USFunds.com • January 05, 2018

Table of ContentsIndex Summary • Domestic Equity Market • Economy and Bond Market • Gold Market

Energy and Natural Resources Market • Emerging Europe • China Region • Leaders and Laggards

It’s Time for the Fear Trade to Move Gold PricesBy Frank HolmesCEO and Chief Investment OfficerU.S. Global Investors

The price of gold and gold mining stocks were very competitive in 2017. The yellow metal ended the year up alittle more than 13 percent—its best year since 2010—while gold stocks, as measured by the NYSE Arca GoldMiners Index, gained more than 11 percent. All of this occurred even as large-cap stocks regularly closed at all-time highs and cryptocurrencies invited massive speculation.

We can thank the Fear Trade for much of gold’s performance last year. The Fear Trade, of course, is driven by lowto negative real interest rates—when inflation erodes away at government bond yields—deficit spending, aweaker U.S. dollar and geopolitical uncertainty.

I believe these forces will only intensify in 2018. With inflation finally showing green shoots and PresidentDonald Trump’s $1.5 trillion tax reform law expected to increase deficit spending, this year could provide theright conditions to spur gold prices higher.

The risks inherent in the Federal Reserve’s monetary policy tightening is a good place to start.

Beware the Rate Hike Cycle?Since the Fed lifted rates last month, gold has behaved just as it did following the last two December rate hikes—that is, it’s begun to appreciate. On the final trading day of 2017, gold broke above $1,300 an ounce, apsychologically important level, and has since climbed an additional 1 percent. This is the first year since 2013, infact, that gold has started the year above $1,300.

We’ve seen this movie before. In July 2016, the yellow metal peaked close to $1,370 an ounce, a 29 percent surgesince the December 2015 rate hike. (If you remember, this represented gold’s best first half of the year since1974.) And in September 2017, it topped out around $1,360, up close to 18 percent since the December 2016 ratehike.

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So will we see a “Fed rally” in 2018 as well? Obviously nothing is guaranteed, but let’s say gold were to follow asimilar trajectory this year as it did in 2016 and 2017. That would put gold somewhere between $1,460 and$1,600 an ounce by summer. These are prices we haven’t seen in four years.

I think it’s also worth pointing out in the chart above that support looks good for gold. For the past couple ofyears, it’s steadily posted higher lows.

But wait—shouldn’t rate hikes put a damper on gold prices? Gold, as I’ve discussed many times before, hastypically thrived in a low-rate environment since it’s a non-yielding asset. What’s really happening here?

I’ll let Jim Rickards, editor of Strategic Intelligence, field this question. In a recent Daily Reckoning article titled“The Next Great Bull Market in Gold Has Begun,” Jim explains that the market is looking beyond the rate hikeand “asking what comes next.”

After all, the December rate hikes in 2015, 2016 and 2017 were all advertised well in advance bythe Fed and were fully discounted by the market. This means that the rate hike was a nonevent,because gold was already priced for it.

Yet the rate hike itself and the Fed’s commentary suggest both a headwind for economic growthand possible Fed ease in the form of future inaction and forward guidance relative toexpectations.

Gold markets, in other words, could be forecasting slower economic growth as a result of higher borrowing costs.You might not agree with Jim here, and I’m not asking you to. After all, the U.S. economy is humming right now.

Consumer spending is up, optimism is high and we have a robust labor market with unemployment at a 17-yearlow of 4.1 percent. Many people expect the Trump tax cuts to prompt multinational corporations to bring homecash that’s been held overseas, lift wages and boost capex spending.

At the same time, we can’t ignore the historical implications of past rate hike cycles. I shared with you last monththat in the past 100 years, only three such cycles out of at least 18 didn’t end in a recession.The current cyclecould turn out to be just as benign, but that would make it a huge exception, not the norm.

U.S. Yield Curve Flattens to Level Not Seen Since 2007Then there’s the flattening yield curve. The yield curve is said to “flatten” when the difference between the two-year Treasury yield and 10-year Treasury yield starts to tighten. As of today, that spread drew up to around 0.496percentage points, its flattest level since October 2007.

This measure is worth watching because it’s often seen as one of the most reliable “canary in the coal mine”predictors of recession. The past seven U.S. recessions were directly preceded by an inverted yield curve—that is,when short-term yields rose above long-term yields.

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To be clear, we still have a way to go before the yield spread inverts. But if this observation concerns you—if youbelieve the business cycle is in fact getting a little long in the tooth—it might make sense to ensure you have a 10percent weighting in gold bullion and high-quality gold mutual funds and ETFs.

Inflation Could Be a Lot Hotter Than We RealizeAnother factor that’s driven gold prices in the past is inflation. When the cost of living has eaten away atgovernment bond yields, investors have tended to seek more attractive stores of value, including gold. This is atthe heart of gold’s Fear Trade.

The problem is that inflation has been sluggish lately—if we’re using the official consumer price index (CPI). In2017, the CPI just barely met the Fed’s 2 percent target rate. Many economists had expected prices to startcreeping up last year in response to President Trump’s nationalist “America first” agenda, complete with newtariffs, strong crackdown on illegal immigration, cancellation of U.S. participation in the Trans-PacificPartnership (TPP) and a renegotiation of the North American Free Trade Agreement (NAFTA). So far thesepolicies haven’t had much effect on inflation.

But what’s the “real” inflation? Which gauge should we be looking at? Again, the CPI doesn’t show muchmovement.

The underlying inflation gauge (UIG), however, tells a different story.

The UIG, introduced only last year by the New York Fed, is a much broader measure of inflation than the CPI. Itincludes not just consumer prices but also producer prices, commodity prices and financial asset prices.

When we use this dataset, we find that—surprise!—inflation is not as subdued as we initially thought. Whereasthe November CPI came in at 2.2 percent, the UIG heated up to 3 percent, its highest reading since August 2006.

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The implications here are huge. Three percent is higher than the five-year Treasury yield, currently around 2.3percent, and the 10-year yield, about 2.5 percent. It’s even higher than the 30-year Treasury yield at 2.8 percent!

But there are even more ways to measure inflation, and some show it being higher than the UIG. Economist JohnWilliams runs a website called Shadow Government Statistics, where you can find, among other “alternate”datasets, current inflation rates as is they were calculated the way the U.S. government did pre-1980. Note thehuge bifurcation between the official CPI and alternate 1980-based CPI. According to the alternate gauge,consumer prices in November rose close to 10 percent year-over-year, or 7.75 percentage points more than theCPI.

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“In general terms,” Williams writes, “methodological shifts in government reporting have depressed reportedinflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain aconstant standard of living.”

So which metric do you believe? The official CPI? The 1980-based CPI? The broader UIG? If it’s one of the lasttwo, you have to ask yourself why you would lock your money up for five years, 10 years or even 30 years in agovernment bond that fails to keep up with real inflation. The investment case for gold suddenly becomes veryattractive.

Interested in learning more? Be sure to check out these 10 charts that show why I think gold isundervalued right now!

Index SummaryThe major market indices finished up this week. The Dow Jones Industrial Average gained 2.33 percent.The S&P 500 Stock Index rose 2.60 percent, while the Nasdaq Composite climbed 3.38 percent. TheRussell 2000 small capitalization index gained 1.60 percent this week.

The Hang Seng Composite gained 3.33 percent this week; while Taiwan was up 2.23 percent and theKOSPI rose 1.22 percent.

The 10-year Treasury bond yield rose 6 basis points to 2.48 percent.

Domestic Equity Market

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StrengthsThe best performing sector for the week was information technology, closing up 4.5 percent.

The best performing stock for the week was Advanced Micro Devices, closing up over 15 percent.

Markit’s U.S. manufacturing report for December came in at 55.1, up 1.2 points from the Novemberreading. Highlighting the results are acceleration in new orders and a two-year best for backlogs, reportsBloomberg.

WeaknessesThe worst performing sector for the week was utilities, down 2.48 percent.

The worst performing stock for the week was Leading Brands, down 16.09 percent.

A snow storm pummeled the U.S. Northeast this week, reports Bloomberg, knocking out power forthousands of residents. Along the East Coast, 21,000 customers lost power and on Friday around 1,427flights were cancelled.

OpportunitiesAmazon will debut the first augmented-reality glasses with the company’s Alexa voice assistant next weekat CES in Las Vegas, reports Bloomberg. “The strategy is designed to put Amazon’s service, whichgenerates revenue for the company, in as many places as possible to sell more products,” the article reads.

Investors will get additional information about the last month’s employment situation next week when theLabor Department’s JOLTS report is released on Tuesday.

The number of scripted television shows released in the U.S. reached a new high in 2017, more thandoubling in seven years, reports Bloomberg. Of the 487 shows released last year, 117 were accounted forby streaming services. This news reflects the “growing efforts of Netflix, Amazon and YouTube to stealviewers and advertisers from traditional networks,” the article reads.

ThreatsCharles Schwab’s client account cash balances as a percentage of total assets are at record low levels,levels below the lows prior to the Technology crash in 2000. This, combined with the longest bull marketin history, nine years running, is seemingly starting to worry some market participants.

During the “dot com” era we witnessed companies adding “.com” to their names. In doing so, stocksrocketed higher as if they found the cure for previously incurable disease. Unfortunately, in the recent

past we started witnessing similar behaviors except “.com” was replaced with “crypto.” For example, LongIsland Iced Tea recently changed its name to “Long Blockchain Corp” and the stock price rallied 180percent. When we see these situations, it might be time to invest with additional caution.

The spread between the 2-year yield and 10-year yield is at multi-year lows. If the Federal Reservecontinues to tighten rates and the 10-year yield stays at current levels, the spread will be close toinverting, thus slowing the flow of money and possibly hindering future growth.

The Economy and Bond Market

StrengthsThe headline JPMorgan Manufacturing purchasing managers’ index (PMI), hit 54.5 in December, thehighest since February 2011. This data indicates that manufacturing has now gained growth momentumfor six successive months, with output, employment and new orders rising at increased rates toward theend of 2017.

American consumers last year were more up beat on average than at any time since 2001, reflecting morefavorable views of the economy, personal finances and the buying climate, according to the BloombergConsumer Comfort Index released Thursday. The index came in at 50.0 for 2017, up from 43.6 a yearearlier and the best reading since 51.8 in 2001. Sentiment in 2017 got a boost from the combination of asolid labor market that’s pushed unemployment to an almost 17-year low, limited inflation and recordstock prices.

The Atlanta Fed’s GDP Nowcast model now sees U.S. fourth-quarter GDP at 3.15 percent compared to 2.7percent forecast earlier. The latest releases affecting the model were ISM manufacturing and constructionspending. The PCE contribution was estimated at 2.24 percent.

WeaknessesThe U.S. M2 monetary growth, already the slowest since 2011 at 4.7 percent, should slow further to 2.1percent in the second quarter due to quantitative tightening, all other things being equal.

Home builders and building materials in the U.S. fell Thursday after Wednesday’s Federal Reserveminutes release firmed up expectations of monetary tightening and rising rates, which makes homebuying more unfavorable. Mortgage REITs were among the largest decliners in both the U.S. and CanadaWednesday. Credit Suisse analyst Douglas Harter wrote in a report that residential mortgage REITs willlikely generate a 4.9 percent return this year versus the 14.3 percent return in 2017.

Employers added 148,000 workers, compared with the 190,000 median estimates of economists surveyedby Bloomberg, held back by a drop in retail positions, a Labor Department report showed Friday. Theunemployment rate holds at 4.1 percent, the lowest level since 2000.

OpportunitiesThe ISM manufacturing index rose 1.5 percentage points from a month earlier to a reading of 59.7 inDecember, the second-highest level since early 2011, the Institute for Supply Management saidWednesday. A sub index of new orders, a measure of sales at factories, rose more than 5 points to 69.4,the highest since early 2004. Details hinted at further growth in coming months. While sales picked up,

inventories at both factories and customer count fell. That combination suggests factories will have toboost production further in the first quarter of 2018 to satisfy demand.

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According to Bloomberg, the top three high duration and high beta securities attracted $200 million eachduring the first session of 2018. After a year that saw investors swap credit risk for duration riskwhenever risk aversion arose, it is clear that reaching for yield is alive and well in 2018.

According to the Wall Street Journal, workers in metro areas with the lowest unemployment areexperiencing among the strongest wage growth in the country. The labor market in places likeMinneapolis, Denver and Fort Myers, Fla., where unemployment rates stand near or even below 3percent, has now tightened to a point where businesses are raising pay to attract employees, often fromcompetitors. Wage growth is finally moving higher and could point to improved incomes nationally in2018.

ThreatsThe WSJ reports that although sales suffered an annual decline, the number of units sold actuallysurpassed the 17M mark for three consecutive years. However, executives remain concerned that thedecline may be more than a blip. U.S. production is reduced in anticipation of weaker demand, risinginterest rates and potential decline in value of used cars. The Federal Reserve forecasts three rate hikesthis year, crimping the free-flowing credit that’s helped fuel a record streak of demand growth that’s cometo an end.

The strongest manufacturing activity since the aftermath of the global financial crisis is slowly drainingcommodities surpluses, sending prices to a 3-year high as investors pour money into everything from oilto copper. For the global economy, the pickup in commodities poses a conundrum. It could show howyears of ultra-lax monetary policies have finally boosted activity and may even be enough to revive long-dormant inflationary pressures. The risk is inflation reemerging faster than central banks expect, forcingthem to raise interest rates more aggressively than they now plan or investors anticipate.

Ray Dalio of Bridgewater sees Americans’ debt as a coming drag on growth and markets. He said not onlywill this drag on growth and markets, it will leave the economy acutely vulnerable to higher interest rates.The problem is that with interest rates and risk premia near all-time lows and debt and asset values nearall-time highs, there’s little fuel to repeat the process. Just as the Fed can’t cut rates much, it can’t raisethem much either, or debt servicing would swamp cash flow and asset prices would sink. Thus Mr. Daliosees years of low interest rates, and while he thinks stocks are fairly valued, returns to a typical stock-bond portfolio over the next decade will be around zero after inflation and taxes.

Gold MarketThis week spot gold closed at $1,320.24 up $17.19 per ounce, or 1.32 percent. Gold stocks, as measured by the

NYSE Arca Gold Miners Index, ended the week higher by 1.65 percent. Junior-tiered stocks outperformed seniorsfor the week, as the S&P/TSX Venture Index closed up 5.29 percent. The U.S. Trade-Weighted Dollar was flattishthis week losing just 0.11 percent.

Date Event Survey Actual Prior

Jan-1 Caixin China PMI Mfg 50.7 51.5 50.8

Jan-3 ISM Manufacturing 58.2 59.7 58.2

Jan-4 ADP Employment Change 190k 250k 185k

Jan-4 Initial Jobless Claims 240k 250k 245k

Jan-5 Eurozone CPI Core YoY 1.0% 0.9% 0.9%

Jan-5 Change in Nonfarm Payrolls 190k 148k 252k

Jan-5 Durable Good Orders -- 1.3% 1.3%

Jan-3 PPI Final Demand YoY 3.0% -- 3.1%

Jan-4 Initial Jobless Claims 248k -- 250k

Jan-5 CPI YoY 2.1% -- 2.2%

StrengthsThe best performing metal this week was platinum, up 4.3 percent as speculators cut their net bearishplatinum positions. After being bullish for the previous three weeks, gold traders and analysts are neutralthis week, according to a Bloomberg survey. However, the number of new investors for BullionVault hitthe highest level since November 2016, according to the online gold vaulting firm.

Even as equities were record-high in 2017, investors still turned to gold as a hedge against uncertainty,pushing the Comex futures volume to an all-time high, according to Bloomberg.

The largest gold ETF, SPDR Gold shares, kicked off 2018 strong by continuing its record streak of gains.The gold price continues to increase due to a weaker U.S. dollar.

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WeaknessesThe worst performing metal this week was gold, still up 1.3 percent. Although gold has started 2018strong, some think warning signs have flashed the gain may be overdone. Bullion’s 14-day relativestrength index hit 74, which is above the level of 70 that suggest a pullback is imminent, according toBloomberg. Gold fell after the Federal Reserve meeting minutes showed most officials support higher

interest rates.

Gold futures were set for the longest rally since 1975 after a report showed a slower-than expected hiringrate. The U.S. dollar dropped at the initial reaction of the news, and then bargain hunters stepped inraising the price of the dollar and pushing the gold price down.

Home resales dropped in Manhattan, New York down 11 percent to 2,127 homes. More than 88 percent ofhomes sold in the fourth quarter of 2017 were below the asking price with the median resale price of$916,425. Many see this as a reaction to impending tax reform taking effect.

OpportunitiesIndia’s December 2017 gold imports rose 37 percent year-over-year from 56.9 tons to 77.7 tons. This isvery positive news given that India has the second highest gold demand behind only China, and mightsignal the return of a gold bull market. India’s gold market has struggled the last year withdemonetization and tax reform but Fitch recently ranked India number one of the top 10 emergingmarkets for GDP growth with the largest working-age population in the next five years. A stronger Indianeconomy has historically been good for gold prices.

Gold mining companies are on the rise due to record high commodity prices and years of self-helpmeasures that have strengthened balance sheets, according to Bloomberg. “Miners look to be in thehealthiest position that we have seen for years,” says Paul Gait, analyst at Sanford C. Bernstein, but notedthat the big M&A deals of the past were value destructive. “There is nothing wrong with being a cashcow,” Gait wrote in the report.

The yellow metal was off to a strong start this month and might rally for the remainder of the month, ifnot the entire year. David Lennox, resource analyst at Australian brokerage Fat Prophets said, “Higherinflation coupled with weakness in the dollar will push the price upwards.” Other evidence to support abullish view is that gold remained strong in 2017 despite the U.S. stock market surging to record highsand interest rates rising three times.

ThreatsAccording to Morgan Stanley, it might be too late in the market cycle to bet on high-yield bonds. Themoney management firm cut its junk bond allocation, citing excesses from the tax cuts might lead to arecession after growth in the short-term.

The U.S. trade deficit hit its highest level in almost six years with an increase in imports exceeding a gainin shipments. This could keep the gross domestic product from advancing at least 3 percent, according toBloomberg’s Andrew Mayeda. Automakers saw their first annual U.S. sales decline since 2009 andprojections for 2018 are down due to expectations of interest rate hikes.

In a Bloomberg interview this week, Former U.S. Treasury Secretary Jacob J. Lew said the recently passedtax reform is a ticking time bomb for debt that could leave the U.S. broke. Lew said the administration is“spending trillions of dollars you don’t have at a time that the economy is doing well.” Lew believes thetax cuts will lead to certain proposals cut or reduced such as medical insurance for the poor and SocialSecurity and Medicare.

Energy and Natural Resources Market

StrengthsLumber was the best performing major commodity this week rising 3.2 percent. The commodity rallied onthe back of another reading showing synchronized global purchasing manufacturers index (PMI)advances. Lumber prices have one of the highest correlations to rising PMIs, which have lifted lumberprices to near all-time highs.

The best performing sector this week was the S&P 1500 Oil & Gas Exploration and Production Index. Theindex rose 7.9 percent propelled higher by rising crude oil prices, to which they offer greater beta thanother energy related sectors.

Fortescue Metals Group, a major Australian producer of iron ore, was the best performing stock in thebroader resource market this week. The stock rallied 10.3 percent after M&G Investments out of Londonrevealed it had initiated a position in the stock, while simultaneously decreasing its holding in BHP.

WeaknessesNatural gas prices dropped 4.0 percent; the most among major commodities. The commodity dropped inspite of the abnormally cold weather experienced by most Americans this week, as natural gas bulls areheading for the exits on signs that the polar chill won’t last, with Accuweather Inc. expecting warmer thanseasonal temperatures reaching the East Coast next week.

The worst performing sector this week was the FTSE 350 Mining Index. The index actually advanced 0.9percent but trailed other resources sectors as advances in industrial metals were offset by decliningcopper prices.

The worst performing stock for the week was Hochschild Mining PLC. The precious metals minerdropped 5.4 percent after RBC cut its rating on the stock to sector perform from outperform on valuationgrounds.

OpportunitiesGlobal PMIs continued their synchronized expansion in December, suggesting the commodity rally couldcontinue. China’s manufacturing sector expanded at its fastest rate in four months in December. TheCaixin-Markit manufacturing purchasing managers’ index rose to 51.5 in December. Eurozonemanufacturers report strongest month on record - The manufacturing purchasing managers’ index for theeurozone as a whole came in at 60.6 in December, its strongest level since the survey began in mid-1997.Similarly, India’s manufacturing sector expanded at its fastest pace in five years in December on sharpincreases in output and new orders.

Oil prices jumped as U.S. crude stockpiles shrink the most since August. American crude inventoriesslipped by 7.42 million barrels last week as refiners boosted operating rates to the highest level in morethan a decade, signaling strong demand, the Energy Information Administration said on Thursday.

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India’s gold imports surged 67 percent in 2017. Increased demand in the South Asian nation drove a risein imports to 855 tonnes in 2017 as jewelers replenished inventory amid a rebound in retail demand.

ThreatsOil retreated from a 3-year high as expanding inventories of gasoline and diesel in the world’s biggesteconomy tempered enthusiasm about shrinking crude supplies. Gasoline stored in U.S. terminals andtanks swelled for an eighth straight week, a phenomenon not seen since the winter of late 2015 and early2016. Ample stockpiles of gasoline and other fuels may signal an imminent fall-off in refiners’ demand forcrude that helped support the recent price rally.

Iron ore stockpiles amassed in ports across China have burst above 150 million metric tons, notchinganother record in the world’s largest importer. Unprecedented state-mandated curbs on steelmakers’output over the winter months’ have blunted demand while seaborne supplies increase. The record portstockpiles are among signs global supply remains plentiful as miners BHP Billiton Ltd., Rio Tinto Groupand Vale SA press on with production.

Clouds have drifted over the U.S. solar industry according to the Financial Times. Tax reform, electricityregulation and potential new duties on imported panels are looming over the industry, threatening todisrupt the conditions that have made success possible. Already, installations have slowed for the firsttime in more than a decade, dropping about 22 percent to 11.8GW last year. President Trump isscheduled to deliver a decision on new duties on imports by January 26, and if he chooses to impose thetariffs sought by U.S. manufacturers, the price of panels in the US could double.

China Region

StrengthsHong Kong’s Hang Seng Composite Index closed out the first calendar week of 2018 with a 3.33 percentgain. Much of the rest of the region also had a strong week, with indices like the Shanghai Composite, theSET Index, TWSE Index, the PCOMP Index, the Ho Chi Minh Stock Index and Singapore’s FTSE StraitsTimes Total Return Index all returning between 2-3 percent for the week.

Energy, along with properties & construction, finished out the week as the top two sectors in the HangSeng Composite so far in 2018, rising 7.17 and 6.84 percent, respectively.

China’s purchasing managers’ index (PMI) came in strong for the December period. OfficialManufacturing and Non-manufacturing PMI clocked in at 51.6 (in line) and 55.0 (beat), while the CaixinChina Manufacturing PMI came in at 51.5 (ahead of expectations for 50.7 and up from last month’s 50.8),while the Caixin Services finished at 53.9, ahead of expectations for a 51.8 print.

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WeaknessesIndonesia was the laggard for the week, as the Jakarta Composite actually declined by 3 basis points.

The services and telecommunication sectors were the worst in the Hang Seng Composite this week,declining mildly by 73 and 70 basis points, respectively.

The Nikkei Indonesia PMI for the December period declined to contractionary territory with a reading of49.3, down from the prior month’s 50.3 print.

OpportunitiesChina will reportedly maintain the same official economic growth expectations as 2017, with a 6.5 percentGDP growth rate target.

Bloomberg News reported this week that Chinese authorities’ plans to introduce a property tax are likelyset to be enacted later than initially expected, and probably not until 2020, at this point. While theintroduction of a tax is a net negative for properties, it appeared that property & construction names likedthe news of a delay this week.

After some overtures earlier in the week, South Korea and North Korea have now agreed to a formaldialogue starting next week, one that hopefully bears fruit.

ThreatsDespite some of the positives in the North Korea situation this week, the issue of rhetorical skirmishesbetween Pyongyang and Washington continued in the odd form of a my-nuclear-button-is-bigger-and-more-powerful-than-your-nuclear-button tweet, delivered in response to a Kim Jong Un speech. Indeed,while the odds of serious escalation continue to appear relatively low, there remains a certain wildcardfactor to North Korea—and in potential responses to it.

At the close of 2017, Chinese authorities announced per-individual caps on domestically-issued bank cardannual withdrawals, a change from the previous policy of per-account caps on withdrawals.

China is planning to limit access to power supplies for some Bitcoin miners, Bloomberg reported thisweek, highlighting plans supposedly outlined in a closed-door meeting of the People’s Bank of China(PBOC). China remains home to many of the world’s largest Bitcoin miners.

Emerging Europe

StrengthsRussia was the best performing country this week, gaining 4.6 percent. This week the country was on aNew Year Holiday Break. The Moscow Stock Exchange was only open a few days, and as most peoplewere on vacation break, trading was light. Mail.Ru and X5 Retail Group were the best performing stocks,gaining more than 12 percent each. Brent crude oil traded above $68 per barrel, a level last seen on May13, 2015.

The Turkish lira was the best performing currency this week, gaining 1.6 percent against the U.S. dollar.Foreign capital is flowing into Turkish stocks and bonds. According to Bloomberg’s note, foreign investorsbought around $9 billion of Turkish securities in 2017, the most in five years.

The material sector was the best performing sector among eastern European markets this week.

WeaknessesTurkey was the worst relative performing country this week, gaining 1.1 percent. Jurors in a New Yorkcourt found the Turkish banker, Hakan Atilla, guilty of helping Iran evade U.S. financial sanctions. Thejudge will announce his sentence in April, and a potential fine against Halkbank might be announcedsoon.

The euro was the worst relative performing currency this week, gaining 30 basis points against the U.S.dollar. A stronger dollar and weaker inflation put pressure on the currency.

Real estate was the worst performing sector among eastern European markets this week.

OpportunitiesGermany and the eurozone’s final manufacturing PMIs for December were unrevised and stayed at recordhighs. France’s PMI was revised lower, but still is at the highest reading since September 2000. Neworders are rising as firms prepare for higher production in 2018.

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Russian gas output jumped by 7.9 percent last year to a record high, supported by higher sales to Europeand rising domestic demand. With new pipeline projects in the works, Russia still has more room forgrowth. Higher gas and oil exports will help the country to generate more revenue.

Hungary’s government bond yields fell below 2 percent for the first time. Policy makers will start interest-rate swap tenders on January 18 in order to lower long-term borrowing costs in the economy. The centralbank is expected to continue its dovish strategy, which should lead to further outperformance forHungarian government bonds compared with Poland, according to Guillaume Tresca, Credit Agricole SAstrategist.

Threats

The mainstream media is telling the world that 2018 should be another favorable year for investors in riskassets, but Kepler Cheuvreux research team does not agree with the mainstream media view. The groupsays that the correction in Europe already began in November and the most persuasive signal for acorrection in European equities will be given when the DAX index falls below the 12780-12800 treshold.The research team anticipates a selloff in European equites.

At the end of January, the United States may announce additional sanctions on Russia. The list of peopleand companies under sanctions might be extended, and sanctions could be imposed on countries and/orindividuals who continue to do business with Russia. Turkey is a member of NATO, but recentlypurchased a weapon system from Russia, making itself a target for some kind of sanctions.

Eurozone inflation weakened despite good growth in the euro area. Consumer prices rose 1.4 percent inthe year to December, down from the previous month’s 1.5 percent rate. The core inflation, which stripsout potentially volatile items such as energy and food, remained even lower at 0.9 percent. The inflation ismoving further away from the European Central Bank’s target of 2 percent.

Leaders and LaggardsWeekly Performance

Index CloseWeekly

Change($)Weekly

Change(%)

Russell 2000 1,560.01 +24.50 +1.60%

S&P Basic Materials 394.19 +15.25 +4.02%

Nasdaq 7,136.56 +233.17 +3.38%

Hang Seng Composite Index 4,278.16 +137.71 +3.33%

S&P 500 2,743.15 +69.54 +2.60%

Gold Futures 1,321.20 +11.90 +0.91%

Korean KOSPI Index 2,497.52 +30.03 +1.22%

DJIA 25,295.87 +576.65 +2.33%

S&P/TSX Global Gold Index 196.70 +1.24 +0.63%

SS&P/TSX Venture Index 895.71 +44.99 +5.29%

XAU 87.39 +2.12 +2.49%

S&P Energy 554.41 +21.00 +3.94%

Oil Futures 61.56 +1.14 +1.89%

10-Yr Treasury Bond 2.48 +0.07 +2.87%

Natural Gas Futures 2.79 -0.16 -5.38%

Monthly Performance

Index CloseMonthly

Change($)Monthly

Change(%)

Korean KOSPI Index 2,497.52 +23.15 +0.94%

Hang Seng Composite Index 4,278.16 +385.95 +9.92%

Nasdaq 7,136.56 +360.18 +5.32%

XAU 87.39 +10.97 +14.35%

S&P/TSX Global Gold Index 196.70 +12.33 +6.69%

Gold Futures 1,321.20 +55.10 +4.35%

S&P 500 2,743.15 +113.88 +4.33%

S&P Basic Materials 394.19 +25.50 +6.92%

DJIA 25,295.87 +1,154.96 +4.78%

Russell 2000 1,560.01 +51.13 +3.39%

SS&P/TSX Venture Index 895.71 +112.05 +14.30%

Oil Futures 61.56 +5.60 +10.01%

S&P Energy 554.41 +50.53 +10.03%

Natural Gas Futures 2.79 -0.13 -4.38%

10-Yr Treasury Bond 2.48 +0.14 +5.81%

Quarterly Performance

Index CloseQuarterly

Change($)Quarterly

Change(%)

Korean KOSPI Index 2,497.52 +103.05 +4.30%

Hang Seng Composite Index 4,278.16 +312.69 +7.89%

Nasdaq 7,136.56 +546.38 +8.29%

Natural Gas Futures 2.79 -0.07 -2.41%

Gold Futures 1,321.20 +42.20 +3.30%

S&P 500 2,743.15 +193.82 +7.60%

S&P Basic Materials 394.19 +31.23 +8.60%

S&P/TSX Global Gold Index 196.70 -5.17 -2.56%

XAU 87.39 +0.49 +0.56%

DJIA 25,295.87 +2,522.20 +11.08%

Russell 2000 1,560.01 +49.79 +3.30%

SS&P/TSX Venture Index 895.71 +107.39 +13.62%

S&P Energy 554.41 +50.62 +10.05%

Oil Futures 61.56 +12.27 +24.89%

10-Yr Treasury Bond 2.48 +0.12 +4.87%

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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned inthe article were held by one or more accounts managed by U.S. Global Investors as of (09/30/2017):

SPDR Gold SharesX5 Retail Group NV

Fortescue Metals GroupBHP Billiton LtdHochschild Mining PLC

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflectdividend reinvestment.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in theirindustry.The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S.companies.The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell3000®, a widely recognized small-cap index.The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed onStock Exchange of Hong Kong, based on average market cap for the 12 months.The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the TaiwanStock Exchange.The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the KoreanStock Exchanges. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leadingcompanies involved in the mining of gold and silver. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights arecapped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset ofthe S&P 500.The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subsetof the S&P 500.The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the1941-43 base period.The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in theindustrial sector as a subset of the S&P 500.The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumerdiscretionary sector as a subset of the S&P 500.The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the informationtechnology sector as a subset of the S&P 500.The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies inthe consumer staples sector as a subset of the S&P 500.The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset ofthe S&P 500.The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as asubset of the S&P 500.The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in thetelecom sector as a subset of the S&P 500.The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly tradedcompanies involved primarily in the mining for gold and silver. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a marketbasket of goods and services purchased by individuals. The weights of components are based on consumer spendingpatterns.The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index isbased on five major indicators: new orders, inventory levels, production, supplier deliveries and the employmentenvironment.The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index ismarket capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to removecompanies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, willbe greater than 0.05% of the index.

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly tradedcompanies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of tradingon December 20, 2002.The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a marketbasket of goods and services purchased by individuals. The weights of components are based on consumer spendingpatterns.The underlying inflation gauge (UIG) captures sustained movements in inflation from information contained in a broad set ofprice, real activity, and financial data.The Bloomberg Consumer Comfort Index is a weekly, random-sample survey tracking Americans' views on the condition ofthe U.S. economy, their personal finances and the buying climate.The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthlysurvey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

The PCE Deflator is a nation-wide indicator of the average increase in prices for all domestic personal consumption.The ISM New Orders Index is prepared by the Institute of Supply Management and is an indicator of the levels of neworders from customers.The Caixin China General Services PMI (Purchasing Managers' Index) is based on data compiled from monthly replies toquestionnaires sent to purchasing executives in over 400 private service sector companies. The index tracks variables suchas sales, employment, inventories and prices.The Caixin China Manufacturing PMI (Purchasing Managers' Index) is based on data compiled from monthly replies toquestionnaires sent to purchasing executives in over 400 private manufacturing sector companies.The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt StockExchange. The S&P 1500 Supercomposite Oil & Gas Equipment & Services Index is a capitalization-weighted indexcomprised of stocks whose primary function is equipment and services for natural gas and oil resources. The FTSE 350Mining Index is a capitalization-weighted index of all stocks designed to measure the performance of the mining sector ofthe FTSE 350 Index. The index was developed with a base value of 1000 as of December 31, 1985. The Caixin ChinaManufacturing PMI (Purchasing Managers' Index) is based on data compiled from monthly replies to questionnaires sent topurchasing executives in over 400 private manufacturing sector companies.Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.The Jakarta Stock Price Index is a modified capitalization-weighted index of all stocks listed on the regular board of theIndonesia Stock Exchange.The Shanghai Stock Exchange Composite Index (SSE Composite) is a market composite made up of all the A-shares andB-shares that trade on the Shanghai Stock Exchange. The SET Index is a Thai composite stock market index which is calculated from the prices of all common stocks on themain board of the Stock Exchange of Thailand, except for stocks that have been suspended for more than one year. TheFTSE Straits Times Index (STI) is a capitalization-weighted stock market index that is regarded as the benchmark index forthe Singapore stock market.The Philippine Stock Exchange PSEi Index (PCOMP) is a capitalization-weighted index composed of stocks representativeof the Industrial, Properties, Services, Holding Firms, Financial and Mining & Oil Sectors of the PSE.The Vietnam Stock Index or VN-Index is a capitalization-weighted index of all the companies listed on the Ho Chi Minh CityStock Exchange.TWSE Capitalization Weighted Stock Index (TAIEX) is a stock index calculated based on all common stocks listed onTWSE, and used as a benchmark for investment in Taiwanese stocks.

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