Gold Takes a Breather… Is this the Buying OpportunityInvestors Are Looking For?

May 21, 2016by Frank Holmes

of U.S. Global Investors

First it was Stan Druckenmiller, now it’s George Soros. Following billionaire former hedge fund manager Druckenmiller’sannouncement that gold was his family office fund’s largest currency allocation, we learned this week that his old boss,billionaire investor George Soros, purchased a $264 million stake in Barrick Gold, the world’s largest gold producer, afterliquidating $3.5 billion in U.S.-listed stocks. Additionally, he disclosed owning call options on a gold ETF.

Soros’ investment can be held up as further proof that sentiment toward gold has decidedly shifted positive, following thechallenging last three years.

London-based precious metals consultancy Metals Focus just released its Gold Focus 2016 report in which the group callsan end to the gold bear market that began in late 2011, after the metal hit its all-time high of $1,900 per ounce. “We areoptimistic about gold over the rest of this year and our projections see it peaking at $1,350 in the fourth quarter,” the groupwrites. Global negative interest rate policy fears have reawakened investors’ confidence in gold as a reliable currency andstore of value.

The group adds: “In the near term, there may well be some liquidations of tactical positions.” This is to be expected,especially around the start of summer, based on historical precedent

Will Gold Follow Its Short or Long-Term Trading Pattern?

We’ve noticed that mining companies which have deleveraged their balance sheets this year have been some of thebiggest gainers. Barrick, now Soros’s largest U.S.-listed allocation, started 18 months ago.

Glencore, Teck Resources and higher-risk junior producers such as Gran Colombia bounced off the canvas after beingknocked down.

Gold equities always have a higher beta than bullion. Usually a ±1 percent move translates into 2 to 3 percent in goldstocks.

Page 1, © 2020 Advisor Perspectives, Inc. All rights reserved.

Regardless of it being a bull or bear market, there are still fairly predictable intra-year trends in the price of gold. Below isan updated composite chart of the metal’s historical yearly patterns over the last five, 15 and 30 years, courtesy of MooreResearch.

click to enlarge

In all periods, gold contracted in May to early summer, then rallied in anticipation of Ramadan—this year beginning June 4—and India’s festival of lights and wedding season. India has one of the largest Muslim populations in the world, and for atleast 5,000 years they’ve adhered to the tradition of giving gold as gifts during religious and other celebrations. .

Predictably so, the yellow metal has retreated somewhat this month, following its best start to a year in 30 years and itsbest-ever first quarter for demand. As I told Daniela Cambone during this week’s Gold Game Film, this pullback provides anattractive buying opportunity

The five-year period decoupled from the other two starting in mid-autumn, but the annual losses in 2013 (when the yellowmetal fell 28 percent), 2014 and 2015 skewed the data. Metals Focus sees gold following its more typical trading patternthis year, possibly climbing to as high as $1,350 an ounce

click to enlarge

In the near-term, gold is threatened by a rate hike, possibly as early as next month’s Federal Open Market Committeemeeting. The metal fell to a three-week low this week on hawkish Fed minutes. If the Fed ends up delaying a hike, it couldgive gold the chance to take off.

Page 2, © 2020 Advisor Perspectives, Inc. All rights reserved.

Analysts See a Possible 25 Percent Depreciation in China’s Currency

One of the concerns the Fed has right now is the depreciation of the Chinese renminbi. In a special report, CLSA estimatesit could fall as much as 25 percent before rebounding somewhat. Because the trade volume with China is so massive, thefear is that it could affect the U.S. economy

click to enlarge

This would have many obvious negative consequences. For one, because China’s oil contracts with the Middle East aredenominated in renminbi, not dollars, Middle East suppliers would be hurt.

CLSA points to several winners, however, including investors. The devaluation could very well “represent the bestopportunity to buy Chinese assets that investors have had since the financial crisis,” the investment banking firm writes.China’s materials sector, local exporting producers and mainland gold producers should also benefit. The renminbi will“inevitably” fall, CLSA says, “irrespective of economic fundamentals, as a free market works out what it is worth.”

It’s little wonder then that, in the meantime, the country’s consumption of gold has skyrocketed in recent years as it vies tobecome one of the world’s key gold price makers. (Remember, China just introduced a new renminbi-denominated gold fixprice.)

click to enlarge

In addition, it was reported earlier this week that Chinese bank ICBC Standard just purchased one of Europe’s largest goldvaults from Barclays, located in London, for $90 billion. This will help give the country greater control over gold transactionsaround the world, about $5 trillion of which are cleared in London every year

Should They Stay or Should They Go?

Page 3, © 2020 Advisor Perspectives, Inc. All rights reserved.

Likely to help gold this summer are geopolitical events, specifically the potential “Brexit” next month when U.K. votersdecide on whether to remain members of or leave the European Union.

Various analysts have warned that such an event could trigger a crisis with both the euro and pound, which might spread toother economies. A recent Bank of America Merrill Lynch survey found, in fact, that the idea of a Brexit has risen to the topof global investors’ worries. What’s more, no consensus was reached during a meeting among G7 nations this pastweekend on how to deal with fiscal policy, other than to take a “go your own way” approach.

In the past, gold has been used as a hedge against the risk of not only negative interest rates but also inflation.

High inflation might also be coming to the U.S. thanks to the Labor Department’s new regulation on overtime pay, whichdoubles the eligibility threshold from $23,660 a year to $47,476 a year, on condition that the worker puts in more than 40hours a week. It’s estimated that the ruling will affect 2.2 million retail and restaurant workers, among others.

President Barack Obama’s heart is certainly in the right place by wanting to boost workers’ wages. But it’s important to beaware of the unintended consequences that have often accompanied such sweeping edicts throughout history. We couldend up with rampant inflation as companies will have little choice but to raise prices to offset the increased expense. Again,having part of your portfolio invested in gold and gold stocks, as much as 10 percent, could help counterbalanceinflationary pressures on your wealth.

Defense Stocks Hit All-Time Highs on Terrorism Jitters

Global fears of terrorism persist, of course, with a Cairo-bound EgyptAir flight crashing in the Mediterranean Sea this week.Although the cause of the crash is not clear at this point, officials have not ruled out terrorism. In light of this and othertragedies—the attacks in Belgium, for instance—defense and military stocks have made huge moves in recent weeks.Shares of Northrop Grumman, Raytheon and L-3 Communications all hit all-time highs last week.

In a recent call, an analyst with Cornerstone Macro predicted that a presidential victory for Donald Trump would be good fordefense stocks, as he’s made promises to “rebuild” the military should he make it into the White House. It appears themarket is already betting on such a win.

Page 4, © 2020 Advisor Perspectives, Inc. All rights reserved.

Finally, I want to wish all of my dear Canadian friends and family a Happy Queen Victoria Day, and a long, restful weekend!The markets have been unexciting, so I hope you can take advantage of the beautiful warm weather, enjoy some barbecueand outdoors on your day off and maybe get your boat ready for the summer months ahead.

Index SummaryThe major market indices finished mixed this week. The Dow Jones Industrial Average lost -0.20 percent. The S&P500 Stock Index rose 0.28 percent, while the Nasdaq Composite climbed 1.10 percent. The Russell 2000 smallcapitalization index gained 0.89 percent this week.

The Hang Seng Composite gained 0.42 percent this week; while Taiwan was up 0.96 percent and the KOSPI fell -0.98 percent.The 10-year Treasury bond yield rose 14 basis points to 1.84 percent.

Domestic Equity Market

click to enlarge

Strengths

Energy was the best performing sector for the week, increasing by 1.51 percent versus an overall increase of 0.28percent for the S&P 500.

Applied Materials was the best performing stock for the week, increasing 15.55 percent. The chip maker guided profitfor the current quarter well above the street’s projections, on strong demand for equipment used to makesmartphones and memory chips. The company also unveiled better-than-expected fiscal second quarter financialresults.

Page 5, © 2020 Advisor Perspectives, Inc. All rights reserved.

Germany's Bayer has made a bid for seed and pesticide maker Monsanto. The deal would create the world's largestseed and pesticide company, valued at $42 billion. In another deal, FMC Technologies announced a planned mergerwith France's Technip in a $13 billion transaction. The deal will build on an existing joint venture between the U.S.and French firms.

Weaknesses

Utilities was the worst performing sector for the week, falling by -2.35 percent versus an overall increase of 0.28percent for the S&P 500.

Hormel Foods was the worst performing stock for the week, falling -12.63 percent. The stock had its worst declinesince 2008 after narrowing margins sparked concern. The profit margin for Hormel’s refrigerated-foods shrank to 11.9percent last quarter before interest and taxes, down from 14.4 percent in the previous three months. That shift,combined with pork industry trends, is likely to limit the company’s upside, according to analysts.A proposed $43 billion purchase of Syngenta by ChemChina has been delayed by additional scrutiny from the U.S.Treasury Department's Committee on Foreign Investment in the United States (CFIUS) and the U.S. Department ofAgriculture. The delay has prompted ChemChina to extend its offer period until July, pending the results of theregulatory review.

Opportunities

Gold has been range-bound between $1,200-1,300 an ounce for the past three months. It reached $1,300 an ounceon May 2, a key technical resistance level, which it has yet to surpass. A clean break of $1,300 an ounce should leadto another wave of technically driven speculative buying. Ahead of this expected push, BCA’s commodity strategistsare upgrading their gold view to tactically bullish. This would provide another leg up to gold mining companies.

Walmart’s positive earnings results suggest upside for the megastores space. There is tentative evidence that theindustry’s investments in store improvements and marketing are paying off. Hypermarket sales are rising in absoluteterms, and are finally gaining ground on overall retail sales. At the same time, costs are under control, as measuredby the deflation in imported consumer goods prices and ongoing deflationary pressures from major producingcountries. This could lead to continued upside profit surprises.Drug prices are a hot political issue, but rising prices have yet to undermine consumption, underscoring thatpharmaceutical profits are likely to remain on an outperformance path.

Threats

Cash flow generation at U.S. companies is weakening, but companies have continued to add leverage on the viewthat interest rates will stay low forever. The funds have not been used for productive investment, but rather to retirestock. While this dynamic has been a large support for earnings per share, it cannot continue forever amid the rapiddecline in the quality of corporate sector balance sheets. High leverage will become much more problematic shouldeconomic growth slow from already anemic rates.

Credit concerns likely explain the inability of banks to participate in the latest equity rally. In fact, bank relativeperformance tends to lead overall debt servicing deterioration. In past cycles, the inability of bank stocks toparticipate has been a warning for the broad market, implying that the latest downturn should not be lightly dismissed.The persistent bid under defensive equities suggests a peaking process for the broad market rather than a breakout.Relative performance, breadth and momentum are strongest in non-cyclical sectors, and comparatively weak in thecyclical and interest rate-sensitive sectors.

The Economy and Bond MarketStrengths

The Consumer Price Index rose 0.4 percent, the strongest monthly reading in more than three years.U.S. industrial production rose a robust 0.7 percent in April, led by utilities output.Housing starts rose at a stronger-than-expected rate of 6.6 percent in April, while building permits rose 3.6 percentfrom the previous month.

Weaknesses

According to the minutes of the April Federal Open Market Committee (FOMC) meeting, the Fed is seriously

Page 6, © 2020 Advisor Perspectives, Inc. All rights reserved.

considering an interest rate hike in mid-June. As a result, there was an immediate and sharp repricing in the outlookfor Fed policy. The market probability of a June rate hike jumped from near zero earlier this week to 35 percent. Thiscaused a selloff in the bond market, with the U.S. 10-year yield jumping from 1.76 to 1.88.

click to enlarge

China reported somewhat weaker than expected economic data this week. Industrial production, retail sales and fixedasset investment were all below economists' forecasts. China's highly indebted economy continues to struggle amidslowing growth as it transitions from an investment-driven to a consumer-led economy.Factory activity in New York shrank in May after expanding for two months, as manufacturers received fewer ordersand shipments fell. The Federal Reserve Bank of New York said that its Empire State manufacturing index slumpedto minus 9 in May, after reaching 9.6 the previous month.

Opportunities

The U.S. Department of the Treasury and Republicans in the U.S. House of Representatives have reached atentative deal to set up a financial control board to take charge of Puerto Rico's debt crisis. The board would managefinancial obligations and oversee some debt restructuring. No U.S. federal funds are being committed as part of thepackage.

The International Monetary Fund (IMF) proposed a debt relief package for Greece in advance of a European summitto tackle Greek finances on 24 May. The IMF proposal includes provisions that payments of principal and interestwould be skipped until 2040 and some loans would extend their maturities out to 2080. Germany is said to see theIMF proposal as an opening bid in a negotiation that EU leaders would like to conclude next week. The hope is for aquick agreement on a debt deal so as to avoid a messy intra-EU battle in the run up to the Brexit referendum on June23.The G7 leaders' summit will be held May 26-27. Japan has sought to use the G7 to promote coordination on fiscal,monetary and currency policies.

Threats

The April U.S. durable goods orders report, an important leading indicator of the economy and equity market, isscheduled for Thursday. Core capital goods orders have been trending lower since peaking in September 2014.Yield curves are flattening both in the U.S. and in the G10 as a whole. This usually heralds weaker growth. Thehawkish tilt by the Fed in the latest release of its minutes will likely exacerbate this flattening trend.The Chinese renminbi is weakening again. The sharp setbacks in U.S. equities last summer and earlier this yearwere preceded by a weaker renminbi. The optimism that China is experiencing a mini reflation cycle is being tested bythe latest economic data.

Gold Market

Page 7, © 2020 Advisor Perspectives, Inc. All rights reserved.

This week spot gold closed at $1,252.71, off $20.36 per ounce, or 1.60 percent. Gold stocks, as measured by the NYSEArca Gold Miners Index, lost 3.05 percent. Junior miners outperformed seniors for the week as the S&P/TSX Venture Indextraded up 0.95 percent. The U.S. Trade-Weighted Dollar Index remained in recovery mode with a 0.75 percent gain for theweek.

Date Event SurveyActualPriorMay-14China Retail Sales YoY 10.6% 10.1% 10.5%

May-17U.S. Housing Starts 1125k 1172k 1099k

May-17U.S. CPI YoY 1.1% 1.1% 0.9%

May-18Eurozone CPI Core YoY 0.7% 0.7% 0.7%

May-19U.S. Initial Jobless Claims 275k 278k 294k

May-24Germany ZEW Survey CurrentSituation

49.0 -- 47.7

May-24Germany ZEW Survey Expectations 12.0 -- 11.2

May-24U.S. New Home Sales 520k -- 511k

May-26Hong Kong Exports YoY -7.1% -- -7.0%

May-26U.S. Initial Jobless Claims 275k -- 278k

May-26U.S. Durable Goods Orders 0.3% -- 1.3%

May-27U.S. GDP Annualized QoQ 0.9% -- 0.5%

Strengths

The best performing precious metal for the week was gold, down -1.60 percent. Bloomberg reports that the “greatgold rush of 2016 is gathering pace,” as holdings in exchange-traded funds have now surged 25 percent. Over thepast two weeks, even as prices lost around 1.61 percent, ETFs swelled 63.2 tons and are rising every day, continuesthe article.ICBC Standard, China’s biggest bank, has agreed to buy one of Europe’s largest gold vaults from Barclays Plc.,reports Bloomberg. Just last week the bank won classification as a market maker by the London Bullion MarketAssociation. “This enables us to better execute on our strategy to become one of the largest Chinese banks in theprecious metals market,” Mark Buncombe, head of commodities at ICBC, said.Ken Hoffman, senior metals analyst at Bloomberg Intelligence, said at a BI forum in London this week that morehedge fund managers “are seeing gold as a currency,” reports Bloomberg. Hoffman continued that those who areworried about central banks’ consequences “think of gold as the alternative.” Investec Wealth agrees – the groupfavors gold over bonds, mainly to hedge against U.S. political risk, continues Bloomberg.

Weaknesses

The worst performing precious metal for the week was palladium, down 5.86 percent. A news story from the priorweek highlighted that electric vehicles could have a large impact on reduced demand from platinum group metals.Norilsk Nickel, Russia’s largest palladium producer, commented that it has begun buying palladium in the market, viaits Global Palladium Fund, in a move the company claims could reduce its volatility. Norilsk noted it will look to investas much as $200 million to the fund for purchases of palladium.This week the Federal Reserve pointed to a possible interest rate hike in June, sending gold to a three-week low.Gold fell 1.6 percent on Wednesday, reports Bloomberg, as the dollar strengthened. In addition, gold traders andanalysts turned bearish for the first week in five weeks following the Fed’s April meeting minutes. Bloomberg reportsthat this ended the longest run of predicting stable or higher prices since mid-February.India’s gold monetization scheme has been met with little success, reports the Financial Express. The governmenthas tweaked a number of the scheme’s parameters in response, with hopes of bettering the public’s reaction movingforward.

Page 8, © 2020 Advisor Perspectives, Inc. All rights reserved.

Opportunities

In BCA’s weekly report, the research group writes “Investors are making a huge mistake in thinking that centralbanks are out of bullets…helicopter money is coming.” They go on to explain that once deployed, this policy willbe more successful than people imagine. As you can see in the chart below, BCA points out that “many peopleforget the Federal Reserve suppressed interest rates during WWII and the years that followed, leading to a 70percent increase in the level of consumer prices between 1939 and 1948.” This led to significant erosion in realdebt levels. BCA notes that banks have already moved very close to adopting helicopter money policies. Theonly difference between helicopter money and QE (quantitative easing) is that the latter entails a temporaryincrease in bank reserves, while the former entails a permanent increase.

click to enlarge

In its Precious Metals Outlook, TD Securities reviews year-end reserve updates, pointing out a 9 percent year-over-year decline in 2015 gold reserve ounces for large/mid-cap producers. Although this marks the fourth straight year ofdeclining reserves, the group points out that this should drive a renewed focus on exploration and acquisitions withinthis space.UBS raised its short-term gold outlook following the Fed outlook, reports Bloomberg. According to a report receivedMonday, UBS’s outlook increased to $1,150 - $1,350 an ounce, from a previous outlook of $1,100 - $1,310 an ounce.

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

Ole Hansen of Saxo Bank believes that risks from the U.K.’s Brexit vote next month could also move the preciousmetal higher. Hansen predicts bullion could jump to $1,400 an ounce this year.

Threats

After holding on to a bullish view of stocks, Goldman Sachs has changed its mind and is warning investors of a “largedrop” in the market, writes ZeroHedge. Goldman strategist David Kostin told CNBC on Thursday that based on thethreat of margin collapse and record-high stock valuations this year, it’s time to play defense in a tough market, thearticle continuesAlthough Canadian raw materials stocks (companies including gold, copper, lumber and fertilizer producers) arehaving their best start to the year in roughly three decades, reports Bloomberg, some say this rally is missing afundamental underpinning – economic growth. “I’ve got three words for you: Dead. Cat. Bounce,” David Rosenberg ofGluskin Sheff said. “There is no fundamental, long-lasting recovery in the commodity space without global demandgrowth shifting course and accelerating,” he continuedMillions of U.S. workers will soon become eligible for overtime pay under a new rule issued by the Obamaadministration on Wednesday. According to an AP wire story on the matter, the annual salary threshold at whichcompanies can deny overtime pay will double from $23,660 to $47,500. “With the stroke of a pen, the LaborDepartment is demoting millions of workers,” David French, senior VP for the National Retail Federation said. “Mostof the people impacted by this change will not see any additional pay.”

Energy and Natural Resources MarketStrengths

Gasoline demand in the U.S. is growing at the highest rate in 25 years. According to VTB analysts, gasoline demandis up 5.7 percent year-over-year in the past four weeks, maintaining the strong growth trend of the past two to threemonths. Energy Information Administration (EIA) data showed gasoline stocks fell 2.5 million barrels last week totheir lowest levels since the start of the year, with the declining trend expected to continue in the run-up to thesummer driving season.The best performing sector for the week were MLPs. The Alerian MLP Index rose 4.4 percent for the week supportedby a second consecutive week of rising oil prices, as well as an increasing appeal for MLP distribution yields amidweaker market fundamentals.Fibria Celulose SA, a Brazilian paper and pulp producer, rose 7.8 percent for the week after rising orders and milldowntime led to a rebound in pulp prices globally. Prices have also stabilized after pulp inventories posted declinesfrom January’s peaks.

Weaknesses

Hedge funds are not buying into energy stocks. Following the 13-F reporting season for the first quarter, hedge fundsreduced their overall exposure to the energy sector by $10 billion. The main outflows were borne by SchlumbergerNV and Halliburton, followed by Pioneer Natural Resources, and ExxonMobil.The worst performing sector for the week was the S&P 500 Packaged Foods Index. The index dropped 3.6 percentfor the week, led lower by Hormel Foods, which slumped 12.6 percent for the week. Hormel dropped on news that ithad agreed to acquire a competitor, despite also announcing a strong earnings’ beat, and upping full year guidance.The worst performing stock for the week in the S&P Global Natural Resources Index was Israel Chemicals Ltd. TheTel Aviv-based fertilizer company dropped 10.6 percent for the week after missing earnings estimates.

Opportunities

Goldman Sachs’ strategists have upgraded their view on crude oil and raised their price forecast to $50 from $45. Themagnitude of supply disruptions--from Canada’s oil sands fire, to Nigeria’s pipeline disruptions--are forcing a supplydemand rebalancing to occur ahead of expectations.We may see a pickup in mergers and acquisitions (M&A) in the oil services sector. According to RBC CapitalMarkets, M&A in the space makes strategic sense, especially in an oil market where service companies are lookingfor any edge to help operators lower upfront costs and increase recovery rates. With a major transaction announcedthis week (FMC Technologies and Technip), more companies in the sector will look to reduce costs through acombination of equipment standardization and streamlined engineering.The U.S. energy market is showing signs of stabilization as the oil rig count stops dropping. Oil services companies,together with MLPs could benefit from a rebound in drilling and processing activity. With crude prices nearly doublingfrom this year’s trough, U.S. activity may begin to stabilize, leading to re-contracting of idle equipment

Page 10, © 2020 Advisor Perspectives, Inc. All rights reserved.

Threats

The Fed has opened the possibility for a June rate hike. A higher rate will likely lead the U.S. dollar higher, whichgenerally leads to weaker commodity prices. Goldman Sachs’ economists believe the divergent growth trajectories ofthe U.S., China and emerging markets will lead to a further 13 percent appreciation of the U.S. dollar. Such a movecould be a major headwind for commodity prices.

click to enlarge

Chinese steel inventories have stopped falling, delivering a blow to the industry’s momentum. Macquarie reports thatend-user demand has remained strong, but has stopped to show sequential improvement, a worrying turn for amarket that is quickly turning from deficit to surplus. As a result, market expectations have declined for the first timesince last November.

Refiners’ buybacks may be at risk after Tudor Pickering Holt (TPH) forecasts weaker earnings. Analysts for TPHdowngraded their view on refiners as crack spreads have not shown the same relative strength of 2015, suggestingearnings at the major refiners will come in slightly below last year’s. As a result of lower earnings, the refiners may beforced to cut back their stock buybacks.

China RegionStrengths

Philippine first-quarter GDP clocked in at a 6.9 percent year-over-year growth, in line with analysts’ expectations butnonetheless ahead of GDP growth rates for most international peers within the region, including China. The newPhilippine president-elect Rodrigo Duterte will take the reigns of a healthy economy, and he has already signaled afocus upon continuing many of the economic priorities of the outgoing administration.

Page 11, © 2020 Advisor Perspectives, Inc. All rights reserved.

click to enlarge

Thailand’s first-quarter GDP data beat expectations. Quarter-over-quarter, first-quarter GDP came in at a gain of 0.9percent, ahead of expectations for a rise of only 0.6 percent, while the year-over-year number—a growth rate of 3.2percent—beat expectations for a year-over-year rise of only 2.8 percentChinese new home prices rose in the most cities in more than two years during the April period. Notably, prices insecond-tier cities outpaced the gains of those in first-tier cities, while the average new home price in April rose some1.03 percent month-over-month.

Weaknesses

Chinese data disappointed last weekend, as Industrial Production (IP), Retail Sales, and Fixed Assets Investment(FAI) all missed their respective expectations. IP came in at 6.0 percent for the April period, short of an expected 6.5percent gain; year-over-year Retail Sales for April came in at 10.1 percent, shy of an expected 10.6 percent; and FAIcame in at 10.5 percent, missing analysts’ expectations for a gain of 11.0 percent for the April periodThe Philippines Composite Index (PCOMP Index) declined 1.85 percent for the week, giving up some of its recent,rapid post-election gains. Indonesia’s Jakarta Composite Index declined just over 1 percent for the week, but morethan 3 percent when adjusted for currency.The Indonesian rupiah was the weakest-performing currency in the region this week, falling more than 2 percentfollowing the U.S. FOMC minutes, the Bank of Indonesia’s decision to hold rates steady, and the Bank of Indonesia’slowering of 2016 GDP estimates to a range of 5-5.4 percent year-over-year.

Opportunities

Newly-elected President Tsai Ing-wen took power today in Taipei after winning Taiwan’s presidential elections inJanuary; she is the first female president of Taiwan. While Tsai’s inauguration speech is seen by some as casting afrosty glance toward the mainland People’s Republic of China, others praised the speech as relatively pragmatic,holding to a middle ground and seeking to stabilize cross-strait relations. Tsai, of the independence-leaningDemocratic Progressive Party, vowed to safeguard democracy and freedom, but will in all likelihood remain focusedprimarily upon promised efforts to revive Taiwan’s flagging economy.Indonesia announced this week that it is considering a potential investment holding company that may be modeled onSingapore’s very-successful Temasek. The Indonesian government says that the fund may focus domestically firstbefore venturing overseas in time.Singapore’s GDP data come out next week. Expectations are for a meager growth rate of 1.9 percent year-over-yearand a rise of 0.4 percent quarter-over-quarter.

Threats

Bank of China Ltd. plans on selling up to 300 million yuan in debt backed by non-performing assets, the bank’s first

Page 12, © 2020 Advisor Perspectives, Inc. All rights reserved.

“bad loan” securitization since 2008. As China’s non-performing assets continue to creep higher, investors are leftspeculating as to the scope of the issue.The Chinese government expressed disappointment with Taiwanese President Tsai’s glaring omission of any sort ofreunification or “one China” referencesU.S. Federal Reserve policy, Chinese monetary policy, and Japanese monetary policy may pose ongoing wildcardrisks to regional equity markets and volatility.

Emerging EuropeStrengths

Greece was the best performing country this week, gaining 2.7 percent. The Greek government is moving forwardwith reforms, creating positive sentiment among investors.The Ukrainian hryvnia was the best performing currency this week, gaining 1.8 percent against the U.S. dollar. Apreliminary agreement has been made to release the third tranche of financial aid to Ukraine from the IMF (which hasbeen held up for eight months), due to Ukraine’s slow progress with its promised reforms. The next payment of $1.7billion from the $17.5 billion IMF bailout program could be released at the end of June.The materials sector was the best performing sector among Eastern European markets this week.

Weaknesses

Turkey was the worst performing market this week, losing 1.9 percent. Turkey’s law has historically granted membersof Parliament full immunity from prosecution, but on Friday, the Turkish Parliament passed a bill to strip all politiciansof immunity. Not only is this bill a step forward in prosecuting Kurdish political leaders from the pro-Kurdish Peoples’Democratic Party (HDP), but is also a step to give more power to President Erdogan. Rising political risk in Turkeyputs pressure on equities and the country’s currencyThe Russian ruble was the worst performing currency this week, losing 1.9 percent against the U.S. dollar. FedericaMogherini, the eurozone’s foreign policy chief, said in an interview with German newspaper Die Welt that economicsanctions against Russia look set to be extended beyond July due to continuing conflict in Ukraine. The sanctions,which expire in late July, include restrictions on defense and energy business ties. They also prevent state-ownedbanks, energy and defense companies from raising money in European financial markets and United StatesThe utility sector was the worst performing sector among Eastern European markets this week.

Opportunities

A recent poll conducted by the Evening Standard and Ipsos Mori, shows that a strong majority of the Britishpopulation believe that the U.K. should remain part of the European Union. The poll gave an 18-point lead to thoseplanning to vote against the Brexit. Following the release of the poll, the pound gained against the U.S. dollar. TheU.K. referendum on the Brexit is scheduled for June 23.This week the Greek government submitted a new austerity bill to Parliament, with a vote scheduled to take place onMay 22. The expectation is that the government will have no issue in passing the reform. Greece is pushing forwardwith reforms and is getting closer to receiving additional monetary aid from the euro-region, which will be muchneeded this summer when large bonds fall due. The chart below shows Greece’s debt payment schedule: 10 billioneuros are due this summer, with the next large bond payment due in July of next year.

Page 13, © 2020 Advisor Perspectives, Inc. All rights reserved.

click to enlarge

Preliminary eurozone PMI data for May will be released next week. Bloomberg analysts predict a slight uptick inServices, Manufacturing and Composite PMI readings.

Threats

Turkey’s ruling Justice and Development Party (AKP) appointed Transport Minister Binali Yildirim as its chairman andthe country’s new prime minister. He is a close ally of President Erdogan and some speculate that his main task willbe to transform Turkey from a parliamentary to a presidential system.The European Commission raised pressure on Poland’s government to resolve a months-long constitutional stand-off, saying it may extend investigation into the country’s democratic standards. The EU has opened its first ever probeinto a member country’s rule of law over concerns that an overhaul of Poland’s Constitutional Tribune presents athreat to democracy. If there is no satisfactory resolution within a reasonable time, the EU could propose strippingPoland of its voting powers, although such a proposal would have to be approved by all members. Hungarian PrimeMinister Viktor Orban, and a friend of Jaroslaw Kaczynski, leader of current ruling party in Poland, says he will neverlet that happen.The dollar appreciated and emerging market currencies underperformed this week after the Federal Reservereleased minutes from its April meeting. Most Fed officials say that an interest rate hike will be appropriate in June ifthe U.S. economy continues to improve. If the dollar keeps climbing higher in anticipation of a rate hike, emergingEurope currencies will depreciated against U.S. currency.

© US Global Investors

www.usfunds.com

Page 14, © 2020 Advisor Perspectives, Inc. All rights reserved.