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Frank Holmes
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Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., a boutique investment advisory firm based in San Antonio that manages domestic and offshore funds specializing in the natural resources and emerging markets sectors. The company’s no-load mutual funds include the... More
My company:
U.S. Global Investors
My blog:
Frank Talk: Insights for Investors
My book:
Goldwatcher: Demystifying Gold Investing
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  • Feelin' The Fire, Investors Are Hot For Gold

    Gold seems to be sparking more attention these days, as investors have seen the precious metal steadily rise from its December low of around $1,200, to a new high of $1,350 just three months later.

    What's Driving Gold?
    The media has been focusing on the conflict in Ukraine and Russia as the main driver for gold, but I think an equally important driver relates to real interest rates.

    For gold, the real fuel lies in negative-to-low real rates of return. Historically, the gold price rises when the inflationary rate (NYSEARCA:CPI) is greater than the current interest rate. Similarly, when real interest rates go above the positive 2-percent mark, you can expect the gold price to drop.

    Investors can watch out for two factors. See if the embers still spark for gold. Take a look at what happened over the past year with real interest rates and gold.

    A Year in Review

    • A year ago in March 2013, the five-year Treasury yield was offering investors 0.88 percent, while inflation was 1.5 percent. This equaled a real rate of return of -0.62 percent, so investors were losing money. That month we saw gold reach as high as $1,614.
    • The five-year Treasury yield rose to 1.74 percent in December of that year, as inflation lowered to 1.20 percent, returning a positive rate of 0.54 percent. What happened to gold? The price dropped to a staggering $1,187.
    • Today inflation has gone up 40 basis points to 1.60 percent while the five-year Treasury yield is at 1.53 percent. A negative real rate of return has resurfaced. Meanwhile, gold rose to $1,350.

    More Inflation Coming?
    Inflation has been off the radar for most people in the U.S., but Macquarie Research made an interesting observation as wage growth experienced the largest monthly increase in more than three years. Going back more than 15 years, you can see the six-month annualized change of 3.3 percent is "the highest pace of wage growth in over five years," says Macquarie.

    (click to enlarge)

    Usually, wage growth leads to an increase in the cost of goods, which translates to higher inflation.

    And, with the Federal Reserve expected to keep rates low for a period of time to allow the economy to continue growing, it looks like real interest rates will remain low-to-negative, which should keep investors hot for gold.

    Check out our latest Special Gold Report to read more on how the gold price is driving Federal Reserve policy, unemployment and inflation.

    The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.

    Mar 19 9:40 AM | Link | Comment!
  • Follow The Money To Asia's Tech Hub

    China's slower economic data points and a surplus in copper and iron ore drove many commodities lower this week, while gold rose. In the short term, until the copper and iron ore surplus is liquidated, or absorbed at a slower pace, the base metals market will likely be sloppy.

    As the second-largest economy in the world and a huge driver of commodities demand, it's not surprising China provoked such a significant response from world markets. Interestingly, most of the media thought it was geopolitical fears from Ukraine that chopped up the market and lifted gold.

    Over the past few decades, we've watched the country experience tremendous economic growth, with its share of world GDP growth going from only 1.4 percent in 1992 to nearly 20 percent two decades later. China has become quite an economic powerhouse, with a tremendous effect on domestic urbanization and wealth, changing consumption patterns dramatically.

    So even if the country experiences short-term headwinds, we believe the long-term story remains slower, but stable. The important part is to look past the negative headlines to uncover the best opportunities, or as we like to say, "Follow the money!"

    At U.S. Global, we strive to follow the money by analyzing the broader Asian market, focusing on the areas that are sustaining leadership, both by sector and by country.

    For instance, did you know that the strongest-performing sector in Asia over the past year is technology? Take a look at the chart below showing that technology stocks in the MSCI Asia Index (excluding Japan) increased 14.2 percent over the past 12 months. The sector far outperformed energy, which declined the most in the same time frame.

    (click to enlarge)

    In the Investor Alert, we've often discussed how the tech industry has been gaining strength in Asia, but particularly in China, which is quickly becoming the largest e-commerce market.

    The world has drastically changed since the last technology boom more than a decade ago. As China has become one of the best consumption stories out there, local technology companies have profited. Take a look at other discussions we've had on China's booming sector:

    You can see below that Chinese technology companies have far outpaced other major Asian technology sectors. Over the past year, China's tech stocks grew 77 percent. In Taiwan, tech businesses rose 15.3 percent while Korean tech stocks decreased 11.6 percent.

    (click to enlarge)

    So what about China makes it a technology hub?
    Similar to what's happening in the U.S., mobile Internet is transforming consumer behavior in China, with further penetration of smart phones, proliferation of mobile-payment apps, and 4G networks rolling out in China. These technologies aid in the ease and pleasure of shopping from home and staying connected, facilitating the rapid adoption of mobile e-commerce in the country.

    In fact, as of the third quarter of last year, mobile e-commerce transactions already comprised 9.5 percent of total e-commerce volume, up from just 0.7 percent in the first quarter of 2011.

    (click to enlarge)

    With this significant growth, what I think is really important in China these days is the entrepreneurial spirit taking place. You have these young entrepreneurs growing up in China, creating new companies and achieving incredible success. In fact, according to the Chinese government, the startup of new companies in the private sector increased 30 percent in 2013, reaching 233 million businesses!

    The entrepreneurs have government support too. In the widely watched annual press conference following the end of the National People's Congress Conference, Premier Li Keqiang highlighted the government's focus on innovation as a key driver for growth. In his signature no-nonsense and candid manner, the premier restated the importance of modernization and advancement.

    As I wrote recently in my blog, innovation is one way companies grow and thrive in today's highly connected and competitive world.

    This innovation can be seen in the government's recent selection of technology companies, Tencent and Alibaba, to open private banks. Currently, almost all banks in the country are state owned. This is yet another positive for tech companies, who have already collected deposits from many smart-phone users, who are able to achieve better rates than normal banks can offer.

    Indonesia is Top-Performing Country in Asia
    When it comes to country leadership in Asia, Indonesia is topping the performance charts. Among Asian countries, Indonesia has been the best performing country over the past six months, increasing about 8 percent as of March 14.

    What is particularly impressive is that, despite investors' worries about the country's current account deficit and weak currency last year, businesses found Indonesia an attractive place to expand operations and do business.

    Aggregate foreign direct investment has been strengthening across Southeast Asia, rising 7 percent in 2013 to $128.4 billion. Foreign investment was a particularly bright spot in Indonesia, as it grew 17 percent, according to Bank of America Merrill Lynch. What's more, investment into Indonesia has been growing at a consistent pace over the past five years.

    (click to enlarge)

    This is a very encouraging sign, as there is great historical parallel, says Xian Liang, portfolio manager of the China Region Fund (MUTF:USCOX). He says that in the 1980s and 1990s, foreign direct investment kept flowing into China, which helped the economy grow.

    Just today, the country was upgraded to market weight by Goldman Sachs, which cited various reasons investors could see a pick-up in the investment cycle within the country.

    We see additional positives for Indonesia, including the following:

    • The country's current account deficit in the fourth quarter improved significantly. Indonesia managed to produce a trade surplus of $50 million compared to economists' expectation of a $775 million deficit.
    • Indonesia inflation stabilized as November CPI was 8.37 percent versus the consensus of 8.45 percent.
    • The country is getting ready for its presidential election on July 9, which could be positive for stocks. According to Goldman Sachs, "elections have historically been an important domestic catalyst" for Indonesia. In addition, depending on the outcome of the vote, pro-growth policies "could help boost investment activity and provide impetus to the overall growth cycle," says Goldman.
    • Secular drivers remain intact for Indonesia. Younger demographics, lower labor costs, robust domestic demand, and rising geopolitical competition among superpowers should help sustain favorable investment cycles in Southeast Asia, especially in faster growing countries such as Indonesia.

    This is only a glance at some of the strengths in Asia where we like to focus. With our ability to dynamically adapt and move to these areas, we can overweight these areas of relative strength while trying to avoid those that have been under pressure.

    Want to read more on Asia? Share your email address and we'll send you a note the next time Frank Holmes posts to his blog. You can also keep informed by following U.S. Global Investors on Twitter or Facebook.

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

    Past performance does not guarantee future results.

    Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund's returns and share price may be more volatile than those of a less concentrated portfolio.

    The Consumer Price Index (NYSEARCA:CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. The MSCI Asia ex-Japan Index is a free float-adjusted, capitalization-weighted index measuring the performance of all stock markets of China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand, India and Pakistan.

    Holdings in the China Region Fund (USCOX) as a percentage of net assets as of 12/31/13: Alibaba 0.00%, Tencent Holdings Ltd. 4.03%.

    Disclosure: I am long TCEHY.

    Mar 17 5:53 PM | Link | Comment!
  • Making Green From Gold, Palladium And Pollution

    Gold's Bull Days Are Back?
    Gold is coming back with a vengeance, experiencing a clear recovery and grabbing the attention of market cynics. Analysts from Noruma Securities even upgraded its outlook for gold, expecting bullion to climb over the next three years, according to Barron's.

    Nomura analysts attribute their increased gold forecast to real interest rates that "don't seem to be heading anywhere at the moment." In addition, there appears to be "long-term demand support from Asian nominal income growth, an evolving post-QE macroeconomic environment and lower disinvestment potential."

    Gold is also gleaming a little brighter in Japan, as its central bank announced that monetary policies will remain very accommodative. With a weakening yen, gold will likely be seen as a store of value for Japanese investors.

    Palladium Near Its Highest Level in Almost a Year
    Two global events recently colluded that dramatically affected the palladium and platinum market. The situation in Ukraine and Russia along with six-week-long strikes in South Africa began raising concerns that these palladium-rich countries may not be able to continue supplying the commodity at normal levels.

    Currently South Africa supplies around 37 percent of the world's palladium; Russia supplies close to 40 percent of the world's palladium.

    What does this all mean for the palladium and its sister platinum? It seems that fear surrounding the international political landscape is helping to push the precious metals prices higher and higher.

    You can see the effect the political landscape is having on palladium. Over the past year, the metal has mainly traded sideways, but this week hit its highest level in almost a year. The precious metal reached $775 per ounce while its sister, platinum, climbed to nearly $1,500 an ounce.

    (click to enlarge)

    In January, I indicated that platinum and palladium looked extremely compelling. There were supply and demand drivers I felt would drive the metals higher.

    Just last week, the U.S. Mint is "ending a four-year exit from the market" by selling one-ounce American Eagle platinum bullion coins, writes Frank Tang from Reuters. According to a wholesaler last week, initial demand is strong, as 1,000 coins have already been scooped up.

    Like I discussed with Resource Investing News at the Vancouver Resource Investment Conference, industrial demand has been gaining strength. Take rising automobile sales in the U.S. that I talked about a few months ago. With interest rates on car loans so low, Americans have been replacing their clunkers with more fuel efficient cars, which is positive for platinum and palladium.

    It's a similar story in emerging markets. In Africa, the GDP without a leveraged economy is still growing at 5 percent, and you definitely need platinum and palladium for their vehicles, even if they are diesel.

    In China, vehicle sales last year rose faster than expected, climbing nearly 14 percent compared to a year earlier, according to the China Association of Automobile Manufacturers. The country is already the biggest automobile market in the world and millions of new cars on the roads add up fast.

    See the interview here.

    Renewable Energy Could Get You More Green

    In our webcast last week, Brian Hicks, portfolio manager of the Global Resources Fund (MUTF:PSPFX), talked about four opportunities he sees in resources over 2014.

    One relates to China's focus on alternative energy.

    See the other three opportunities now.

    In BP's latest Energy Outlook 2035, you can see the incredible long-term growth anticipated in the renewable energy industry. In terms of volume growth, China is expected to surpass the European Union countries by 2035. Based on this secular transformation, the local clean energy sector should continue to benefit.

    (click to enlarge)

    Specifically, wind power and solar look especially attractive, especially given the excessive pollution in the Asian giant. Take a look at CLSA data: In 2009, the country had about 0.2 percent of the global market. By 2014, it's estimated to grow to one third of the global market.

    China isn't the only country with a growing renewable energy market. After the massive earthquake hit Japan in 2011, the solar market is taking off there too.

    (click to enlarge)

    If you were too busy to tune into our webcast last week, you missed a good discussion among Brian Hicks, John Derrick and me. It was an hour chock-filled with investing ideas in the U.S. market, emerging countries, resources and gold. However, it's not too late to watch the replay at your leisure this weekend.

    Watch it now.

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

    Past performance does not guarantee future results.

    Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

    Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: commodities
    Mar 12 10:26 AM | Link | Comment!
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