World Gold Council’s Latest Gold Demand Trends Report

The World Gold Council (WGC)’s quarterly Gold Demand Trends report is always well worth analysing as it contains some excellent statistical research on global gold supply and demand supplied by London based precious metals consultancy, Metals Focus.  One may not agree with all their data, but overall it is among the most comprehensive available to the gold market analyst.  Here follows the WGC’s own release on the latest report, published today, and links to enable readers to access the full data set:

Gold demand rises 2% in 2016 as investment surges

Global gold demand rose 2% in 2016 to reach 4,309 tonnes (t), the highest level since 2013, according to the World Gold Council’s latest Gold Demand Trends report. This was largely driven by inflows into gold-backed Exchange Traded Funds (ETFs) of 532t, the second-highest year on record, as investors responded to concerns over future monetary policy, geopolitical uncertainty and negative interest rates.

Continued global economic and political uncertainty, most notably Brexit, the US election and currency weakness in China, helped to boost overall investment demand by 70%, to a four-year high of 1,561t.   The price dip in November led to a strong recovery in the bar and coin market in the final quarter of 2016, although this didn’t offset weak demand in the first three quarters; annual demand reached 1,029t, down 2% year-on-year.

Alistair Hewitt, Head of Market Intelligence at the World Gold Council, commented: “2016 saw an unprecedented degree of political upheaval, which underpinned huge institutional investor flows into gold. Retail investors – having been subdued for most of the year – responded quickly to the price fall in Q4, a fact reflected by a surge in demand in the physical market. With an equally uncertain political and economic environment likely in 2017, we expect investment demand to remain buoyant.”

While overall investment demand rose sharply, it was counterbalanced by declines in both jewellery, a 15% fall in 2016 to 2,042t, and central bank purchases. Central banks faced a challenging backdrop, with increased pressure on foreign exchange reserves resulting in demand falling by 33% to 384t for the year. Despite this, 2016 was the seventh consecutive year of net purchases by central banks.

In spite of resilient consumer demand in the fourth quarter of 2016, the two leading gold markets, India and China, both experienced a drop in consumer buying in 2016, falling 21% and 7% respectively. In China, jewellery demand was dampened due to a high gold price throughout much of the year, coupled with constrained levels of supply in Q4, owing to a tightening of currency controls in the country.

Indian demand also faced a raft of challenges throughout the year, including regulatory changes, culminating in the surprise demonetisation policy, which severely hampered demand in both the jewellery and retail investment sectors.

Alistair Hewitt added: “The Indian market faces a challenging time in 2017. We anticipate many of the headwinds that affected demand in 2016 to continue into this year, but we are confident that the Government’s move towards a more transparent gold market will ensure that gold remains an important asset class for millions of people in India.”

Total supply reached 4,571t in 2016, an increase of 5% compared with 2015. Growth in the sector was supported by net producer hedging, which doubled in 2016, as gold producers saw an opportunity to secure cashflow at higher prices. It was also supported by high levels of recycling in Europe and the Middle East, driven by weak currencies and a high gold price. Mine production remained virtually unchanged from 2015 as a result of industry cost-cutting schemes, however, higher gold prices and lower costs have seen a renewed interest in exploration and increased project development is likely in the years ahead.

The key findings included in the Gold Demand Trends Full Year 2016 report are as follows:

Full year 2016 figures:

  • Overall demand for FY 2016 was 4,309t, up 2% compared with 4,216t in 2015
  • Total consumer demand for FY 2016 fell by 11% to 3,071t, from 3,436t in 2015
  • Total investment demand grew by 70% to 1,561t in FY 2016 from 919t in 2015
  • Global jewellery demand was down 15% at 2,042t, compared with 2,389t in 2015
  • Central bank demand was 384t, down 33% compared with 577t in 2015
  • Demand in the technology sector decreased by 3% to 322t from 332t in 2015
  • Total supply grew by 5% to 4,571t this year from 4,363t during 2015. This was largely driven by recycling, which increased 17% to 1,309t from 1,117t in 2015.

 Q4 2016 figures:

  • Overall demand was 994t, a fall of 11% compared with 1,123t in Q4 2015
  • Total consumer demand increased by 5% to 989t from 940t in Q4 2015
  • Total investment demand fell 21% to 174t this quarter compared with 220t last year
  • Global jewellery demand was down 5% at 622t, compared with 653t in Q4 2015
  • Central bank demand reached 114t this quarter, a fall of 32% from 169t in Q4 2015
  • Demand in the technology sector increased by 3% year-on-year, up to 84t compared with 82t during Q4 2015
  • Total supply fell by 4% to 1,036t this quarter from 1,081t during Q4 2015.  
  • Recycling increased by 5% to 250t during the fourth quarter, from 239t during Q4 last year.

The Gold Demand Trends Full Year 2016 report, which includes comprehensive data provided by Metals Focus, can be viewed at http://www.gold.org/supply-and-demand/gold-demand-trends and on our iOS and Android apps. Gold Demand Trends data can also be explored using our interactive charting tool http://www.gold.org/supply-and-demand/interactive-gold-market-charting.

Inflation Expectations for 2017 Keep the Polish on Gold

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

Inflationary Expectations 2017 Keep Polish Gold

Inflation can be understood as the destruction of a currency’s purchasing power. To combat this, investors, central banks and families have historically stored a portion of their wealth in gold. I call this the Fear Trade.

The Fear Trade continues to be a rational strategy. Since President-elect Donald Trump’s surprise win a month ago, the Turkish lira has plunged against the strengthening U.S. dollar, prompting President Recep Erdogan to urge businesses, citizens and institutions to convert all foreign exchange into either the lira or gold. Most obliged out of patriotism, including the Borsa Istanbul, Turkey’s stock exchange, and the move has helped support the currency from falling further.

Gold Save Turkish Lira
click to enlarge

Venezuela, meanwhile, has dire inflationary problems of its own. Out-of-control socialism has led to an extreme case of “demand-pull inflation,” economists’ term for when demand far outpaces supply. Indeed, the South American country’s food and medicine crisis has only worsened since Hugo Chavez’s autocratic regime and the collapse in oil prices. The bolivar is now so worthless; many shopkeepers don’t even bother counting it, as Bloomberg reports. Instead, they literally weigh bricks of bolivar notes on scales.

“I feel like Pablo Escobar,” one Venezuelan bakery owner joked, referring to the notorious Colombian drug lord, as he surveyed his trash bags brimming with worthless paper money.

Because hyperinflation has destroyed the bolivar, the ailing South American country sold as much as 25 percent of its gold reserves in the first half of 2016 just to make its debt payments. Venezuela’s official holdings now stand at a record low of $7.5 billion.

Trump-Carrier Deal a Case Study in U.S. Inflation

visited Bloomberg TV studio today rates gold

The U.S. is not likely to experience out-of-control hyperinflation anytime soon, as the dollar continues to surge on bets that Trump’s proposals of lower taxes, streamlined regulations and infrastructure spending will boost economic growth. But I do believe the market is underestimating inflationary pressures here in the U.S. starting next year.

As I explained to Scarlet Fu and Julie Hyman on Bloomberg TV last week, inflation we might soon see is largely caused by rising production costs, which is different from the situation in Turkey and Venezuela.

Nevertheless, it still serves as a positive gold catalyst for 2017.

Consider Trump’s recent Carrier deal—the one that saved, by his own estimate, 1,100 jobs from being shipped to Mexico. We should applaud Trump and Vice President-elect Mike Pence for looking out for American workers, but it’s important to acknowledge the effect such interventionist efforts will have on consumer prices.

Trumps jobs Carrier indicative protectionist policies

As I see it, the Carrier deal is indicative of the sort of trade protectionism that could spur inflation to levels unseen in more than 30 years. The Indiana-based air conditioner manufacturer has already announced it will likely need to raise prices as much as 5 percent to offset what it would have saved by moving south of the border.

We can expect the same price inflation for all consumer goods, from iPhones to Nikes, if production is brought back home. That’s just the reality of it. Prices will go up, especially if Trump succeeds at levying a 35 percent tariff on American goods that are built overseas but imported back into the U.S. The extra cost will simply be passed on to consumers.

What’s more, Trump has been very critical of free trade agreements, threatening to tear them up after blaming them—NAFTA, specifically—for the loss of American jobs and stagnant wage growth. There’s some truth to this. But trade agreements have also helped restrain inflation over the past three decades. This is what has allowed prices for flat-screen, plasma TVs to come down so dramatically and become affordable for most Americans.

International Trade Deals Slowed Inflation
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In its 2014 assessment of NAFTA, the Peterson Institute for International Economics (PIIE) calculated that for every job that could be linked to free trade, “the gains to the U.S. economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.”

Additional tariffs and the inability to import cheaper goods are inflationary pressures that could result in a deeper negative real rate environment. And as I’ve pointed out many times before, negative real rates have a real positive effect on gold, as the two are inversely correlated.

Inverse Correlation Between Gold Real Fed Funds Rate
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Macquarie research shows that last year, ahead of the December rate hike, gold retreated about 18 percent from its year-to-date high. Afterward, it gained 26 percent in the first half of 2016. The decline so far this year has been about 15 percent from its year-to-date high. Gold, according to Macquarie, is setting up for another rally in a fashion similar to last year.

Central Bank Demand Could Accelerate on Growing Federal Debt

The U.S. government is currently saddled with $19.9 trillion in public debt. Since 2008, federal debt growth has exceeded gross domestic product (GDP) growth. And according to a Credit Suisse report last week, Trump’s tax proposal, coupled with deficit spending, could cause federal debt to grow even faster than under current policy.

After analyzing projections from a number of agencies and think tanks, Credit Suisse “estimates a federal debt-to-GDP of 92 percent by 2026, including a GDP growth offset from the lower tax tailwind, and 107 percent excluding the GDP growth offset.”

Higher US Budget Deficits Debt Spur Banks Increase Gold Buying
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The U.S. dollar accounts for about 64 percent of central banks’ foreign exchange reserves. With the potential for higher U.S. budget deficits and debt risking dollar strength, central banks around the globecould be motivated to increase their gold holdings, says Credit Suisse.

Waiting for Mean Reversion

As I mentioned last week, gold is looking oversold in the short term and long term, down more than two standard deviations over the last 20 trading days. Statistically, when gold has done this, a return to the mean has often followed. This has been an attractive entry point for investors seeking the sort of diversification benefits gold and gold stocks have offered.

In a note to investors last week, ETF Securities highlighted these diversification benefits, writing that a gold allocation has “historically increased portfolio efficiency—lowering risk while increasing return—compared to a diversified portfolio without an allocation to precious metals.”

As always, I recommend a 10 percent weighting: 5 percent in gold bullion, 5 percent in gold stocks, then rebalance every year.

Central bank gold purchases holding up – but only 3 significant regular buyers

The World Gold Council (WGC) has now released the latest figures for national central bank gold holdings for November, and while the total level of gold purchases remains at a significant level overall, it should be recognised that the vast majority of the reserve increases is only coming from three countries – China, Russia and, to a lesser extent, Kazakhstan.  Few other countries are reporting any changes at all, and those that are doing so are effectively insignificant in the scheme of things.

Over the past six months, both China and Russia have been buying in the order of between 30 and 45 tonnes per month between them.  Kazakhstan’s pace of purchase is rather smaller at around 2-3 tonnes  a month.  Over the five months to November (China was not reporting monthly increases prior to this), these three nations alone have accounted for around 90% of the global reported gold reserves increase.  And of the other 10%, Turkey accounts for around 4%, but its figures are not strictly comparable as they include that country’s policy of including gold in its reserve requirements from commercial banks, which is anomalous in relation to other nations’ reporting practices, and prone to comparatively large monthly fluctuations.

So while we do anticipate the scale of central bank purchasing to continue (China has already noted it bought around 19 tonnes in December), it does look to be particularly vulnerable to any change in purchasing policy from either of the two big buyers.  Russia in particular is a little more erratic in its month-by-month purchasing – last year for example it bought no gold in the first two months of the calendar year (and no doubt if the same happens this year the mainstream media will tell us central bank purchases are collapsing!), yet in the 11 months so far reported by the WGC, Russia has actually been the largest buyer with a total of 185 tonnes.  If it matches its December 2014 purchase of 20.73 tonnes that will bring the annual total to just over 200 tonnes – a well up on the 163 tonnes it purchased in 2014, but its month to month purchase figures can be erratic.

One should note that the figures quoted above are as reported by the individual nations to the IMF – they are not audited – and most nations just report the same numbers year in year out.  There have been doubts cast in the past on China’s reporting in particular – doubts that were shown to be correct when the Asian dragon out of the blue reported a massive 604 tonnes gold reserve increase in June, apparently accumulated over the prior 6 years, but not reported at the time.  There are thus continuing doubts about the true level of Chinese reserves, some estimates putting them considerably higher than the current figure of around 1,740 tonnes, which only comprises around 1.8% of its total forex holdings, while the top Western countries apparently manage 60-70% of their forex holdings in gold.  But these figures and levels may be equally dubious.  It isn’t only China which is believed to falsify its reported holdings to the IMF.

Both China and Russia do currently have stated policies to accumulate gold into their reserves so we do expect their purchases – and those of Kazakhstan – to continue at or around current stated levels, but the oft repeated analysts mantra that central banks are buying gold is only true in part and could be considered misleading.  It is only around the three countries noted in this article which are increasing their gold holdings on any kind of regular basis.  The rest are, at least officially, neutral in this respect.

Russian central bank accumulates another 34.2 tonnes of gold

Russia continues to amass more gold in its reserves with the purchase of another 34.2 tonnes in September, bringing its total to around 1,353 tonnes – or around 13% of its total foreign exchange reserve figure.  This is Russia’s second highest monthly total purchase in six years and represents yet another indicator of its continuing desire to downplay the significance of the U.S. dollar holding in its overall forex reserve make-up.

This is the seventh successive month that Russia has increased its gold reserve – it didn’t add to reserves in January or February.  It thus remains the world’s sixth largest national holder of gold, moving further ahead of Switzerland in seventh place which is sitting on 1,040 tonnes and closing the official gap with China which also reported increasing its gold reserve in September by 15 tonnes to 1,708 tonnes, although this only represents well under 2% of its massive forex reserves of around $3.5 trillion. Many reckon though that gold held in Chinese government accounts amounts to a far higher total than officially reported being amassed in accounts which it does not classify as part of its forex holdings and thus does not report to the IMF.

Top 10 World national holders of gold in forex reserves
Country Gold holdings
(in tonnes)*
Gold’s share of
forex reserves
1 USA 8,133.5 72.6%
2 Germany 3,381.0 66.8%
3 Italy 2,451.8 64.9%
4 France 2,435.4 65.2%
5 China 1,677.4 1.6%
6 Russia 1,288.2 12.7%
7 Switzerland 1,040.0 6.1%
8 Japan 765.2 2.2%
9 Netherlands 612.5 56.3%
10 India 557.7 5.5%

Sources:  IMF, Wikipedia, Sharelynx, LawrieOnGold

However transparency in the reporting of global gold holdings can be obscure – even for those like China and Russia which are reporting month by month official changes.  Most of the gold holders in the table above as the central banks of the countries concerned do not allow audits of their gold holdings and many have reported zero change for a number of years.  In particular, as Wikipedia points out, gold leasing by central banks could place into doubt their reported gold holdings.

Manipulation of gold and silver prices – How it is done

There is a continuing argument over whether the gold price is manipulated and we feel that it is – along with virtually every other market out there – by institutions with sufficient funds to exert a degree of control.  That seems to be an integral part of the modern-day investment sector, whether ethical or not.

But is gold a special case?  Or is silver?  Investors in these precious metals certainly believe so and we feel there is sufficient evidence out there to say definitely yes – at least from time to time when for the powers that be things start to be getting out of hand as they see it.  Why should gold in particular be a special case?

In many peoples’ eyes gold has been the ultimate form of money and indicator of wealth for centuries and since the world entered the total fiat currency era after President Nixon closed the gold window in 1971, before which the world’s global reserve currency was backed by gold, many still see gold as the ultimate bellwether as an indicator of the true strength of these currencies and of the dollar in particular.  Control the bellwether and you control the herd!

The Gold Anti Trust Action Committee (GATA) has preached gold price suppression, implemented by the major central banks (the U.S. Fed in particular) with government support allied with the monetary power of the bullion banks to do so and has been very successful in procuring various government documents, memos and emails which would support their case. This documentation recognises that at various points in time gold has most certainly been on the agenda and needs to be controlled with recognition by the financial elite that the gold price can pose a threat to their economic management and the overall picture they are tryuing to present to the people.  Couple this with ongoing media propaganda downplaying gold’s power as an investment and such intervention can probably be kept to a minimum with investors and markets doing much of their dirty work for them most of the time.

But not all of the time!  Every now and then the gold price threatens to get out of control and more drastic measures are needed to knock it back.  Hence the flash crashes when huge futures transactions, often when major markets are mostly closed, are implemented with the seemingly intended purpose to knock prices sufficiently to trigger stop-loss computer trading and thus drive the price down further.  these are a relatively recent phenomenon perhaps exemplified – one might say trialled – in the much smaller silver market back in April 2011 when the silver price was soaring up close to $50 an ounce.  While silver may no longer be truly a monetary metal it still has monetary correlations in the eyes of many and while the silver price tends to move broadly in concert with gold, but with greater extremes, there would have been the fear that in this case the tail could be wagging the dog and if the silver price was allowed to continue its upwards path it could drag gold along with it.

But while the silver price was successfully knocked back, gold managed to continue on its own upwards path for another 5 months and in August/September 2011 gold fever was in full swing and it too looked to be taking off out of control.  Cue another huge flash crash and the amount of capital at risk in the futures markets to implement this might be seen as exceptional with the theory that this was put in place by the bullion banks with central banks and government support.  True only circumstantial evidence here, but the numbers suggested something hugely more than any normal trading activity.

Once this was seen to be successful, so the theory goes, almost every time some piece of government data, or world news, seen as potentially strongly gold positive has been released there has been an almost instantaneous similar, but smaller, flash crash implemented through big futures transactions – always seemingly designed to take the price down to stop-loss selling levels.  Coupled with a Fed easing programme designed to boost the general stock markets these have turned investor sentiment away from gold very successfully and the price has been drifting downwards.

So what next for gold?  The gold investment fraternity will be hoping that the huge gold flows from West to East and the likely prospect of China eventually wresting control of gold benchmark price setting from London will reduce the power of COMEX futures market dominated price manipulation.  But China itself may then well set its own price manipulation process in place – it certainly has the financial power to do so -although the agenda and price direction may be different!  We shall see.

For more on this subject and more on what’s been happening in the silver market, readers should take a look at my other recent article on this subject on Mineweb – See: Gold price manipulation: Who really calls the tune?

Currency Wars 2015 – The year of the Central Banks

Frank Holmes of U.S. Global Investors – www.usfunds.com – presents hs views on the race for the bottom in global fiat currencies and what this means for gold and other investments

Frank Holmes in Zurich holding a gold bar
Frank Holmes in Zurich holding a gold bar

The Chinese Year of the Ram (or sheep or goat depending on which translation one uses) will kick off at the end of this month, but for now it looks as if 2015 will be the Year of the Central Banks.

I spend a lot of time talking about gold, oil and emerging markets, and it’s important to recognize what drives these asset classes’ performance. Government and fiscal policy often have much to do with it. But in the past three months, we’ve seen central banks take center stage to engage in a new currency war: a race to the bottom of the exchange rate in an attempt to weaken their own currencies and undercut competitor nations.

Indeed, amid rock-bottom oil prices, deflation fears and slowing growth, policymakers from every corner of the globe are enacting some sort of monetary easing program. Last month alone, 14 countries cut rates and loosened borrowing standards, the most recent one being Russia.

A weak currency makes export prices more competitive and can help give inflation a boost, among other benefits.

“The U.S. seems to be the only country right now that doesn’t mind having a strong currency,” says John Derrick, Director of Research here at U.S. Global Investors.

Since July, major currencies have fallen more than 15 percent against the greenback.

U.S. Dollar CLimbing HIgher Against Other World Currencies
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Two weeks ago, Switzerland’s central bank surprised markets by unpegging the Swiss franc from the euro in an attempt to protect its currency, known as a safe haven, against a sliding European bill. Its 10-year bond yield then retreated into negative territory, meaning investors are essentially paying the government to lend it money.

This and other monetary shifts have huge effects on commodities, specifically gold. As I told Resource Investing News last week:

Gold is money. And whenever there’s negative real interest rates, gold in those currencies start to rise. Whenever interest rates are positive, and the government will pay you more than inflation, then gold falls in that country’s currency. Last year, only the U.S. dollar had positive real rates of return. All the other countries had negative real rates of return, so gold performed exceptionally well.

Other countries whose central banks have enacted monetary easing are Canada, India, Turkey, Denmark and Singapore, not to mention the European Central Bank (ECB), which recently unveiled a much-needed trillion-dollar stimulus package.

U.S. Dollar CLimbing HIgher Against Other World Currencies

Gold bears are puzzled as hedge funds raise bullish gold bets.
clever image of a Panda crushing an american eagle (see below)

 

A recent BCA Research report forecasts that as a result of quantitative easing (QE), a weak euro and low oil prices, the eurozone should grow “by about 2 percentage points over the next two years, taking growth from the current level of 1 percent to around 3 percent. This is well above the range of any mainstream forecast.” The report continues: “[European] banks, in particular, are likely to outperform, as they will be the direct beneficiaries of rising credit demand, falling default rates and the ECB’s efforts to reflate asset prices.” This bodes well for our Emerging Europe Fund (EUROX),which is overweight financials.

Speaking of oil, the current average price of a gallon of gas, according to AAA’s Daily Fuel Gauge Report, is $2.05. But in the UK, where I visited last week, it’s over $6. That’s actually down from $9 in June. You can see why Brits don’t drive trucks and SUVs.

But that’s the power of currencies. As illustrated by the clever image of a Chinese panda crushing an American eagle (above), China’s economy surpassed our own late last year, based on purchasing-power parity (PPP).

China's Economy Surpasses the U.S.'s Based on Purchasing Power Parity
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Financial columnist Brett Arends puts it into perspective just how huge this development really is: “For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.”

Burgerology: Price of a Big Mac as of 2015

An easier way to comprehend PPP is by using The Economist’s Big Mac Index, a “lighthearted guide to whether currencies are at their ‘correct’ level.” The index takes into account the price of McDonald’s signature sandwich in several countries and compares it to the price of one here in the U.S. to determine whether those currencies are undervalued or overvalued. A Big Mac in China, for instance, costs $2.77, suggesting the yuan is undervalued by 42 percent. The same burger in Switzerland will set you back $7.54, making the franc overvalued by 57 percent.

Earning More in a Low Interest Rate World

From what we know, the Federal Reserve is the only central bank in the world that’s considering raising rates sometime this year, having ended its own QE program in October.

Last month we learned that the Consumer Price Index (CPI), or the cost of living, fell 0.4 percent in December, its biggest decline in over six years. We’re not alone, as the rest of the world is also bracing for deflation:

Global Consumer Price Index (CPI) Trends
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Following Fed Chair Janet Yellen’s announcement last Wednesday, the bond market rallied, pushing the 10-year yield to a 20-month low.

U.S. 10-Year Bond Yield Dips to a 20-Month Low
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Interest rates remain at historic lows, where they might very well stay this year. But when they do begin to rise—whenever that will be—shorter-term bond funds offer more protection than longer-term bond funds. That’s basic risk management. We always encourage investors to understand the DNA of volatility. Every asset class has its own unique characteristics. For example:

The Longer the Maturity, the Greater the Price Volatiity
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Upcoming Webcast

To those who listened in on our last webcast, “Bad News Is Good News: A Contrarian Case for Commodities,” we hope you enjoyed it and received some good, actionable insight. If you weren’t able to join us, you can watch the webcast at your convenience on demand. Our next webcast is coming up February 18 and will focus on emerging markets, China in particular. We hope you’ll join us! We’ll be sharing a registration link soon.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting http://www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.