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Three Events That Sum Up the Week
US Global Investors
By Frank Holmes
November 17, 2012

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3 Events That Sum Up the Week

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

Indian Gold Demand Picks Up
The love for gold has been reignited in India, according to the World Gold Council (WGC) in its Gold Demand Trends for the third quarter of 2012. India regained its title as the strongest performing market, overtaking the greater China area, as the country experienced a bounceback in demand due to improved sentiment during the festival season.

Compared to the third quarter of last year, Indian gold jewelry demand grew by 7 percent while gold bar and coin demand rose 12 percent. Total consumer demand was 223 tons, compared to 205 tons this time last year. The second largest market was Greater China, which consumed 185 tons in the third quarter of 2012. This was less than the 201 tons consumed in the third quarter of last year.

Together these markets in the east made up 55 percent of the world’s jewelry and investment demand, according to the WGC.

Domestic Equity Market - U.S. Global Investors

Although India experienced a setback earlier this year when gold shops boycotted a proposed tax on the yellow metal, imports recovered by July “as inventory levels were bolstered (aided by a well-timed dip in the local price) and the market adjusted to the customs duty,” says the WGC.

The third quarter has historically been a strong seasonal time for the Love Trade to come alive in the east. Monsoon rains and the festival season in the fall are generally associated with the buying and giving of gold. Still, for the year, don’t expect the Love Trade in India to be as strong as it was in 2011, as gold demand remains subdued with the ongoing weakness of the rupee.

The WGC has a wealth of information about the gold market in the third quarter. I encourage all serious gold investors to download its reports at

FHA in Need of Taxpayer Bailout Keeping Fear Trade Alive

This week, the Federal Housing Administration reported that it has exhausted its reserves, possibly requiring a bailout from U.S. taxpayers for the first time ever in its nearly 80-year history.

Domestic Equity Market - U.S. Global Investors

The agency prides itself on being “the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.” Meanwhile, delinquent loans have been steadily climbing for the last few years. According to data from the FHA, the Wall Street Journal reported that the number of single-family loans insured by the FHA that are 90 days or more past due climbed to roughly 739,000 in September. “That represents about 9.6 percent of its $1.08 trillion in mortgages guaranteed,” says the WSJ.

Now its capital reserves have dropped to a negative $16.3 billion. This is considerably below the required 2 percent capital cushion. Based on its $1.1 trillion portfolio, it should be reserving about $22 billion.

To keep the FHA solvent and meet its requirement, approximately $38 billion of cash would need to be injected.

The FHA has played an important role in keeping the housing market healthy, as it provides insurance on mortgage loans for single- and multi-family homes. Many of the loans backed by the FHA are held by borrowers who make a small down payment, which can be as little as 3.5 percent of the purchase price. Without the government’s guarantee, most private lenders wouldn’t have originated these loans.

It appears that another government bailout is on the horizon. The housing market is key to the U.S. recovery, which incentivizes the government to print more money and debase the currency, just as the Federal Reserve is driven to seek maximum employment. These continuing actions should stoke gold’s Fear Trade all through the winter.

Gold is a “must have” investment today, according to Investment Strategist Keith Fitz-Gerald of Money Map Press. During our webcast earlier this week, Keith explained how gold helps hedge value. The yellow metal has been “proven to have a roughly 10-to-1 relationship with interest rates. And that means it’s an indirect correlation or a corollary to bond portfolios,” he says.

“If interest rates start rising, that’s where your gold is really going to pay off,” Keith says.

Read more about the dynamics driving prices higher in our Special Gold Report.

Keep in mind that although there are many powerful reasons to accumulate gold, make sure you invest prudently. We recommend having a 5 to 10 percent weighting of gold and gold stocks in your portfolio. How should you invest the other portion?

Keith suggests structuring portfolios using the 50-40-10 pyramid model shown here. At the bottom of the pyramid are the “Base Builders,” where 50 percent of the portfolio is invested in defensive positions that tend to hold their value in nearly all market conditions.

Domestic Equity Market - U.S. Global Investors

One base builder that Keith recommends is U.S. Global’s Near-Term Tax Free Fund (NEARX), which invests in municipal bonds that have a relatively short maturity.

Above the Base Builders are the “Glocal Income & Growth” investments, which should make up 40 percent of a portfolio. These are globally recognized brands with strong balance sheets, experienced management, high levels of cash flow and above-average dividends.

The remaining 10 percent is invested in what Keith calls “Rocket Riders,” which are riskier assets. Special situations, IPOs and options fall into this category, allowing the investor to “swing for the fences.”

China’s Pyramid of Power

The global economic picture came into focus a little more this week with the announcement of China’s new leadership. We now know the seven men who will lead the world’s most populous country and second largest economy over the next several years.

But don’t expect sweeping changes, as the new pyramid of power will likely follow the path of its predecessors. Yet the leaders will likely feel pressure to “continue making significant reforms to China’s economic structure and expanding the personal freedom of its people,” says China Macro Strategist Andy Rothman of CLSA. Likely pushed to the top of the agenda is the rule of law, as it is a key evolutionary step for China and can benefit both the rich and the poor. CLSA believes it is fundamental to the country’s economic growth as well as its social stability.

We will need to wait until after the Party’s economic work committee meeting in December to hear about China’s economic strategy for 2013, however, more details will be revealed after the new government formally takes office in March. Regardless, it would be helpful to eager investors to communicate stronger reform messages sooner rather than later.

“We’re In for a Barbeque Economy”

Despite the clarity that we have following the outcome of the U.S. elections and the selection of China’s new leaders, we’ll likely continue facing uncertainty during this long, slow recovery, says Keith. It helps to think of the economic recovery like a good barbeque. It doesn’t come from being cooked fast; rather, it requires patience and time. So even if progress is slow in this “barbeque economy,” growth will continue, he says.

Make sure your portfolio is well prepared.

If you missed Keith’s words of wisdom from our webcast earlier this week, now you can watch it online at your leisure. Click here to see it now.

Index Summary

  • The major market indices were down again this week. The Dow Jones Industrial Average fell 1.77 percent. The S&P 500 Stock Index dropped 1.45 percent, while the Nasdaq Composite declined 1.78 percent. The Russell 2000 small capitalization index closed the week with a loss of 2.36 percent.
  • The Hang Seng Composite fell 1.05 percent; Taiwan fell 2.24 percent, while the KOSPI declined by 2.29 percent.
  • The 10-year Treasury bond yield fell 3 basis points for the week, to 1.58 percent.


Domestic Equity Market

The S&P 500 Index was down again this week, falling 1.45 percent. Concerns regarding the “fiscal cliff” and the potential tax and economic ramifications dominated trading this week. On Friday, we received some relief as “fiscal cliff” discussions between the White House and congressional leaders were initially constructive and gave the market hope that a resolution could be found before the end of the year.

Domestic Equity Market - U.S. Global Investors


  • At the sector level, all groups were down for the week but the consumer discretion sector was the best performer in a weak market. Within the consumer discretion sector, Abercrombie & Fitch and GameStop were the leaders, rising 29.7 percent and 15.6 percent, respectively. Abercrombie & Fitch reported earnings that were well ahead of street estimates as management’s turnaround efforts are showing traction. Gamestop announced the closing of 200 money-losing stores next year, which was well received. The company also announced the sale of more than one million copies of the new “Call of Duty” game, which is potentially the best initial game launch in the company’s history.
  • The healthcare sector was also a relatively strong performer with the biotech area outperforming. Gilead Sciences was the leader, rising by more than 14 percent on the release of very favorable clinical trial results of an experimental Hepatitis C drug.
  • Titanium Metals was the best performing stock in the S&P 500 this week as the company rose by 43.5 percent after Precision Castparts offered to buy the company for $16.50 in cash.


  • Cyclical areas were the hardest hit this week with industrials, materials and technology as the worst performers. Industrials experienced broad-based weakness with only a handful of stocks able to eke out gains. The materials sector was similar with weakness across the board.
  • The technology sector saw weakness in bellwether names such as Microsoft, Dell and Hewlett-Packard.
  • J.C. Penney was the worst performer in the S&P 500 this week, falling 21 percent. The company’s turnaround plan is moving slower than many expected and it appears it will get worse before it gets better.


  • After a significant selloff, the market staged a potentially significant reversal on Friday, possibly allowing for at least a bounce in next week’s holiday-shortened trading sessions.


  • The market is clearly focusing on the upcoming “fiscal cliff” and any delays or disappointments during the lame duck session will likely garner a negative response.

The Economy and Bond Market

Treasury bond yields moved modestly lower this week. Foreign economic news was generally negative, while U.S. economic data was negatively skewed by Superstorm Sandy. So while the data looks bad, it is very “noisy” and most analysts are not putting too much emphasis on these reports.

The 10-year treasury bond has rallied after the election as monetary policy is likely to remain very accommodative.

10 Year Treasury


  • We received encouraging news Friday out of the “fiscal cliff” summit at the White House, which implies an increased probability of a resolution before year end.
  • The Chinese leadership transition is now mostly complete and removes one uncertainty from the market.
  • Japan’s prime minister called elections for December which was well received by the financial markets as it is likely to usher in more simulative government policies.


  • The eurozone is officially back in recession, as third quarter GDP fell 0.1 percent after falling 0.2 percent in the second quarter.
  • Many European countries are struggling with inflation, even as their economies contract, reminiscent of the 1970s period of stagflation.
  • Economic data was generally weak here in the U.S. as retail sales fell 0.3 percent in October and industrial production fell 0.4 percent. Both were negatively impacted by Superstorm Sandy and should be taken with a grain of salt.


  • There remains considerable speculation about the prospects for near-term government policy action in China that would support the economy or stock market.
  • Interest rates are likely to remain very low for the foreseeable future, both here in the U.S. and globally.


  • The “fiscal cliff” is front and center on investors’ radar, but much progress is unlikely until after the Thanksgiving holiday.
  • Europe appears to be on the verge of another crisis, but policy-makers continue to bicker, just adding to the uncertainty.


Gold Market

For the week, spot gold closed at $1,713.50, down $17.68 per ounce, or 1.02 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 8.42 percent. The U.S. Trade-Weighted Dollar Index gained 0.19 percent for the week.


  • On November 12, Osisko announced the acquisition of Queenston Mining. Queenston shareholders will receive 0.611 Osisko shares per Queenston Mining share, implying a C$6 offer, and representing a 20 percent premium to last Friday’s closing price. Queenston Mining gained 14.8 percent on Monday after the announcement.
  • Continental Gold provided an update on drilling of the Yaragua vein at its Burtica project in Colombia. The release was highlighted by the results of a deep step-out hole drilled 200m to the west of (and well below) the current Yaragua resource shell. The results indicate strong potential for resource growth.
  • The Indian gold market is showing signs of recovery, up 9 percent to 223.1 tons in the third quarter of 2012 from 204.8 tons in the third quarter of 2011, following increases in both jewelry and investment demand. Jewelry demand increased due to restocking ahead of the Indian wedding and festival season.
  • Billionaire fund manager George Soros increased his stake by about 50 percent in the SDPR Gold Trust, and John Paulson maintained his holdings in the world’s largest gold bullion-backed ETF. During the third quarter, Soros Fund Management raised its stake in the SPDR Gold Trust from 884,400 shares in the second quarter to 1.3 million shares.


  • Most of the recent selling in U.S. equities has been attributed to reducing assets ahead of the potential Bush-era tax cut expiry.
  • According to the World Gold Council Report, central banks continued to buy gold in the third quarter for a total of 97.6 tons worth $5.2 billion, but central banks were buying at a slower pace, accounting for 9 percent of overall demand.
  • China’s gold demand fell 8 percent to 176.8 tons in the third quarter of 2012 from 191.2 tons in the third quarter of 2011. The fall is due in part to lower jewelry and investment demand, down 6 percent and 12 percent, respectively.


  • Christopher Wood, of CLSA, in Friday’s GREED & Fear publication wrote that uncertainty continues in Washington and believes there will likely be a last-minute fix on the “fiscal cliff.” Ben Bernanke will have the excuse he is probably looking to resume unsterilized purchases of long-term Treasury bonds, at the current rate of $45 billion a month, which means further Fed balance sheet expansion. Such a move, together with uncertainty has the potential to take the ten-year treasury bond yield back to old lows.
  • Platinum and palladium will return to the biggest shortages in at least a decade this year as strikes and safety stoppages in South Africa and falling sales from Russia cut supplies. According to UBS, platinum and palladium supply will decline 10 percent this year. South Africa platinum output fell 12 percent, producing just over 600,000 fewer ounces than last year. Palladium supply is expected to decline, led by falling Russian state stock sales, which are expected to diminish to 250,000 ounces this year from 755,000 ounces last year.
  • Philip Klapwijk, Global Head of Metals Analysis at GFMS, stated Wednesday that silver prices may rise as much as 38 percent in 2013 from current levels as a weak global economy spurs safe-haven demand for the precious metal. Strong investment demand, higher gold prices on the back of monetary easing, rising inflation expectations and low interest rates are among the factors that should lure buyers to the safety of silver. Spot silver has gained more than 16 percent so far this year, outperforming a rise of 10 percent in gold.
  • The U.S. Mint is selling more silver coins relative to gold coins than in any year in the bullion coin program history.


  • The World Gold Council reported that the global gold demand fell sharply in the third quarter from the year-ago period because of global weakness, high prices and slower demand from China. Global gold demand, as reported by the World Gold Council, fell 14 percent year-over-year.
  • This week, the gold metal price held up relatively strong compared to a loss of 8.4 percent in mining stocks measured by the NYSE Arca Gold Miners Index.  The index fell below its 200-day moving average, implying technical weakness.
  • Gold investment demand in the third quarter dropped 16 percent from the year-ago period.


Energy and Natural Resources Market

Energy Commodity Scorecard


  • The price of natural gas made a new 52-week high to $3.78 per Mmbtu on expectations of colder temperatures in the northeast later this month.
  • According to Reuters, China's SRB bought 100Kt each of aluminum and zinc from domestic smelters yesterday. 
  • South African striking miners accepted Amplats’ latest offer and returned to work, ending a nearly two-month long illegal labor unrest in the country.
  • China’s apparent oil demand rose 7.45 percent in October from a year earlier, to 9.76 million barrels per day, according to the data compiled by Bloomberg.
  • The National Energy Administration said China's power consumption reached 399.8 terawatt hours (TWh) in October this year, up 6.1 percent compared to the same period last year.


  • Master Limited Partnerships declined nearly 3 percent this week, and 6 percent for the month, as investor concerns mount over future dividend taxation and fund repositioning.
  • Wood MacKenzie reported that only 36 percent of proposed replacement/growth projects for coking coal used in steel production will generate a sufficient return at a current HCC benchmark price of $170 a ton. As a result, more project delays are expected.
  • According to the agriculture ministry of Russia, the country’s grain exports fell to 10.7 million metric tons from 15.1 million tons a year earlier.


  • The U.S. is set to become the world’s largest energy produceraccording to the new IEA World Energy Outlook. By around 2020, the U.S. is projected to become the largest global oil producer (overtaking Saudi Arabia until the mid 2020s) and to start seeing the impact of new fuel efficiency measures in transport. The result is a continued fall in U.S. oil imports, to the extent that North America becomes a net oil exporter around 2030.
  • Rio Tinto said that Australia's mining industry grew complacent in its race to cash in on an overheated commodity market, and the global miner predicted the industry faces widespread cost-cuts now that prices have cooled.
  • Goldcorp expects to receive a new permit for the $3.9 billion El Morro copper-gold mine in Chile within the next year, according to management. The mine is expected to produce about 200 million pounds of copper and more than 210,000 ounces of gold per annum for Goldcorp.


  • China's incoming leadership change is unlikely to spur fresh economic stimulus measures anytime soon, according to global miner Rio Tinto, which sells tens-of-millions of tons of iron ore, copper and coal to China annually. Earlier rounds of stimulus helped drive global iron ore and coal prices to record highs.


Emerging Markets


  • China has completed a leadership transition which has removed any political hangover in regards to who is getting into the power circle. China wants to double GDP and income per capita by 2020, which implicitly targets annual GDP growth of 7 percent. This will make the new leadership remain on pro-growth policies for 2013 when it consolidates its power base.
  • China’s October fiscal revenue rose 13.7 percent year-over-year to RMB 1.04 trillion and fiscal spending rose 6.7 percent to 861.7 billion Yuan. According to Reuters, last Friday the chairman of China Railway Group said that China has preliminary plans to spend RMB 600 billion in railway infrastructure in 2013. October railway investment surged 141 percent to RMB 81 billion from last year’s low-base.
  • China’s October total social financing quickened to 20.1 percent growth, thanks to increasing corporate bond issuances that offset lower bank loans. Bank loans were RMB 505 billion, lower than consensus RMB 590 billion. M2 grew a decent 14.1 percent, though lower than the expected 14.4 percent.
  • Chinese passenger-vehicle sales were up 6.4 percent in October and exports increased 11.6 percent versus the estimate 10 percent. This widened the trade surplus to $32 billion, the most in four years.
  • Singapore’s October exports are up 1.6 percent, reversing a decline in September.
  • Malaysia’s third quarter GDP expanded a robust 5.2 percent, exceeding the market expectation and benefitting from 22.7 percent investment expansion and 8.5 percent private consumption growth.
  • GDP in Hong Kong grew 0.6 percent quarter-over-quarter, and 1.3 percent year-over-year, reversing a contraction in the prior quarter.
  • Philippines remittance rose 5.9 percent in September to $1.84 billion.
  • In Turkey, the country saw the continued sharp decline in the current account (C/A) deficit. At $2.7 billion, the September C/A deficit came out below the consensus forecast of $3 billion and the overall deficit to GDP is at 7 percent, representing a meaningful decline from the 10 percent level of the previous year. More importantly, the non-energy C/A posted a significant surplus of approximately $1.7 billion compared to a deficit of $2 billion a year ago. In regard to monetary policy, the Central Bank of Turkey will hold its MPC meeting on November 20. The market expects the upper end of the interest rate corridor to be cut by 50 basis points to 9 percent.
  • Brazil’s Rousseff administration has cut taxes on consumer goods, pressured banks to lower borrowing cost and demanded that electric utilities reduce rates as part of an intervention policy intended to spur an economic rebound.
  • In Hungary, October CPI printed at 6 percent, lower than the consensus of 6.3 percent. In Poland, October CPI eased to 3.4 percent, broadly in line with expectations.


  • In the last week, the Philippines stock market witnessed a net money inflow of $16 million, while Indonesia and Thailand witnessed net outflows of $35 million and $222 million, respectively.
  • Official data from the China Bank Regulatory Commission (CRBC) showed that commercial banks’ NPL size rose by 4.9 percent quarter-over-quarter in the third quarter, while the NPL ratio rose by 1 basis point quarter-over-quarter to 0.95 percent. While NPLs at joint-stock banks rose 13 percent quarter-over-quarter, or 32 percent year-to-date, the big five state banks continue to report good asset quality, with NPLs rising 1.7 percent quarter-over-quarter, or 2.5 percent year-to-date. NPLs are also largely concentrated in Zhejiang province where Wenzhou was the worst.
  • China’s government will introduce a time-differential dividend tax policy. Investors who hold stocks for more than one year will pay a 5 percent tax while holders of shares for between one month and one year will pay a 10 percent tax, leaving holders of shares for less than one month to pay a 20 percent tax. While any tax is negative, it might deter short-term speculators.
  • Singapore retail sales fell 0.5 percent month-over-month, versus the consensus forecast of 1.4 percent.
  • Brazil’s real fell on speculation that the central bank will allow the currency to weaken. The real is the worst performer in the past year among emerging market currencies, dropping 15 percent.
  • In the Czech Republic, the preliminary third quarter GDP release showed GDP down by 1.5 percent, below the market consensus of -1.2 percent. In Hungary, third quarter GDP was down 1.5 percent, below the consensus expectation of -1.3 percent.
  • In South Africa, retail sales for September came in at 4.3 percent, slightly lower than consensus expectations of 4.8 percent. This was mostly due to weak performance in clothing and textiles, household furniture, pharmaceutical products and hardware paint and glass.


China Home Sales

  • The two graphs above from BCA show housing sales and property price changes. The first graph shows housing sales have increased, which helped developers’ sales growth and cash flow, while the second graph shows a moderate property increase in spite of rising property sales.  A flat or slight rising price will keep the policy-makers at bay in further tightening the market.


  • After three decades of rapid growth, China is facing a development gap between regions, enlarging wealth inequality, government official corruptions, an aging population and environmental degradation. While the new leadership has identified these challenges, there are no clear ideas yet on how and when to implement reform policies, particularly to rally reformers and conservatives to the tasks.
  • Although GDP growth turned to a positive 1.3 percent in the third quarter, Hong Kong’s export of services dipped visibly to only 0.1 percent, down from 2.9 percent in the second quarter this year. The lackluster performance showed the combined effects of sluggish trade flows and quieter fund-raising and cross-border financing activities in the face of a weak global economy. Those factors may continue to hinder a strong rebound of the Hong Kong economy.
  • Petroleo Brasileiro SA, the world’s biggest oil producer in deep waters, fell to its lowest in more than three months after saying it may have to sell more assets if it does not get a fuel price increase. To hike the fuel price, it will need approval from the company’s board, which is controlled by the government.

(c) US Global Investors


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