value remain under pressure. As I wrote last year in my whitepaper Managing Expectations: “We welcome the regulators to explore ways to manage these issues better and create both a fairer playing field and more transparent trading arena.”

But until gold is allowed to find its true, fundamental value, now might be a good time to accumulate. As always, I recommend that investors allocate 10 percent of their portfolios to gold—5 percent in bullion, 5 percent in gold stocks, then rebalance every year.