Gold Glimmers as Global Market Fear Grips InvestorsAugust 21, 2015by Frank Holmes

of U.S. Global InvestorsGold this week broke above its 50-day moving average as a fresh round of negative news from around the globe rekindledinvestors’ interest in the yellow metal as a safe haven. The Fear Trade, it seems, is in full force.

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Below are just a few of the recent news items that have made some investors skittish, which has supported gold prices:

China, the world’s second-largest economy, continues to slow. Its preliminary purchasing managers’ index (PMI)reading, released today, came in at 47.8, a 77-month low. This follows China’s decision last week to devalue itscurrency, the renminbi, close to 2 percent. For the first time in a year, the Shanghai Composite Index fell below its200-day moving average.Crude oil has been on an eight-week losing streak, the longest in 29 years. West Texas Intermediate (WTI) slippedbelow $40 per barrel in intraday trading today, the first time it’s done so since 2009.U.S. stocks are undergoing an ugly selloff. They just had their worst week since September 2011 and are on track topost their worst month since May 2012. The Dow Jones Industrial Average, down 10 percent since its all-time high, isnearing correction territory. All 10 S&P 500 Index sectors were off this week.

We can also add to this list the high levels of margin lending on the New York Stock Exchange (NYSE) right now. At theend of every month, the exchange discloses margin amounts, and it appears that everyone is leveraged. Real margin debtgrowth since 1995 is twice as much as real S&P 500 growth.

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Cartson Ringler is a market analyst and founder of Ringler Consulting and Research in Germany. Speaking with the GoldReport this week, he highlighted the precariousness of high margin debt in domestic equities:

We saw a huge bull market from 2009 to 2015 on the S&P 500 when it went to around 2,080 from 666. That marketis really mature. One number that scares me is the high margin debt on NYSE. When the big market crashhappened in 1987, we saw $38 billion in margin debt, but as of June 2015, NYSE margin debt was more than $504billion. Everyone is dancing until the music stops. So I’m shorting the S&P 500, while building my basket of differentprecious metals producers.

Should the $504 billion—an all-time high, by the way—worry us, as Ringler suggests? Maybe, maybe not. It’s worthremembering, though, that high margin lending in China greatly contributed to the Shanghai Stock Exchange’s 30-percentcorrection just a month ago.

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In its Friday newsletter, Kitco made note of many of these market-moving events and said that “optimism in gold shouldspill over next week. A strong majority among retail investors and market professionals expect to see higher prices the lastfull week of August.”

The Contrarian Case for Gold Is Scorching HotPage 2, © 2020 Advisor Perspectives, Inc. All rights reserved.

Earlier this month I shared with you that hedge funds are net short gold for the first time since U.S. Commodity FuturesTrading Commission data began in 2006. Being short has become a very crowded trade, and many contrarian investorshave seized upon this bearishness to add to their gold exposure. American Eagle gold coin sales rose an impressive 124percent in July month-over-month.

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This week, famed hedge fund manager Stanley Druckenmiller plunked down more than $323 million of his own money intoa gold ETF, according to second-quarter regulatory filings.Druckenmiller is the guy who consistently delivered 30 percent on an average annual basis between 1986 and 2010, theyear he closed his fund to investors. He’s also responsible for making the call to short the British pound in 1992, which“broke the bank of England” because it forced the British government to devalue and withdraw the currency from theEuropean Exchange Rate Mechanism (ERM).

And now he’s made a huge bet on gold. The $323-million investment, in fact, is the largest position in his familyfund.

Demand among global central banks and retail buyers has also heated up. As I told Daniela Cambone in this week’s GoldGame Film, the Chinese government is now reporting monthly on its gold consumption to offer greater transparency andconvince the International Monetary Fund (IMF) that the renminbi should be included as part of the special drawing rights.Last month, the Asian country purchased 54 million ounces. And in the first half of the year, demand in Germany, the third-largest gold market behind China and India, increased 50 percent over the same period in 2014.

Gold in Russian Ruble Terms Shows The Value of Hard Assets

The Russian ruble, meanwhile, has lost nearly 50 percent of its purchasing power from 12 months ago, following itsinvasion of Ukraine and the drop in oil prices. Over the same period, gold has risen about 54 percent.

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It shows that when a currency loses value and falls out of favor, gold has tended to benefit as investors seek real assets.Gold prices have then been able to soar, just as we saw in the months following the financial crisis, eventually reaching anall-time high of $1,921 per ounce in September 2011.

Remember, Druckenmiller just invested heavily into gold. Prudent investors such as him understand the dynamic betweenfiat currencies and gold, and they adjust their funds accordingly. Does he predict something happening to the U.S. dollarthat might benefit gold?

Druckenmiller might have 20 percent allocated to gold, but it’s advisable to have closer to 10 percent—5 percent in goldstocks, 5 percent in bullion, then rebalance every year. This should be strongly considered whether the economy is soaringor struggling.

I invite you to head over to Kitco and compare for yourself the price of gold in U.S. dollars to other world currencies.

Looking for Other “Safe Haven” Options in the Volatile Market?

Gold is indeed glimmering with safe haven appeal, but I encourage investors seeking an investment that has a history ofless drama to check out municipal bonds.

Having provided investors with over 20 straight years of positive returns, NEARX holds five stars overall from Morningstar,among 185 Municipal National Short-Term funds as of 6/30/2015, based on risk-adjusted return.

Air Traffic Demand Continues Its Upward Ascent

On a final note, Jeffries released its latest air traffic demand growth numbers yesterday, and the results were very positive.According to the group:

The July Jefferies Air Traffic survey registered a 6.4-percent year-over-year growth rate for our sample. The IATA(International Aviation Transport Association) report for July could show traffic growth of about 8.5 percent, strongvs. 5.9 percent year-to-date. Financial market turmoil and weak commodity prices don’t appear to be hurtingdemand.

July demand is up from 4.8 percent in June, Jefferies also notes. The strong traffic results serve as further justification forthe group’s year-end demand growth of 6 percent.

Index SummaryPage 4, © 2020 Advisor Perspectives, Inc. All rights reserved.

The major market indices were hammered this week. The Dow Jones Industrial Average fell 5.82 percent. The S&P500 Stock Index dropped 5.77 percent, while the Nasdaq Composite declined 6.78 percent. The Russell 2000 smallcapitalization index slid 4.61percent this week.The Hang Seng Composite tumbled 7.29 percent this week; while Taiwan fell 6.25 percent and the KOSPI dropped5.41 percent.The 10-year Treasury bond yield fell 2 basis points to 2.04 percent.

Domestic Equity Market

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Strengths

Utilities was the best performing sector in the S&P 500 Index this week as escalating concerns of a global growthslowdown dragged down equities and government yields. The S&P Utilities Sector Index fell 1.19 percent this week.Housing starts and existing home sales for the month of July came in much stronger than expected. These two datapoints highlight that housing is still an area of relative strength in the U.S.Despite a selloff in many currencies this week, the dollar actually fell. The decline in the greenback is usually seen asa positive sign for global growth. The Trade Weighted Dollar Index fell 1.67 percent this week.

Weaknesses

Energy was the worst performing sector in the S&P 500 Index this week as oil prices continue to collapse and globalgrowth concerns take hold. The S&P 500 Energy Sector Index fell 8.64 percent this week.The global selloff in equities witnessed this week is particularly concerning for the more cyclical areas such asmaterials and industrials. The slowdown in the Chinese economy is the largest headwind in the global economycurrently.The United States Empire Manufacturing Index contracted sharply for the month of August. The index came in at -14.92 compared to an expected gain of 4.5, signaling serious weakness and concern in the manufacturing sector.

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Opportunities

The Federal Open Market Committee (FOMC) minutes were more dovish than expected, which could mean rates willnot rise until December, which would be positive for equities in the short term.The next preliminary second quarter GDP growth reading for the United States will be released next week and isexpected to be much more positive than the first preliminary reading.The Conference Board Consumer Confidence Index is expected to rise to 93.4 for the month of August. A furtherincrease in consumer confidence would be a tailwind for discretion and other consumer based industries.

Threats

Any rate hike this year may be too early given the recent changes in global economic sentiment. Inflationexpectations are particularly weak, with the 5-year forward 5-year inflation breakeven rate in the United States fallingbelow 2 percent for the first time in months. If the Fed jumps the gun, markets could unwind fast.

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The Markit U.S. Manufacturing Purchasing Managers’ Index (PMI) for month of August came in at 52.9 percent,declining from 53.8 percent in the prior month. This negative reading signals a potential slowdown in themanufacturing sector.The Conference Board’s Leading Index contracted by 0.2 percent for the month of July. A composite of variousleading indicators, the Leading Index aims to anticipate changes in the real economy that have yet to come.

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The Economy and Bond MarketGlobal markets were rattled by more bad news from China. Still reeling from last week's surprise action to devalue therenminbi, investors sold off stocks and bought “safe-haven” bonds and gold. The bearish mood was exacerbated Friday bythe weakest reading from China's factory sector in six years. The VIX volatility index hit 24 intraday, a high not seen in2015, and the S&P 500 Index fell into negative territory for the year to date. The yield on the 10-year U.S. Treasury notedropped to 2.04 percent, the lowest rate since April.

Accompanying the broad and steep selloff in equities were further drops in prices for commodities, including oil andcopper. Asian emerging markets were among the hardest hit, feeling the fallout from China's currency weakness anddeclining demand for their exports. U.S. West Texas Intermediate crude oil fell to $40 per barrel, while Brent futures tradedclose to $45.

Strengths

Housing starts picked up to 1.206 million seasonally adjusted annual rate (SAAR) in July, surpassing expectations of1.18 million and reaching the fastest pace of building since October 2007. June was also revised up notably to 1.204million from 1.174 million. Coupling this with increasing optimism among homebuilders, as evidenced by the NAHBhousing index reaching a cyclical high of 61 in August, the uptrend for housing starts should continue.

Existing home sales ramped up for a third consecutive month in July, rising 2.0 percent to 5.59 million SAAR. Thiswas well above expectations for a pullback to 5.43 million, and is the strongest pace of sales since February 2007.Britain’s inflation rate unexpectedly rose in July and a core measure of price growth jumped to the highest in fivemonths. The increase in the headline reading to 0.1 percent from zero was due to clothing prices, with smallerdiscounts in the summer sales this year compared with a year earlier. Economists in a Bloomberg survey hadforecast the rate would stay at zero. The core measure increased to 1.2 percent from 0.8 percent, higher than the 0.9percent reading predicted by economists.

Weaknesses

Headline and core Consumer Price Index (CPI) both increased 0.1 percent month-over-month in July, coming in atouch below expectations of 0.2 percent. Should the recent fall in crude prices persist, it would suggest additionaldownside to headline inflation.

The Empire manufacturing index collapsed to -14.9 in August from 3.9 in July, suggesting a notable contraction inmanufacturing conditions during the month. This was a hugely disappointing print, as the market anticipated a slightimprovement to 4.5. Additionally, this is the lowest reading for the index since April 2009.Japan's economy contracted at a 1.6 percent annualized rate in the second quarter, dragged down by weakerconsumer spending and exports.

Opportunities

U.S. second quarter GDP is released next Thursday. A confirmation of the expected 2 percent growth would likelyadd some stability to recent volatility.

According to PIMCO, securities near the middle of the quality scale will probably be in a sweet spot when the FederalReserve raises rates. The so-called “crossover bonds” perform better and are less correlated to U.S. Treasuries thanare their investment-grade counterparts. This would provide an opportunity for bond investors that have the flexibilityto cross the line between high-quality and junk-rated debt.Thanks to stronger sales growth and improving margins, European firms should continue to enjoy robust earningsgrowth.

Threats

Goods-producing and globally-exposed firms will remain under pressure as their pricing power deflates. Leadingindicators such as the ISM services vs. ISM manufacturing indexes have been favoring services producers, andadditional U.S. dollar strength will reinforce these trends. Defensives and services companies have a substantialpositive pricing power advantage over their cyclical and goods-producing counterparts and the meltdown in emerging

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market currencies will likely exacerbate that gap further.

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With the one-month in Durable Goods Orders trending below the three-months, a data disappointment in nextThursday’s reading could negatively affect equity sentiment.

Given the focus on the trajectory of economic growth in the second half of the year, the Conference Board's index ofleading economic indicators (LEI) series should receive heightened attention. This index is highly correlated withGDP growth over broad periods of time. If the LEI is entering a sustained deceleration, it would be a troubling omenfor GDP. The LEI is now up 5.4 percent over year-ago levels, modestly below the pace in the first quarter (5.8percent) and fourth quarter of 2014 (6.2 percent), though this is not sufficient in magnitude to imply a GDP slowdown.Nonetheless, the cooling trend in the LEI is hinting that the economy is only gradually improving relative to the firsthalf.

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Gold MarketFor the week, spot gold closed at $1,160.95 up $45.86 per ounce, or 4.11 percent. Gold stocks, as measured by the NYSEArca Gold Miners Index, gained 6.42 percent. The U.S. Trade-Weighted Dollar Index slid 1.57 percent for the week.

Date Event SurveyActualPriorAug -18

U.S. Housing Starts 1180K 1206K 1174K

Aug -19

U.S. CPI YoY 0.20% 0.20% 0.20%

Aug -20

U.S. Initial Jobless Claims 271K 277K 274K

Aug -20

CH Caixin China PMI Mfg 48.2 47.1 47.8

Aug -25

HK Exports YoY -- -- -3.10%

Aug -25

US New Home Sales 510K -- 482K

Aug -25

US Consumer ConfidenceIndex

93.4 -- 90.9

Aug -26

US Durable Goods Orders -0.40% -- 3.40%

Aug -27

US GDP Annualized QoQ 3.20% -- 2.30%

Aug -27

U.S. Initial Jobless Claims 275K -- 277K

Aug -28

GE CPI YoY 0.10% -- 0.20%

Strengths

Gold Fields was the best-performing senior mining stock for the week, up 33.96 percent. CEO Nick Holland saidinvestors are missing the quality of its foreign operations by focusing on delays and higher costs at its domesticprojects. The company’s mines in Peru, Australia and Ghana helped raise headline earnings to $19 million in thesecond quarter, mending losses from the previous two quarters.Alamos Gold was the best-performing junior mining stock for the week, up 20.57 percent. The company recentlyreported positive second-quarter financial results and was upgraded by the Canadian Imperial Bank of Commerce(CIBC). We see the stock trading 5 percent above the fair value of its resource base.According to the latest SEC filings, Stanley Druckenmiller bought shares in a gold ETF worth $323.6 million at theend of June, making it the largest position in his family office fund.South African unions accepted the Chamber of Mines’ final gold pay offer, ending what has been a contentious routof negotiations.

Weaknesses

Eldorado Gold was the worst-performing senior mining stock for the week, down 12.67 percent. The company isbattling to develop its Greek mines in the face of government opposition. Citing an “openly hostile” Greek EnergyMinistry, the company said it would suspend most mining and development activities at its operations in northernGreece. It also said it would take legal action against the government’s decision to revoke its technical studies at thedevelopment projects.

Rubicon Minerals Group was the worst-performing junior mining stock for the week, down 22.57 percent. Thecompany’s update on its projects revealed some delays in the extraction of its first trial slope. This will likely cause acash burn that could force the company to come back to the markets to raise money.In the past few months, a handful of mines have dropped under $1 per share, prompting notices from the New YorkStock Exchange that they have six months to resume trading over $1 for at least a month or else they will be forcedto delist. Companies affected have been McEwen Mining, Thompson Creek Metals and Silvercorp.Huaan Yifu Gold ETF, the bullion ETF with the biggest volume in China over the past month, posted a third straightweekly outflow. Outflows could be driving liquidity needs.

OpportunitiesPage 9, © 2020 Advisor Perspectives, Inc. All rights reserved.

According to Strategas, 30 percent of S&P 500 Index stocks have fallen to a 20-day low. Readings in excess of 50percent would be more consistent with a washout. That means gold’s oversold rebound can continue. According tothe King Report, if there is no stock market appreciation from the recent rout, the entire rationalization for financialrepression will be destroyed. If a bear market for stocks develops during financial repression, the economicconsequences should be dire. At that point, it would then be time to get long pitchforks and torches. Governmentleaders and Fed officials would be a short.

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China increased its gold reserves 1.1 percent in July as gold prices dropped 4 percent in July, according to datarelease from the central bank this week. This may suggest that China is selling some of its dollar reserves and rollingit into gold. If these monthly updates become a mainstay, it could provide momentum for the gold market.The release of the U.S. Consumer Confidence Index is expected to show an improvement from 90.9 to 93.4. Giventhe recently mixed economic data, a disappointment could lift gold prices.

Threats

Barnabas Gan, the top-ranked precious metals forecaster, said the Fed will still raise interest rates this year, whichwill hurt gold.

According to Citigroup, Venezuela appears poised for a near-term crisis amid protests and basic goods shortages asthe country heads for parliamentary elections in December. As such, the central bank could be tempted to sell part oftheir gold reserves to raise funds.If next week’s release of second-quarter GDP comes in stronger than the expected 3.2 percent, it could raise theprospect of a September rate hike by the Federal Reserve and potentially depress the gold price.

Energy and Natural Resources Market

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Strengths

Gold equities led natural resources this week as Kazakhstan’s currency, the tenge, plunged by about a quarter onThursday after the central bank stopped managing the exchange rate, prompting fears that a wider emerging marketcurrency rout could be coming. The Philadelphia Gold & Silver Index gained 4.95 percent this week.The S&P 500 Utilities Index outperformed the S&P 500 Index by 4.57 percent this week on renewed fears over globaldeflation and falling government bond yields.On a relative basis, global coal stocks weathered the broader market downturn better than most natural resourcesindustry groups, as selling pressure decelerated from an oversold condition.

Weaknesses

Oil and gas royalty companies underperformed as dividends continue to be cut or suspended due to falling crude oilprices. The Yorkville Oil & Gas Royalty Index fell 10.88 percent this week.TSX listed energy stocks underperformed this week on a combination of a weakening Canadian dollar, decliningmarket liquidity and a weaker commodity price. The TSX Capped Energy Index fell 10.00 percent during the week.Copper and other base metals stocks pulled back as investors continue to fear a slowdown in China’s growth. TheS&P/TSX Capped Diversified Metals and Mining Index fell 10.41 percent this week.

Opportunities

U.S. New Homes sales will be released next week and is expected to show further momentum building in housingmarket, which could be positive for timber and related wood product producers.

China’s Conference Board of Leading Economic Indicators will be released next week which could provide morevisibility regarding the country’s economic growth.U.S. President Barack Obama will speak at the eighth annual National Clean Energy Summit next week, kicking off acampaign to promote his climate agenda ahead of United Nations-sponsored negotiations in December.

Threats

Concerns over China’s slowing growth rate remain high. Commodities and related stocks could remain volatile overthe short-term.Crude oil fell below $40 a barrel in intraday trading on Friday, and could fall further given high inventories and resilientU.S. production that remains elevated despite a lower rig count and softer prices.The Fed has all but said for certain that it will raise rates this year, which threatens to boost the U.S. dollar higher andpressure commodity prices.

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China RegionStrengths

This week saw a global sell off in equities. With very few places to hide, gold and other “safe haven” assets were therelative outperformers as far as asset classes go. Regionally, every East Asian market closed down for the week.Telecommunication was the best performing sector in the region as investors flocked to lower beta and moredefensive areas of the market.Singapore retail sales for the month of June came out last week and were particularly strong. Analysts expectedyear-over-year growth in retail sales to be 3.5 percent, but the actual growth was 6.9 percent.

Weaknesses

Chinese equities fell sharply amid a global sell off in equities. The government’s unexpected devaluation of the yuanand consistently disappointing PMI readings are greatly weakening investor sentiment. The Shanghai StockExchange Composite Index fell 11.54 percent this week.Indonesian equities fell with the rest of global markets this week as the country’s exports contracted sharply in Julyfrom a year earlier. The Jakarta Stock Exchange Composite Index fell 5.44 percent this week.South Korean stocks underperformed this week alongside its regional peers. The Korea Stock Exchange KOSPIindex fell 5.41 percent this week.

Opportunities

Korean exporters should see increased competiveness from a weaker won relative to the Japanese Yen. The wonhas weakened significantly against the yen over the past few weeks after a prolonged period of yen depreciation dueto Japan’s QE program.

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The Federal Open Market Committee (FOMC) minutes revealed a more dovish Fed than expected, meaning it maybe more likely that rates rise in December rather than next month. Prolonging the inevitable rate rise is positive foremerging markets.

Ongoing recovery in the U.S. housing market has pushed existing home sales to the highest since February 2007,which has manifested itself in the latest quarterly results of bellwether U.S. home improvement stores. Leading powertool exporters in Asia should continue to benefit from resurgent demand for remodeling homes for sale in the U.S.,significantly lower raw material prices compared with a year ago, and favorable effect from recent Chinesedevaluation due to U.S. dollar denominated revenue and renminbi denominated costs of production.

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Threats

Malaysia’s foreign exchange reserve fell below US$ 100 billion in July for the first time since August 2010. Slumpinglocal currency, accelerating capital outflow, growing fiscal pressure, and, above all, a real threat of crude oil decliningfurther make the net energy exporting country vulnerable for sustained underperformance within emerging Asia.Economists cut Japan’s growth forecast for the 12 months ending March 2016 once again. The lower forecast evenfurther diverges from the Bank of Japan’s more optimistic forecast.Singapore’s industrial production growth for the month of July is expected to decline by 3.7 percent. While this is animprovement from the prior months reading, the contraction is still concerning.

Emerging EuropeStrengths

Hungary was the strongest market this week, falling only 80 basis points. On the other hand, GDP growth for thesecond quarter was reported at 2.7 versus the prior reading of 3.5, and July PMI data was reported at 50 versus theprior reading at 55.4.The Czech koruna was the strongest currency this week, gaining 2.3 percent. Economic data coming out for CzechRepublic continues to surprise to the upside. Second quarter GDP growth was reported at 4.4 percent versus theprior 4 percent. The PMI data for July was the strongest among emerging European countries at 57.5.In a down week, the utilities sector was the best performing sector.

Weaknesses

Borsa Istanbul fell 4.5 percent this week and the Turkish lira weakened by 3 percent. Political crisis and reports ofviolence in Turkey weighted on equities and sent the lira to a record low. The yield on 10-year Turkish Governmentnotes continues to move higher, highlighting the stress in the country’s markets.

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The Russian ruble lost 6 percent of its value this week, moving towards prior low levels that we saw at the end ofJanuary. Economic data coming out of Russia is weak. Real wages and retail sales declined by 9.2 percent, industrialproduction is down 4.7 percent and July PMI data fell to 48.3. Further weakness in Brent crude oil prices putpressure on Russia’s economy.

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The Industrial sector was the worst performing sector this week.

Opportunities

Greece’s Prime Minister Alexis Tsipras resigned late Thursday after being in power for seven months. He acceptedthat he failed to bring the agreement that he wanted but he will continue to try to improve the Memorandum ofUnderstanding (MoU). During his resignation speech, his comments were pro Europe and supporting the MoU. Anew round of elections will take place probably on September 20 or 27.Eurozone Manufacturing PMI data for July came in strong at 52.4. Polish and Czech Republic PMI numbers remainstrong as well. Turkey’s PMI data crossed above 50, signaling growth. Also, Consumer Confidence for the eurozonecame in stronger than expected.Next week Economic Confidence data will be coming out for the eurozone area.

Threats

Russia’s manufacturing PMI headed lower this week, signaling further signs of trouble for the struggling economy.Furthermore, Brent crude’s continued decline is creating serious headwinds for the country.Despite a more comforting dovish tone from the FOMC minutes released this week, the Fed will still most likely hikerates this year, which will negatively affect emerging markets.

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If there is no pickup in China’s economic growth and a restoration of investor confidence, global equities will continueto remain depressed.

(c) US Global Investors

www.usfunds.com

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