Don't Be Spooked by Market Volatility--Opportunity Is Still Knocking!

By: Frank Holmes | Mon, Nov 3, 2014
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One of the greatest fears this October--possibly the most volatile month of the year--has been the correlation between the S&P 500 Index's ascent in the first three quarters of the year and the possible ramifications of the end of quantitative easing (QE).

It's well known that Japan and Singapore have been buying their countries' blue chip stocks with their excessive money printing. Today, about 1.8 percent of the Japanese market is owned by the Bank of Japan. American investors fear the Federal Reserve might do the same and take away the punch bowl, so to speak.

As you can see, the S&P 500 Index has been rising in tandem with government securities, and it's uncertain what will happen when QE ends.

Fed Securities Hodlings and S&P 500

The Ebola epidemic has also contributed toward moving the needle to the fear side of the spectrum and driven investors to seek shelter not in gold necessarily but in so-called "Ebola stocks." For every negative, as tragic as they often are, there is a positive. When a major hurricane hits Florida, for instance, insurance stocks fall while real estate stocks rise. The deadly Ebola virus, on top of an aging demographic, has helped make health care and biotechnology pop this year. The Daily Reckoning's Paul Mampilly, in fact, calls this rally "the biggest biotech market ever."

Possibly. Before we get too excited, let's look at the numbers. Over the last 10 years, the S&P 500 Biotechnology Index has had a rolling 12-month percentage change of ±23. As of this writing, the index is up 32 percent, meaning it's up by only 1.3 standard deviation. In other words, biotech is behaving approximately within its expected range.

Gold bullion, over the same period, has had a percentage change of ±19--not so dramatically different from biotech--and is down by 1.3 standard deviation. Again, this is "normal" behavior.

Uncomfortable with the Volatility of Gold? It's Much Like Biotechnology Stocks

As you can see, biotech corrected and then rallied firmly into the sell zone. Seventy percent of the time, it's normal for the asset class to rise and fall one standard deviation. Each asset class has had its own DNA of volatility over the last 10 years. Knowing this helps you manage your expectations of how they perform.

 

Asset Class Standard Deviation
WTI Crude Oil 34%
Gold Stocks 34%
Emerging Markets 29%
S&P 500 Index 17%

 

Even health care and biotech companies not actively working toward finding treatments and vaccines for the virus seem to have incidentally benefited from the rally. California-based Gilead Sciences and New Jersey-based Celgene, for instance--both of which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX) and were named by Motley Fool as two of the four most important stocks of the last 16 years--have hit all-time highs. Gilead Sciences concentrates mostly on drug therapies for HIV and hepatitis B, while Celgene conducts similar work for cancer and inflammatory disorders.

Celgene and Gilead Sciences Hit All-Time Highs

And it's not just American health care stocks that are doing well. We've been impressed lately with the performance of the Stock Exchange of Thailand Health Care Index and Bangkok Dusit Medical Services, Thailand's largest private hospital operator, which we hold in our China Region Fund (USCOX). Both the index and the equity have excelled year-to-date, delivering 57 percent.

Thai Health Care Services One of the Top-Performing Sectors in Asian Industries


Bullion and Gold Stocks

As for gold, between mid-August and October 3, the precious metal completely ignored the fact that September is historically its best-performing month, tumbling 9 percent from $1,310 to $1,190. It soon rebounded in the days leading up to Diwali.

Gold stocks, on the other hand, have yet to recover. Since the end of August, the NYSE Arca Gold BUGS Index has plunged 25 percent to lows we haven't seen since April 2005. The Market Vectors Junior Gold Miners ETF has lost nearly 30 percent; the Philadelphia Gold and Silver Index (XAU), 25 percent.

On a few occasions I've pointed out that in the last 30 years, the XAU has never experienced a losing streak of more than three years. As of this writing, it's lost close to 17 percent, with only two months left. The cards are definitely stacked against the XAU, but I remain optimistic it can continue the trend.

In 30 Years, the XAU Never Experienced a Losing Streak of More Than 3 Years

Many investors are understandably concerned that mining companies in West Africa will suffer because of Ebola. Several companies operating in the three hardest-hit countries have indeed been hurt by the virus, some of them being forced to halt production. However, none of our funds has any direct exposure to them. Three companies that we own in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX)--IAMGOLD, Newmont Mining and Randgold Resources--continue to operate normally in the region.

Here I must remind investors that we recommend 10-percent holding in gold: 5 percent in bullion, 5 percent in stocks. Rebalance every year.


Looking Past Ebola

The Ebloa Scare Has Contributed Toward Moving the Market Needle into Fear Territory

One of our most important tenets at U.S. Global is to always stay curious. That includes being familiar with world events and determining how they might affect our funds. Ebola certainly falls into this category, but that doesn't necessarily mean our funds will undergo any significant changes based on this unfortunate event. Again, other factors have contributed, including the so-called October effect. We remain committed to our fundaments and pick stocks because they've been well-screened and fit in our results-oriented models.

If the markets seem too volatile for you right now, we're proud to offer investors a "no-drama" alternative. Check out our Near-Term Tax Free Fund (NEARX), which has delivered positive returns for the past 13 years.

Happy investing, and stay safe!

 


 

Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


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

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