Van Eck Blogs http://www.vaneck.com/Templates/PageLayout_Special_rwd.aspx?pageid=12884903011?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 2016-02-06 en-US Fallen Angels Retain Their Halos in 2015 http://www.vaneck.com/blogs/etfs-february-05-2016/ Fallen angels, corporate high yield bonds that were originally issued with investment grade credit ratings, proved resilient in 2015. The main factors that helped fallen angels end the year ahead of the broad high yield bond market included higher average credit quality and lower average exposure to the energy sector.

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Van Eck Blogs 2/5/2016 12:00:00 AM

Authored by Meredith Larson, Product Manager, ETFs  

Performance Helped by Higher Credit Quality and Lower Energy Exposure

Fallen angels, corporate high yield bonds that were originally issued with investment grade credit ratings, proved resilient in 2015.

Generally characterized by higher average credit quality than the broad high yield bond market, fallen angels outperformed by 1.39%, as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (-3.23%) versus the BofA Merrill Lynch US High Yield Index (-4.62%). Higher average credit quality, lower average exposure to the energy sector, and higher average credit quality within the energy sector were main factors that helped fallen angels end the year ahead of the broad high yield bond market.

Less Weight in Exploration & Production

While the energy sector allocation among fallen angels increased in 2015 (from 4.3% to 13.3%) as the broad high yield bond market’s decreased (from 13.4% to 10.9%), it was fallen angels’ significantly lower yearend industry weight in exploration and production (E&P) that primarily contributed to outperformance. At 0.48%, fallen angels were less exposed to E&P than the broad high yield bond market, which ended 2015 with 4.89% in E&P, arguably one of the energy sector’s more vulnerable industries to the oil price collapse.

Declining oil and commodity prices had a greater relative impact on fallen angels’ 4Q 2015 performance, as fallen angels underperformed the broad high yield bond market by 74 basis points. While the energy sector grew from fallen angel entrants throughout 2015, none were E&P bonds. Furthermore, the fallen angel universe maintained its higher average credit quality, ending 2015 with 81.6% in BB-rated (below investment grade) bonds versus the broad high yield bond market’s 48.4%.

Sector Biases Drove Fallen Angel Performance in 2015

The main drivers of fallen angels' performance relative to the broad high yield bond market remained consistent throughout 4Q and 2015. Based on average sector weights:

  • Positive Influences
    • Energy (underweight)
    • Banking (overweight)
    • Financial Services (overweight)
     
  • Negative Influences
    • Basic Industry (overweight)
    • Healthcare (underweight)
    • Media (underweight)  
     

Sector Return Attribution (%):

 

Fallen Angels Relative to the Broad High Yield Bond Market

 

02-10-2016 Sector Return AttributionWhile fallen angels had lower average energy exposure in 2015, two more energy sector fallen angels entered the index in January, increasing the allocation to 14.3% versus the broad high yield bond market’s 10.3%, as of January 31, 2016.

Source: FactSet. Data as of December 31, 2015. Past performance is no guarantee of future performance. Top and bottom five sector attribution of the BofA Merrill Lynch US Fallen Angel High Yield Index for fallen angels versus the BofA Merrill Lynch US High Yield Index for the broad high yield bond market. Figures are gross of fees, non-transaction based and therefore estimates only. Past performance is not indicative of future results. Attribution represents the opportunity cost of investment positions in a group relative to the overall benchmark.
 

 

Learn More About ANGL

Additional resources and information on
Market Vectors® Fallen Angel High Yield Bond ETF (ANGL) »
 
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Munis: Municipals in 2016 http://www.vaneck.com/muni-nation-blog/municipals-in-2016-02-04-16/ The "new normal" is officially dead. You probably read or heard about the now obsolete term in the past year but it doesn’t apply to 2016, where we find ourselves propelled through the first quarter by change, uncertainty, and volatility.

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Van Eck Blogs 2/4/2016 12:00:00 AM The "new normal" is officially dead. You probably read or heard about the now obsolete term in the past year but it doesn’t apply to 2016, where we find ourselves propelled through the first quarter by change, uncertainty, and volatility. Given that we are in an election year when the world’s leading political economies are struggling to find a fertile environment to regenerate growth, it is impossible to overlook the benefits of a well-diversified municipal portfolio.

In December we addressed the question, "What to do?" if and when the Federal Reserve (Fed) began to aggressively move rates higher. Let’s not forget what the winning formula was then and during most of 2015. The factors in play told us to 1) remain calm, 2) continue to take advantage of the steepness of the intermediate part of the muni yield curve, and 3) play the taxable yield equivalent opportunity favoring high yield munis versus corporate high yield.

Despite a vicious selloff in oil precipitating a near free-fall in equities, the Fed continues to have designs on raising rates during 2016. Although global economic forces may ease the inflation scenario near term, the municipal market continues to maintain a rock solid position as the glue holding portfolio valuations stable. As of this moment, both investment grade and high yield indexes are positive so far this year. New issue supply, forecast to be higher in 2016 than last year, has yet to emerge to dampen trading behavior and consequently offers little incentive for portfolio managers to execute changes in strategies. And finally, the year-over-year characteristics of supply/demand that contributed to favorable returns during the past two years will likely again be an important theme in 2016.

It is almost assured that the fundamentals that underpin the broad investing universe will change meaningfully by yearend, leaving perhaps only municipals to retain some semblance of normal behavior. As we saw in the past two years, that result was more than satisfactory.

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China Dominates Emerging Markets Discussions http://www.vaneck.com/blogs/emerging-markets-equity-january-29-2016/ 2015 was a tough year for emerging markets (EM) and there is considerable uncertainty among investors about the asset class as we enter 2016. But we see promising opportunities for growth in China and other EM countries.

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Van Eck Blogs 1/29/2016 12:00:00 AM Fighting the Global Headwinds

2015 was a tough year for emerging markets and there is considerable uncertainty among investors about the asset class as 2016 begins. In 2015 China’s news dominated headlines for most of the year, along with the political and fiscal woes of Brazil and geopolitical events in the Middle East. Commodity prices continued to fall, which, while causing a positive terms-of-trade shock in most of the emerging markets, had a distinctly negative effect on the economies of a few. The Federal Reserve (Fed) finally raised rates after almost a decade and U.S. dollar strength in our view has not been helpful for EM.

With extensive experience in the asset class, we have lived and invested through quite a number of periods of similar angst. As always, we will stick to our philosophy of seeking structural growth at a reasonable price. In many cases, the "price" has become reasonable indeed. Given that we are a fundamental, bottom-up strategy, individual stock selection across the market cap spectrum remains a key contributor to strategy performance. With that said, we can give a sense of where our strategy is positioned in terms of sector and country, describing the context in which our investments operate and are valued.

Financials: We Favor Companies in Real Growth Niches

Generally, the Energy and Materials sectors in emerging markets are very difficult places to find good, non-cyclical growth. In addition, many of the companies in the Telecom and Utility sectors struggle to demonstrate interesting levels of growth. The Consumer Staples sector is a natural area in emerging markets to find structural growth, but it has tended to be very expensive in the last few years and this largely remains the case.

Financials are currently a large weighting for our strategy, but it’s important to dig down into the type of financials that we typically hold. We have a definitive bias towards companies in real growth niches; they are often those providing financial services to the "unbanked." Examples include payday lending in Central and Eastern Europe, pawn shops in Mexico, secondhand truck financing in India, and leasing to small- and medium-sized enterprises in Mexico.

Within the Information Technology sector, demand in terms of hardware, smartphones, tablets, PCs, etc., was sluggish in the fourth quarter of 2015 and the bright spot was the Internet space, as e-commerce and "online to offline" (o2o) grew practically everywhere. Finally, we continue to favor Healthcare, clearly a long-running structural growth story as EM consumers appear to dedicate a higher percentage of their increasingly disposable income to their healthcare spend.

China's Transitional Economy is Providing Opportunities

For any investor in emerging markets, China remains at the forefront of discussions. Likewise, it is a critically important country for our emerging markets equity strategy. Investors remain concerned about the depreciation of the currency, the renminbi (RMB), and a messy deleveraging as China’s economy transitions away from investment-led, state-controlled growth to expansion that is based more on consumption and services.

Watch VideoWatch Semple's latest video for more details on where we see growth opportunities in China . . .  
China Growth Spots in 2016

David Semple, Portfolio Manager

Watch Now  

Overall, we expect lower but better growth from China with continued monetary and fiscal easing. We expect the RMB to depreciate against the U.S. dollar in a modest and fairly controlled fashion, assuming that the U.S. dollar continues to be strong against other major currencies. (That the dollar will be strong is not necessarily our base view, but if it is strong we expect the RMB to weaken, as measured by the bilateral rate.)

We expect a modest cyclical recovery in China's economy, or at least stabilization, in the first half of 2016. This will allow some more breathing room for further significant structural reforms, with more emphasis on supply-side reforms rather than attempts simply to "juice up" demand. We believe more credit issues are likely, as the tidying up of highly indebted, state-owned enterprise (SOE)-related entities continues. In fact, credit growth has picked up nicely in China, but is obscured by the ongoing swap of debt held in local government finance vehicles for municipal bonds.

Our strategy has very little exposure to China’s old, smokestack/SOE complex and we continue to favor areas of China’s economy that are still attractive, such as the environment, internet, healthcare, tourism, and insurance.

India was an EM Bright Spot in 2015

India remains a country of very significant investment opportunity for us, despite some disappointments regarding the pace of reforms. In many ways, India is somewhat of an "island" in the turmoil that has afflicted global economies. We do expect rate cuts in the course of the year, which may help to energize the business cycle that disappointed in 2015.

We See No Easy Answer for Brazil

Brazil is still in a depressed state, with no easy solution to its current issues. To restore confidence will require a political change and/or time, in our view. Although we have a high degree of confidence in the positions we hold and their ability to grow even in the face of economic weakness, we are not inclined to add to risk in Brazil at this juncture.

Quality Growth Bubble

One of the buzz phrases that has been bandied about recently is the "quality growth bubble" in emerging markets, meaning that the valuations of companies that have quality characteristics appear to be at a significant premium to other companies in the emerging markets. We have two points to make about this. First, as far as we can see, this seems to be a problem that is really associated with large-cap companies in emerging markets. Our emerging markets equity strategy is truly an all-cap strategy and we do not see overvaluation among mid- and small-cap "quality growth" companies. Second, we do think that in a world that is relatively starved of growth, the higher relative certainty of growth that tends to come from companies with quality characteristics does deserve a premium.

Optimism for 2016 on the Back of Attractive Valuations

It seems the emerging markets asset class is a bit out of favor right now, and while it is hard to predict the timing of a change in investor sentiment, cheap valuations and negative positioning set the stage for better returns down the road. On a positive note, we anticipate more stability in China’s economic numbers (and less hysteria in the headlines) and we are encouraged that we have started down the road of Fed tightening. A combination of Fed tightening and attractive emerging markets valuations has historically set up good emerging markets performance and we certainly hope that this will be the case in 2016.

Post Disclosure

This blog supports our Emerging Markets Equity strategy which seeks to uncover opportunities that exhibit "structural growth at a reasonable price" ("S GARP") through investment in emerging market securities across all market capitalizations. This means we seek companies transitioning from value to growth that are fueled by a structural shift in country, sector, or stock fundamentals, with prolonged, inherent growth that is neither opportunistic nor event catalyst dependent. We aim to focus on companies with strong and innovative management, robust business models, proven track records, high barriers to entry, and a positive attitude toward minority shareholders.

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Spin-Off in the Spotlight: Madison Square Garden Co. (Ticker: MSG) http://www.vaneck.com/blogs/spin-offs/madison-square-garden-january-2016/ ]]> Van Eck Blogs 1/22/2016 9:24:54 AM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who together bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

Spin-Off Company: Madison Square Garden Co. (Ticker: MSG)
Parent Company:
MSG Networks Inc. (Ticker: MSGN)  

Spin-Off Date: October 1, 2015
GSPIN Index Inclusion Date: January 1, 2016

Madison Square Garden was first added to the GSPIN Index when the company was spun out from Cablevision Systems Corp. (NYSE: CVC) in 2010. At the time, the company was comprised of the New York Knicks (NBA), New York Rangers (NHL) and New York Liberty (WNBA) sports teams, as well as cable channels and an entertainment business that produces concerts and events for its various venues. Perhaps more interesting is the fact that the company also owns a significant amount of valuable real estate; namely, two whole blocks in Midtown Manhattan currently occupied by the Madison Square Garden Arena, which sits atop the busiest transportation facility in the U.S.: Pennsylvania Station.

At the time of the MSG spin-off, revenues from the cable channels were depressed, as the advertising market was still recovering from the recent recession. The entertainment business was also experiencing a cyclical lull due to weaker consumer spending. Still, it was our opinion that the earnings potential of these businesses in a normal economic environment could create a significant amount of share price appreciation.

Additionally, we believed that MSG’s market value did not fully reflect the value of its sports teams and real estate. Whether one viewed these assets as another source of potential value to be unlocked over time or simply as a margin of safety, it was our opinion that the company’s asset value was being significantly underpriced by the equity market. The Index’s methodology dictated MSG’s removal five years later, but not before its shares appreciated by nearly 300%.

This inefficiency persists even today; we believe it is the rationale behind the parent company’s (renamed MSG Networks Inc., NYSE: MSGN) decision to spin-off the Madison Square Garden Co., which contains the sports teams, real estate, and entertainment business. The cable channels will remain with the parent company. Today, Madison Square Garden Co. has a market capitalization of $4 billion, relative to $1.5 billion in cash and, according to Forbes, estimated valuations of $2.5 billion for the Knicks and $1.1 billion for the Rangers. The company currently has no debt and $1 billion in total liabilities. In other words, the company’s current share price implies that virtually no value is being given to its real estate, nor to its entertainment business. Management appears to be aware that its shares are undervalued, having recently announced an authorization to repurchase up to $525 million of Class A common stock, equal to 12.5% of the company at current prices.

As of December 31, 2015, Madison Square Garden Co. represented 1.11% of SPUN's total net assets.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio2   0.62%
Net Expense Ratio2   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly
 
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Marketplace Lending Shows its Strength http://www.vaneck.com/blogs/van-eck-views-january-20-2016/ In my last post, I touched upon the attractiveness of the marketplace lending sector. With global markets experiencing continued volatility, we hope to provide a look into what is driving the relatively attractive returns from online loans.

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Van Eck Blogs 1/20/2016 12:00:00 AM

Jan van Eck: We are very excited about this new asset class. To give you a compelling top-down perspective, my colleagues Bill Ullman, Director, Van Eck Associates Corporation, and Carlos Nogueira, Member of Van Eck's Fixed Income Investment Team have co-authored this special post. Bill Ullman is also Senior Advisor to fintech and marketplace lending companies including: Orchard Platform, Mirador Financial, Drive Sally, and Vetr.

Yearend Review: Marketplace Lending

2015, and in particular the fourth quarter of the year, was another period of robust growth for the marketplace lending industry. Industry estimates indicate that approximately $15 billion of online loans were originated during the year.1  While the majority of these were unsecured consumer loans, small business, student, real estate, and mortgage loans were also part of the mix. Capital continued to flow into new marketplace loan origination platforms to fund both the loans being originated and the businesses themselves. Strategic transactions — partnerships and mergers and acquisitions — also became part of this young industry as it began to mature and companies sought expanded distribution channels, new technology, and more diversified funding sources. Another key theme underscored in 2015 was that the marketplace lending industry is now a global one, with disruption patterns inherent to the online finance landscape occurring here in the U.S., in Europe, and in Asia.

Industry Performance

Over the course of 2015, the asset class continued to see positive performance with low volatility. The Orchard US Consumer Marketplace Lending Index, which aggregates the investment performance of loans originated by the two largest consumer lending platforms, Lending Club and Prosper, was up 6.24% year to date through November of 2015 and 6.84% over the trailing 12 months through November 2015. This Index was up 8.66% in 2014 and 7.80% in 2013. Over the last nearly three-year period, the Index was up approximately 24.4% in aggregate.2  

Let’s review the key trends one by one.

Continued Rapid Industry Growth

The industry overall has grown at rates sometimes approaching 100% annually (depending on the platform). Looking at Lending Club and Prosper, the two largest platforms in the U.S., we’ve seen nothing short of tremendous growth. In the third quarter of 2014, Lending Club issued approximately $1.17 billion of loans. A year later (3Q '15), the company originated over $2.24 billion of loans, nearly 100% growth.3 Loan origination growth at Prosper was just as impressive, if not more so. There was a total of $3.7 billion of originations on the platform in 2015, up from $1.6 billion in 2014, representing  over 100% year-on-year growth.4 Industry leaders weren’t the only ones to enjoy growth. Social Finance Inc. ("SoFi"), OnDeck, Kabbage, Avant, Funding Circle and many other smaller platforms experienced rapid growth.

Diversified and Institutional Capital Inflows

The continuation of "institutionalized" capital flows into online loans is a key trend to watch as we enter 2016. In the last year — and the last quarter — we have seen rated securitizations of Prosper loans by BlackRock and Citibank; we have seen successive capital raisings by four closed-end funds listed on the London Stock Exchange —all of which invest in marketplace loans; we have seen growing involvement in the industry by registered investment advisers, hedge/private funds, banks, diversified financial institutions, family offices and, of course, individuals. We believe this institutionalization and diversification of capital funding will likely support the marketplace lending industry’s continued growth.

Additionally, major amounts of venture capital and private equity funding have flowed into marketplace lending platforms, allowing them to hire talent, expand operations, and market aggressively to borrowers. SoFi raised over $1.25 billion from Softbank Group Corp. (of Japan) and Third Point Ventures (New York)5, among others. Several smaller platforms raised money from venture capitalists in Series A and Series B rounds, including RealtyMogul.com, AssetAvenue, Lon Operations (dba Bread and/or GetBread), Orchard Platform, and Mirador Financial. Indeed, 2015 was a record year for fintech investment (almost doubling from 2014)6, helping to create the next generation of online lending companies.

Strategic Transactions

Consistent with increased flows of capital into the industry, the frequency of strategic transactions has increased. An example is Prosper’s acquisition of Israel-based financial app company BillGuard. According to Prosper, this transaction has enabled the firm to expand its reach to many more potential borrowers in the U.S. and to do so in an efficient and cost-effective way. Customer (borrower) acquisition remains a major cost and burden for origination platforms and this acquisition appears to directly address that issue for Prosper. A second transaction worth noting is JPMorgan’s partnership with small business lender OnDeck, which was announced in December 2015. This partnership is particularly significant as it shows just how powerful and valuable the technology of these platforms can be, even to a major global financial institution with extensive internal capabilities.

Globalization

The industry is truly a global one, not unlike other internet-disrupted industries such as travel, stock trading, taxis or media. China’s marketplace lending business is larger than that of the U.S.7, and in the UK, consumer lender Zopa recently crossed the £1 billion in outstanding loans milestone.8

For further information on the industry and more commentary in graphical form, we encourage you to take a look at an article from Crowdfund Insider: Orchard Shares "Most Interesting Charts" of 2015; it offers insights from Orchard about the loans being originated and this rapidly growing industry.

 

 
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Gold Markets Tormented by Rate Hike Intrigue in 2015 http://www.vaneck.com/blogs/gold-commentary/ In December, selling pressure pushed gold to a new cycle low of $1,046 per ounce on December 3. Headwinds likely to ease in 2016.

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Van Eck Blogs 1/11/2016 12:00:00 AM

 

For the month ended December 31, 2015

Gold's Response Following Anticipated Rate Hike

During November gold came under pressure and the U.S. dollar strengthened as the market gained conviction for a December Federal Reserve (Fed) rate increase. This selling pressure continued into the early days of December and gold fell to a new cycle low of $1,046 per ounce on December 3. At that point, it appeared that the gold market had already priced in this anticipated rate hike. On December 4, gold gained $24 per ounce despite a strong U.S. payroll report that earlier in the year would have spelled trouble for gold. Gold gained $11 on December 16, the day the Fed announced its a 25 basis point increase in the targeted federal funds rate, the first rate increase in over nine years. Time will tell if this change in direction by the Fed also marks a turning point for gold, but it looks as if there are some prominent investors that might hold this view. As evidence, on December 18 gold bullion exchange traded products (ETPs) booked 18.7 tonnes ($641 million) of inflows, the largest one day increase in four years. Overall for the month, gold was little changed, finishing December down $3.35 at $1,061.42 per ounce.

Gold Shares Positive in December

By contrast, although gold stocks also felt the downward pressure leading up to the Fed’s rate decision, they did not make new lows in December. The low point of this cycle for the NYSE Arca Gold Miners Index (GDMNTR)1 was on September 11. This was the first time since the bear market began in 2011 that the GDMNTR has not followed gold bullion to new long-term lows. For the month, the GDMNTR advanced 0.9%, while the Market Vectors Junior Gold Miners Index (MVGDXJTR)2 gained 2.8%.

Gold funds had a difficult year – tormented by the Fed’s seemingly endless machinations around the timing of a rate increase. For the year 2015 the gold price declined $123 per ounce (10.4%). Gold miners exhibited their leverage to gold with a decline of 24.8% in the GDMNTR and a drop of 19.2% for the MVGDXJTR. The overall downward price trend was interrupted twice by concerns over financial risks. The first came in January when the Swiss broke the franc’s peg to the euro, the European Central Bank (ECB) started a massive quantitative easing (QE)3 program, and radical leadership came to power in Greece. Gold rose to its high for the year at $1,307 on January 22. The second risk driver started in August when China’s stock market collapse panicked markets globally. While these events each created $100 moves in the gold price and substantial increases across gold stocks, in the longer term they were not enough to overcome the negative sentiment brought on by persistent anticipation of rising rates in the U.S. This enabled the U.S. Dollar Index (DXY)4 to make new long-term highs in March and again in December, while bullion ETPs experienced heavy redemptions in July and November. Gold was also pressured by the bear market in the broader commodities complex, shown by the 32% decline in WTI crude and 25% fall in copper for 2015.

Outlook 2016: Worst of Times Beginning to Change?

As the positive moves in the gold price in January and again in August – October have shown, gold responds to heightened levels of financial stress. Gold is commonly used as a portfolio diversifier and a hedge against onerous levels of inflation or deflation, currency turmoil, insolvencies brought on by poor debt and/or risk management by governments and financial institutions, and difficulties caused by overall economic weakness, to name a few. For our investors and clients, we endeavor to identify the systemic risks that might drive the gold price. With the start of the New Year, we make several observations that may offer clues as to where the gold price might trend in 2016.

To begin, it is instructive to look at where the market has been. For gold fund managers, it has been the worst of times. When it seems the market can’t go lower, it finds new lows. In our view, gold and gold stocks are unloved and oversold. We have felt this sentiment before, in the crash of 2008, the grueling bear market from 1996 to 2001, and the epic collapse from 1980 to 1985. The current period of 2011 to 2015 ranks historically among the worst bear markets for gold and gold stocks, as measured by peak-to-trough performance in percentage terms. Given the depth and duration of this bear market, using past markets as guides suggests this market should begin to improve in 2016.

In order for the market to improve, there must be a fundamental driver or drivers. Because of radical monetary policies and unsustainable debt levels globally, the financial system remains quite vulnerable to another crisis event or crash like the tech bust or subprime crisis. However, 2016 may not be the year for such a calamity. Think of German economist Rudi Dornbusch’s famous quote: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

Headwinds to Gold Price Likely to Ease in 2016

We see 2016 as a year when many of the headwinds to the gold price begin to ease. Such headwinds have included:

  • Fed tightening
  • Strong U.S. dollar
  • Weak commodities
  • Rising real rates
  • Rising gold production
  • Market positioning

 

Here is a brief look at each:

Fed Tightening

The Fed has guided towards roughly another one percent in rate increases in 2016, which would probably amount to four 25 basis point increases. Given the extreme caution the Fed has exhibited in getting to this point in the rate cycle, it is hard to imagine it being more aggressive. In fact, we believe there is a good possibility that the Fed will not be as aggressive as its current guidance suggests. In our view, the U.S. economy is no longer capable of generating more than 2% annual growth due to policy uncertainty, the debt burden, and a byzantine tax and regulatory structure that has reached economically stifling proportions. A low-growth economy is vulnerable to impediments and rising rates could become a significant impediment in 2016.

Easy Fed policies have supported growth in residential and commercial real estate as well as booming auto sales. Fed tightening usually increases rates on everything from mortgages and car loans, to the cost of financing fiscal deficits. It looks like the recent decline in the size of U.S. federal deficits will end as Congress has approved a rash of tax breaks and credits that are expected to add more than $800 billion to the debt load over the coming decade. While federal debt is now a staggering 100% of GDP, interest on that debt is at multi-decade lows of around 11% of GDP. Debt service would double if rates returned to the levels of 2007, which suggests that increasing rates could become unpopular politically.

Strong U.S. Dollar

The U.S. dollar had a tremendous run from July 2014 through March 2015 during which the DXY advanced 25% to new long-term highs. It has maintained those gains through December. A strengthening U.S. economy, weak global growth, and anticipation of rising rates drove the dollar’s rise. These drivers are currently already priced in, in our view, which limits the scope for further gains in the dollar.

Weak Commodities

Commodities prices have been hurt mainly by slack demand from China. China is transitioning from a commodities intensive industrial revolution to an economy led by consumerism and services. This transition is in full swing and as overproduction of commodities is being addressed by producers, we believe much of the bad news is already reflected in prices. While it is difficult to see a turnaround in things like oil, iron ore, or copper, we believe that downward price pressure is likely to ease in 2016.

Rising Real Rates

Negative real inflation-adjusted rates are a common characteristic of gold bull markets. In the 2001 to 2011 bull market, real one-year treasury rates bottomed at -3.75% in 2011, around the same time gold reached its all-time high. Since then, real rates have trended upwards, reaching a high of 0.40% in September. The increase in real rates was achieved through a combination of disinflation in the global economy, deflation in commodities, and tightening in Fed policies through QE tapering and guiding market expectations towards higher rates. We believe real rates could fall somewhat in 2016 if inflation picks up as commodities prices stabilize and if tighter U.S. labor markets put pressure on wages. In addition, economic weakness may cause the Fed to reduce its rate outlook.

Rising Gold Production

Gold production has been on the rise since 2009. We expect mine production to begin a slow, permanent decline in 2016, a trend that would increase should the gold price fall further. Credit Suisse calculates 15% of production in its coverage universe is free cash flow negative at $1,100 gold. These marginal mines are no doubt doing all they can to cut costs further, but at lower gold prices, some would likely be forced to shut down. While gold production is not a strong price driver due to large above-ground stocks, we believe evidence of a production decline would nonetheless have a positive influence on prices.

Market Positioning

Gold positioning indicates that bearish bets are at extreme levels that are typical of turning points in the market. Net speculative long positions on Comex5 are now lower than what occurred following the 2013 gold price collapse and are currently at levels last seen in 2002. Gross speculative shorts reached an all-time high in July, and remain at high levels. This points to the heavy exposure hedge funds, commodities traders, and other speculators already have to falling gold prices. Gold held in bullion ETPs is down to levels last seen in early 2009. This suggests that most of the extraordinary gold buying that occurred in ETPs after the financial crisis has been unwound.

We acknowledge that the gold market is on shaky ground and that there is little positive sentiment as the year begins. However, having been through a number of bear markets in our 47 years as gold fund managers, we also know historically that these markets always come to an end and that gold shares offer their highest leverage to gold when the price is close to the cost of production. Perhaps this leverage will be on display in 2016.

 

Download Commentary PDF »  

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2016 Investment Outlook http://www.vaneck.com/blogs/van-eck-views-january-8-2016/ "I think in 2016 that global growth is not going to accelerate....Globally there are several industries that are growing relatively aggressively and these are the growth spots that we are excited about in 2016."

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Van Eck Blogs 1/8/2016 12:00:00 AM

Friday, January 8, 2016

Watch Video 2016 Investment Outlook  

Jan van Eck, CEO, shares his 2016 investment outlook.

Watch Now  



 

Special Note on Recent Market Activity:  

Since the filming of this video at yearend 2015, we have seen some notable market moves. In the past week, we’ve experienced several “OMG days” as China’s stock market has taken a dramatic tumble. Although this has created a lot of negativity and confusion regarding China, particularly in the media, our long-term outlook for China remains positive.  

Long-Term Commodities Momentum Suggests a Bottom in Q1

TOM BUTCHER: Jan, let’s discuss your outlook for 2016. First: Commodities.

JAN VAN ECK: 2015 was an awful year for commodities. It was really the culmination of a decade-long bull market, and this has ended and brought commodity prices and the prices of commodity equities really to where they were before 2000-2001, before the commodities bull market started. I think the difficulty for markets -- and this has really affected psychology over the last few quarters-- is that the supply decreases that are inevitable with the slowdown have not yet hit where demand is. There will be a period when supply and demand will meet. Maybe it's in 2016 for some commodities; maybe early 2017 for other commodities. But investors just hate this current period of uncertainty. There has also been a big credit crunch that has impacted commodity producers, from Petrobras to Glencore, to the MLP [master limited partnership] sector.

It is really difficult right now to look at all the fundamentals and figure out what's going on. We know we're in a bear market, and we know there will be a turn. The typical commodity cycle does take about 18 months, and that would mean the current cycle should end in the first quarter of 2016. We believe that is a good a guide as to when we are likely to see the bottom of this commodity cycle.

Opportunities for 2016: Growth Spots in Emerging Markets

BUTCHER: If there's uncertainty in commodities, what about the emerging markets?

VAN ECK: Some countries are affected much more than others by commodities among the emerging markets. It's really funny because we've read so much this year about China and the stock market fall, but really, the country that had the most difficulty in 2015 was Brazil. Brazil was impacted by the fall in commodities, the over-leveraged commodities in its economy, political uncertainty, corruption, and a whole number of different factors that has led to a fall in not only Brazil’s financial markets, but also in its currency. We are likely to enter 2016 with a lot of uncertainty around Brazil.

Everyone knows now that China’s growth is slowing down. 2015 was a hugely pivotal year for China, in which it really entered the world's capital markets. What I like to say is that 2001 and 2015 were the most important years for China in the last 30 years. In 2001, China entered the world trading system and trade interaction with other countries exploded. Last year, 2015, it became clear that there was enough money moving in and out of China, that China couldn't separate its interest rate from its exchange rate. Given this, we know that China’s interest rate cycle is on a downward trajectory. That means China’s currency will probably weaken in 2016. We just don't think it'll be too chaotic. Perhaps something on the order of 10% to 15%, and it's already started depreciating now.

For emerging markets, we like to focus on where there are growth spots, and there are a number of sectors and countries that are doing quite well in the emerging markets in this slow-growth world.

BUTCHER: Can you give me two examples of such growth spots?

VAN ECK: I think in 2016 and looking forward, that global growth is not going to accelerate, as we have said before. Monetary and fiscal policies in the U.S. are on the margin contractionary and will likely stay generally the same in 2016, and the same structural issues that the developed world has will likely continue to exist. Growth in the emerging markets is not even. But there are several industries that are growing relatively aggressively. There are growth spots that we are excited about in 2016. I will identify a couple of examples that represent trends that are less mainstream. Everyone knows about the more mainstream trends, like the internet consumption in China through Alibaba and other internet players. First, Turkey created some tax incentives for savings plans, like a 401(k) savings plan we have here in the United States. And that growth has been 20% to 40% a year, because it's just taking off. Mobile payments in Africa are another trend. With several emerging markets, payment systems have leap frogged what we've done here in the United States, and people make most payments and transactions using mobile phones, and cell phone penetration in Africa is relatively high. A third example would be private banking in India, which is just another secular trend where the financial sector is reforming, and private players appear to be benefiting. Again, it has been a 20% growth industry. These are the types of emerging markets trends and sectors that investors can take advantage of, but are difficult to access. They are not always available through a mainstream index, so accessing them generally favors an active management approach.

Credit Markets are Historically Cheap and a New Asset Class Provides Opportunity

BUTCHER: Can you talk about fixed income investing?

VAN ECK: There are two points that we would make about fixed income investing. First, spreads have increased quite a bit over the last year. In fact, interest rate spreads for corporate debt are as high as they've really been over the last 15 years, putting aside the credit crunch of 2008-2009. This means you're getting paid a lot to invest in high-yield debt, in MLPs, and other types of fixed-income closed-end funds. Is this the time to buy? Over the next 12 months or so, we think it could be pretty interesting to buy fixed income. That's the first point. People talk about the rate increases, but really, spreads have been widening over the course of the year, and so we believe that makes fixed income more attractive.

Secondly, there is this new asset class that we're very interested in that accesses loans that are originated from online lending platforms like Lending Club and Prosper. They're called marketplace loans or online loans. And what this asset class does is allow investors, for the first time, to invest in consumer credit. If you think about it, there is bank lending, company bonds, and the bond market. Individual investors have always been able to invest in company bonds. But we've never been able to invest directly in the debt of individuals. It's always been through financial institutions. But now, consumer debt can be invested in through online platforms. To me, this represents a new asset class, and it's a trillion-dollar asset class, which is huge. We feel The American consumer is in pretty good shape, and currently that the asset class is relatively attractive.

BUTCHER: Wonderful, thank you.

 
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Health, Happiness, and Higher Rates http://www.vaneck.com/blogs/van-eck-views-december-21-2015/ ]]> Van Eck Blogs 12/21/2015 12:00:00 AM

Monday, December 21, 2015

Watch Video CEO Jan van Eck: Health, Happiness, and Higher Rates  

Now that the Fed has raised rates, there is more to celebrate than the holidays. Not only is the U.S. economy stronger, but 2016 may bring unique opportunities.

Watch Now  


TOM BUTCHER: After much anticipation, the Federal Reserve (Fed) announced that it is raising short-term interest rates for the first time in nearly a decade. Jan, it looks as if we are wishing our clients health, happiness, and now higher rates this holiday season.

JAN VAN ECK: I think it is indeed a reason to celebrate because I think the Fed is saying that the U.S. economy is strong enough to withstand a normalization of monetary policy. It started a year ago with a roll-off of QE3, i.e., the third round of quantitative easing. Now it seems that the Fed is comfortable enough with U.S. labor statistics and the global economic situation, which had caused the Fed to delay this rate hike a couple of times in 2015. First, I think turbulence in Europe and the strengthening U.S. dollar against the euro concerned the Fed; then came [stock market] turbulence in China over the summer. Now there is reason to celebrate and things are relatively good.

The question is: What are the implications of the rate hike on our asset classes? I think there are few direct implications. With respect to commodities, there is still much consolidation that needs to wipe through the markets, and if a normal cycle is upon us, commodities should bottom in the first quarter of 2016 [see 11/25 post]. We think that this process will continue largely unaffected by the Fed's rate hike.

Additionally, growth is slow in the developed markets and China is slowing; global growth has been weak for two years now. There are many headwinds, and we think these trends will persist as well.

What gets us excited for 2016 is what we call growth spots, meaning sectors in different countries that may grow 20% or more, regardless of whether global growth is only 2%. That’s how we are looking at 2016, and the Fed's interest rate hike doesn't really impact that outlook.

BUTCHER: Thank you very much.

 
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Munis: Go Long for Rising Rates: Just the Facts - Part 2 http://www.vaneck.com/muni-nation-blog/just-the-facts-part-2-12-17-15/ Many investors want to avoid erosion of their income due to inflation and protect the nominal value of their investments from a protracted period of rising rates.

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Van Eck Blogs 12/17/2015 12:00:00 AM My December 3 post introduced the notion that in our recent past, when the Federal Reserve (Fed) moved to push interest rates higher due to inflationary pressures, a curious and perhaps counterintuitive event occurred. Between 2003 and 2006 the yield curve shifted higher in short maturities but flattened out or remained nearly unchanged in longer maturities over the same timeframe. The conclusion was that the primary risk to valuations was borne in products with maturities of 1-16 years. Bonds with longer stated maturities were impacted far less than one might have anticipated.

The Fed knows it can affect the velocity of money moving through the financial system by adjusting the federal funds rate and thus changing the cost of borrowing for companies and financial intermediaries. Professional money managers realize this dynamic too and know that to earn a real return on their fixed income dollars means investing further out on the curve where yields generate positive results, even after adjustment for inflation.

U.S. Treasury Yield Minus CPI*

12-17-2015 Just the Facts - Part 2

*The Consumer Price Index (CPI) is a measure of changes, over time, in retail prices of a constant basket of goods and services representative of consumption expenditure by resident households.
Source: Bloomberg as of 12/14/15.

Since most fixed income markets price securities with some reference to the Treasury curve, one can expect similar adjustments in municipals, which is precisely what you see in the chart from my post from December 3.

It seems many investors want to avoid erosion of their income due to inflation and protect the nominal value of their investments from a protracted period of rising rates. Proper positioning in the intermediate and long end of the yield curve can potentially mitigate the impact of Fed policy.

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China GDP Rebalancing: Greater Stability in 2016? http://www.vaneck.com/blogs/van-eck-views-december-11-2015/ Van Eck Blogs 12/11/2015 12:00:00 AM

There is little doubt that China's gross domestic product (GDP) is rebalancing, and rebalancing fast. As the country attempts to shift to a more consumption-led growth model, the services sector is becoming the largest and fastest growing part of the economy. Financial intermediation growth is a big factor in this process. With Chinese society becoming more prosperous, this should provide a natural growth "stabilizer."

While this post focuses on rebalancing, we believe it is important to note the significance of the financial sector's health in terms of the overall economy, about which there are legitimate questions. In addition, given eventual leverage constraints, we believe China has to grow at a faster rate than it is creating debt; otherwise it will not deleverage.

Services Sector Takes the Lead

The services sector, often referred to as "tertiary" in China, now accounts for the largest part of the country’s nominal GDP (about 50%). This share has been steadily increasing in recent years (Fig. 1A). By way of contrast, manufacturing, the "secondary" sector, now accounts for only 40% of nominal GDP and is set to decline further.

The services sector is also the fastest growing part of Chinese GDP in real terms, in contrast to the sharp deceleration of manufacturing growth. In the third quarter of 2015, services sector growth accounted for over 4% year-over-year (YOY) real GDP growth (out of 7%), whereas the manufacturing/industrial sector’s contribution fell to just 2.5% YOY (Fig. 1B).


Fig. 1 Structure of China's Nominal GDP and Real GDP Growth  

China Nominal GDP Industry Structure  
Contribution To China Real GDP Growth  
Source: Bloomberg, data as of September 2015. This chart is for illustrative purposes only. Historical information is not indicative of future results; current data may differ from data quoted.  

 

Authorities Under Pressure to Support Manufacturing

Despite the country's overall real GDP growth rate remaining fairly strong, it is the extent of the drop in the manufacturing sector’s contribution to growth that is pressuring the authorities to implement additional stimulus measures.

While the manufacturing sector's real growth appears to be stabilizing at just over 6% YOY, following a multi-year drop that began as the effect of the post-2008 stimulus started to wear off, it comes hand-in-hand with the rapid decline in the manufacturing sector’s share in nominal GDP. Under the old growth model, however, the manufacturing sector's expansion exhibited high volatility, undergoing several significant shifts in its rate of growth. Therefore, in our view, returning to the old economic model is not going to be any sort of panacea and could actually result in more growth volatility.

Hope for Greater Stability?

Growth in the services sector appears to offer a more "palatable" growth/expansion pattern than that offered by the manufacturing sector. With just one major boom and bust in the run-up to and period following the 2008 crisis (the most likely culprits being the pre-crisis wholesale/retail trade "binge", as well as a massive surge in the banking sector’s nominal growth during the same period), the sector currently enjoys a high single-digit growth range with a gradual expansion as a share of nominal GDP.

The big question now, therefore, concerns the stability/sustainability of this shift in growth. Just how stable, or sustainable, are the current positive trends we are seeing in the services sector? A more detailed look at the contribution of specific sub-sectors to China's real GDP growth reveals a larger increase coming from financial intermediation, especially in the last three to four quarters (Fig. 2).

While there is little doubt that a part of this increase reflects the "organic" growth stemming from higher per capita income, we should be mindful that many resources are now being spent on re-leveraging and shifting loans from local government balance sheets to the banking sector. Still, although the financial sector’s expansion (either in real or nominal terms) is well below the pre-crisis levels, we should keep a close eye on it. We do note the significant reforms in the services sector, particularly financial services, as a driver for financial intermediation.

Interestingly, despite rising incomes, the wholesale/retail trade's contribution to real GDP growth declined slightly over the same period, in contrast to the retail "binge" that took place prior to the 2008 crisis.


Fig. 2 Contribution to China’s Real GDP Growth (% YOY)  

Contribution to China’s Real GDP Growth (% YOY)  

Source: Bloomberg, data as of September 2015. This chart is for illustrative purposes only. Historical information is not indicative of future results; current data may differ from data quoted.  

Where from Here?

Growing prosperity, i.e., higher per capita GDP, equates to a larger share of the services sector in China's nominal GDP (Fig. 3). If the expansion rate we are currently seeing can be sustained and per capita GDP grows as expected in the next five years, then the sector's share in nominal GDP should exceed 52% and should be able to contribute at least 4% to China’s real GDP per annum.

Having said that manufacturing's share of the economy is declining, unless the manufacturing sector's growth collapses and becomes negative, a "hard landing" scenario for the country should be avoided. We do, however, consider that such a harsh drop in manufacturing is unlikely, especially if the authorities continue to implement measured stimuli, not least because the range of policy instruments available to China is wider than that of many of its peers.

China does have many tools at its disposal to help stimulate growth in the manufacturing sector. It still has room to cut interest rates, which it has done six times this year, and also still has room to lower the banks' capital reserves ratio. Although those measures cannot be applied loosely, as they might trigger capital outflows, recent inflation data seem to be supportive of further easing.

We do still need to monitor the manufacturing sector — and especially industry — for the potential risks associated with the decline in nominal growth.

The manufacturing sector has a high level of indebtedness and a large part of this debt can be unproductive (many loans are “evergreened” loans that are continuously renewed to avoid recognition of a loss) and can therefore become an issue for the banking sector later on.

As discussed, the financial sector's health will likely remain key; this includes the continuation of structural reform and liberalization to encourage the use of financial intermediation and to help widen the range of financial services and products offered to the growing middle class.


Fig. 3 China – Per Capita GDP and Services Sector’s Share in Nominal GDP (2004 – 2020F)  

China – Per Capita GDP and Services Sector’s Share in Nominal GDP (2004 – 2020F)  

Source: Van Eck Research and Bloomberg, data as of September 2015. This chart is for illustrative purposes only. Historical information is not indicative of future results; current data may differ from data quoted.
 
Note: Symbols represent individual historical quarterly datum points  

 

Additional Considerations: Leverage

It is clear that the level and composition of Chinese growth is a key focus for markets. In this post we have discussed where we are in the process of shifting to a more consumption-led growth model. We should emphasize that this is one of many issues of relevance in China. In fact, we also focus on China's leverage, accumulated liabilities created over past decades to help generate growth, which potentially dilutes the importance of any view on the composition of growth. This leverage makes the fixed income team cautious about the Chinese currency and Chinese bonds, although we do note in the previous section the advantageous effects of liberalization, and that some of the more troubled areas of the economy have been reducing leverage for some time.

In particular, this leverage is a central risk to the points we make earlier on rebalancing. First, some inflation measures such as the Producer Price Index1 (PPI) point to deeper disinflationary pressures in parts of the economy associated with manufacturing. This underscores the risks of leverage, particularly via the banking system. Second, the ongoing deceleration of manufacturing growth should be considered in the context of concentrated debt accumulation in this part of the economy, and additional stimulus measures would make deleveraging an even more distant prospect. Third, any devaluation is not irrelevant; devaluation would diminish Chinese purchasing power, which goes against the rebalancing story.

One possible explanation for the tension between rebalancing and leverage is that some market participants focus on growth while others focus on acccumulated imbalances — the asset-price focus. Equity investors see economic rebalancing as generating a number of specific new corporate winners, which can generate substantial upside. Fixed income investors see rebalancing as being a bumpy process historically, and the upside in fixed income is generally lower than that in equities. Put differently, we can see why equity investors are more bullish than fixed income investors and we don’t necessarily view this as a contradiction.

Nonetheless, "growth" remains a focus to many market participants and that is the focus of this post. China’s GDP is rebalancing and doing so in an obvious way, with the services sector becoming the largest and the fastest growing part of the economy. Financial intermediation growth is a big factor in this process. This new source of growth means the country’s economy has a possible new "stabilizer" over time. However, we believe it emphasizes the importance of financial sector health to the economy. Healthy growth is good, but it can’t compensate for significant financial sector imbalances, and a financial sector in which loans are commonly evergreened shouldn’t be the basis of optimism.

 
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Munis: Why Duration Matters http://www.vaneck.com/muni-nation-blog/why-duration-matters-12-9-15/ ]]> Van Eck Blogs 12/9/2015 12:00:00 AM

For this week’s installment, I have invited my colleague Fran Rodilosso, Portfolio Manager of Van Eck’s taxable fixed income funds, to explain why duration matters right now. While it is only part of the fixed income equation, duration is something we feel investors should understand, particularly given that a December U.S. rate hike is likely. I’ve also included a link to a FINRA educational piece to help you deepen your understanding of this very important concept.

Watch Video Why Duration Matters

Watch Now | Video Transcript

FINRA on Duration »

Video Transcript - Why Duration Matters

TOM BUTCHER: Why should investors be concerned about duration?

FRAN RODILOSSO: Investors should always be concerned about duration in a bond or in a portfolio of bonds. Measuring duration is how one measures a bond or bond portfolio’s sensitivity to movements in yield and movements in interest rates.

In today's environment, we're at unprecedentedly low yield levels, particularly in the U.S., Europe, and Japan. The market is anticipating that the Federal Open Market Committee (FOMC) is going to make a change in policy. The FOMC has stated its intention to begin hiking rates for the first time since late 2008. In the meantime, we've been stuck at a zero interest rate policy in terms of the federal funds rate target.

There are, however, many other factors to consider, especially when it comes to five-year yields, ten-year yields, or thirty-year yields. Those bond yields may not move in lockstep with how the Federal Reserve (Fed) moves the federal funds rate. In fact, the market shows us that the yield curve should be flattening. It has been flattening, which means the difference, for instance, between ten-year yields and two-year yields has narrowed in recent weeks. Ten-year Treasury yields and thirty-year Treasury yields, however, are far closer to the bottom ends of their ranges over the last five years than they are to the high ends. Since the “taper tantrum” of 2013, they've been even closer to the bottom ends of their ranges than to the high ends of their ranges. I think the market has thus already priced in low inflation expectations, expectations that commodity prices are not going to turn sharply higher, and expectations that tightness in labor markets, particularly in the U.S., is not going to become more extreme than it is now.

BUTCHER: Can you give me an example of what might happen should interest rates start rising?

RODILOSSO: Let’s consider a ten-year U.S. Treasury bond. Today the modified duration of the bond is about 8.8, which means if interest rates rise by 1%, one would expect the bond's price to fall by more than 8%. A ten-year Treasury has a current yield of about 2%. Let’s say in one year the yield on ten-years goes from 2% to 3%. The bond will lose about 8% in price. Actually, it will lose less than 8% in price because duration changes as yield increases. There might then be a 7.5% change in price and a 2% current yield. Over that period, however, total return is -5.5%, which represents a fairly significant loss for a risk-free bond investment. That is the mark-to-market effect if you sell those bonds.

If you own two-year Treasuries, which have a duration of about 1.9, and they go up a full percent higher over the next year, the total return will still be negative, but closer to net -1.5% because the duration on those two-years is much lower. That’s what it means to move down the curve, i.e., shorten your duration and achieve lower sensitivity to interest rates.

Should rates remain low or move even lower from here, however, there are other risks that investors should consider, such as reinvestment risk. If you are all short duration and have no interest rate risk, you'll constantly need to be reinvesting. If rates stay where they are or move higher, it will be good news. But if they're moving lower, you'll be investing at lower interest rates and that's not good news.

The other thing to remember is that duration is not the only risk of your bonds or your bond portfolio. There's credit risk. There's also political risk in emerging markets bonds. There's liquidity risk. Many factors can impact the price of your bonds, your bond fund, or your bond portfolio.

I think in the current context, regardless of whether you believe the Federal Reserve (Fed) will proceed slowly or interest rates will rise rapidly, the potential risks are still skewed. There could be more damage done to your portfolio by higher rates. The market has priced in a less aggressive Fed and lower inflation expectations. Now is therefore a good time to consider your duration exposure and how you should manage it.

BUTCHER: Is the usefulness of duration measurements predicated on a parallel shift in the yield curve?

RODILOSSO: Duration does work as a measure when shifts are parallel, but it's still a fairly good relative risk measurement in any case. However, it has happened many times before in many different markets that short-term rates have risen as long-term rates have fallen. If that's the case now, looking at duration on your long-term bonds might cause you alarm if the Fed is hiking rates. It’s very important to think about where you are on the curve, i.e., where your exposure is, and how that part of the curve might be moving.

There are various scenarios that can play out over the next 12 months, regardless of whether the Fed starts hiking rates. Something to consider in terms of risks in the bond market is: the Fed has probably lost some credibility this year by not moving in September and by introducing the concept of, to use the Fed’s language, “concern about foreign markets.” A loss of credibility by the Fed could actually cause higher volatility and augment the risk of the U.S. Treasury market, which would ultimately lead to higher yields. If the market perceives that the Fed is behind the curve, i.e., not keeping up with inflationary expectations, the yield curve may steepen; five-year, ten-year, or thirty-year yields may rise much faster than the Fed moves short-term rates. That is not a scenario that anyone seems to be pricing in right now, which may be one small reason to consider it.

BUTCHER: Thank you very much.

Important Disclosure

The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.

Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Debt securities carry interest rate and credit risk. Bonds and bond funds will decrease in value as interest rates rise. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. High-yield and municipal securities have additional risks. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.

Duration is a measure of the sensitivity of the price of a bond to a change in interest rates and is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

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Moat Investing: All Aboard the Moat Investing Train http://www.vaneck.com/blogs/moat-investor-monthly-december-2015/ November was a strong month for global moat companies relative to the broader equity markets. In the U.S., railroad operators and public utilities posted strong results, boosted by mergers and acquisitions discussions. Internationally, moat companies in Australia and France were in the spotlight.

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Van Eck Blogs 12/8/2015 12:00:00 AM

 

For the Month Ending November 30, 2015

Performance Overview  

November was a strong month on a relative basis for moat-rated companies in the U.S. and globally. Generally stock returns were flat in the U.S. and negative internationally. The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) outperformed the S&P 500® Index (1.75% vs. 0.30%), and the internationally focused Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) topped the MSCI All Country World Index ex USA (-1.67% vs. -2.06%).


Domestic Moats: All Aboard  

Merger talks helped rail operator Norfolk Southern Corp. (NSC US) take the performance lead among MWMFTR’s constituents in November. Autodesk (ADSK US), a software design firm known for AutoCAD, continued its strong showing in November, following its top performance spot in October. Electric utility ITC Holdings Corp. (ITC US) also boosted the Index’s performance at the end of the month after rumors surfaced that it may be entertaining buyers. By contrast, Qualcomm Inc. (QCOM US) was the Index’s worst performer in November. Early in the month, QCOM US released poor quarterly results stemming from declining sales and concerns about the licensing of its products in China. 


International Moats: Success Down Under  

Several Australian firms helped boost MGEUMFUN’s performance in November, including Platinum Asset Management Ltd. (PTM AU) and supply chain logistics company Brambles Ltd. (BXB AU). The top MGEUMFUN performer in November was Edenred (EDEN FP), a French company that specializes in prepaid corporate services including employee benefits and expense management services. By contrast, the uranium mining firm Cameco Corp. (CCO CN) was the Index’s worst performer, and financials overall detracted from performance.



(%) Month Ending 11/30/15

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 11/30/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Top 5 Index Performers
Constituent Ticker Total Return
Norfolk Southern Corporation
 
NSC US
 
19.65
Autodesk, Inc.
 
ADSK US
 
15.00
ITC Holdings Corp.
 
ITC US
 
13.34
Applied Materials, Inc.
 
AMAT US
 
12.55
Emerson Electric Co.
 
EMR US 6.92

Bottom 5 Index Performers
Constituent Ticker Total Return
Twenty-First Century Fox, Inc. Class A
 
FOXA US
 
-3.84
Union Pacific Corporation
 
UNP US
 
-5.43
Polaris Industries Inc.
 
PII US
 
-5.68
Time Warner Inc.
 
TWX US
 
-6.65
Qualcomm Incorporated
 
QCOM US
 
-17.08

View MOAT’s current constituents

 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Top 5 Index Performers
Constituent Ticker Total Return
Edenred SA   EDEN FP 12.13  
Platinum Asset Management Ltd PTM AU   10.76  
Johnson Matthey Plc JMAT LN   6.71  
Brambles Ltd BXB AU   6.55  
Sigma Pharmaceuticals Limited SIP AU   5.19  

Bottom 5 Index Performers
Constituent Ticker Total Return
Agricultural Bank of China Limited Class H 1288 HK -6.63
Kering SA KER FP -7.23
CapitaLand Commercial Trust CCT SP -7.65
Burberry Group plc BRBY LN -8.62
Cameco Corporation CCO CN -13.42

View MOTI’s current constituents

 
 
 

As of 9/18/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Index Additions  
Added Constituent Ticker
Applied Materials Inc AMAT US
Autodesk Inc ADSK US
CSX Corp CSX US
Emerson Electric Co EMR US
Monsanto Co. MON US
Norfolk Southern Corp NSC US
Procter & Gamble PG US
Qualcomm Inc QCOM US
Time Warner Inc TWX US
Union Pacific Corp UNP US
United Technologies Corp UTX US
Walt Disney Co DIS US
Western Union Co WU US

Index Deletions  
Deleted Constituent Ticker
American Express Co AXP US
Amgen Inc AMGN US
Blackbaud Inc BLKB US
Exxon Mobil Corp XOM US
Google Inc A GOOGL US
Harley-Davidson Inc HOG US
Hershey Foods Corp HSY US
ONEOK Inc OKE US
Spectra Energy Corp SE US
The Williams Companies Inc WMB US
US Bancorp USB US
Varian Medical Systems Inc VAR US
VF Corp VFC US

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents
 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Index Additions  
Added Constituent Ticker
Banco Bilbao Vizcaya Argentaria SA BBVA SM
Bank of China Ltd 3988 HK
BOC Hong Kong (Holdings) Ltd. 2388 HK
Brambles Industries Ltd BXB AU
Burberry Group BRBY LN
Cameco Corp CCO CN
CapitaLand Mall Trust REIT CT SP
Carrefour SA CA FP
Centrica CAN LN
China Construction Bank Corp 3311 HK
Credit Agricole SA ACA FP
Edenred EDEN FP
Grupo Televisa SAB CPO TLEVICPO MM
ICICI Bank Ltd ICICIBC IN
Industrial and Commercial Bank of China 1398 HK
Ioof Hldgs Ltd IFL AU
Johnson, Matthey JMAT LN
Kering KER FP
Platinum Asset Management Limited PTM AU
Power Corporation of Canada POW CN
Power Financial Corp PWF CN
Schneider Electric SE SU FP
Sigma Pharmaceuticals Limited SIP AU
United Overseas Bank UOB SP

Index Deletions  
Deleted Constituent Ticker
America Movil SAB de CV L AMXL MM
ANZ Banking Group ANZ AU
Banco de Chile CHILE CI
Bank of Nova Scotia Halifax BNS CN
BG GROUP PLC BG/ LN
Contact Energy Ltd CEN NZ
CSL Ltd CSL AU
Dongfeng Motor Group Co. Ltd. 489 HK
Eldorado Gold Corp ELD CN
Genesis Energy Limited GNE NZ
Iluka Resources Ltd ILU AU
Kingfisher KGF LN
National Australia Bank Ltd NAB AU
National Bank of Canada NA CN
Nestle SA Reg NESN VX
Precinct Properties New Zealand Ltd PCT NZ
Rogers Communications Inc B NV RCI/B CN
Sky Network Television Limited SKT NZ
Slater & Gordon Limited SGH AU
Sun Pharmaceutical Industries Ltd SUNP IN
Tata Motors Ltd TTMT IN
Veda Group Limited VED AU
Westpac Banking Corp WBC AU
Wipro Ltd WPRO IN

View Latest MOTI Reconstitution Report
View MOTI’s list of current constituents

 
 


 
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Munis: Just the Facts - Part 1 http://www.vaneck.com/muni-nation-blog/just-the-facts-part-1-12-3-15/ ]]> Van Eck Blogs 12/3/2015 12:00:00 AM Just the Facts - Part 1

As long as the fixed income marketplace has been anticipating what has been commonly referred to as “lift-off” by the Federal Reserve (Fed), strategists have been suggesting ways to address a move to higher rates and seek to limit the damage to investment portfolios that can occur with market downturns.

There is little reason to believe that this time will be different from other times when higher rates impacted the fixed income market, except for the speed at which rates have moved or will move the markets. The Fed has been so reluctant to act aggressively that unless there is a sudden, unexpected growth spurt in the economy, I believe it may be months before short-term rates rise much above 75 basis points (bps).

The chart below illustrates the beginning and end of a three-year period of rising interest rates, from June 2003 to June 2006. During this time, the U.S. Federal Funds Target Rate rose from 1.00% to 5.25%. In the chart you can see the dramatic flattening that occurred, especially in the 1 to 17 year maturity range.

AAA Municipal Bond Yield Curves
(Beginning and End of a Period of Rising Interest Rates)

12-3-2015 Just the Facts - Part 1  

Source: BofA Merrill Lynch.  

If the Fed decides to begin raising rates this month, the initial impact of rising short-term rates may very well cause the municipal yield curve to flatten again. In my opinion, this indicates that there may be a simple strategy to employ for muni portfolios: positioning in the longer end (17 – 30 years) of the yield curve while the rate cycle plays out.

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When Will Commodities Recover? http://www.vaneck.com/blogs/van-eck-views-november-25-2015/ Commodities have been in a multi-month bear market, and this begs the question: When will this change? We believe that it could be reasonably soon.

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Van Eck Blogs 11/25/2015 12:00:00 AM Untitled Document

Commodities have been in a multi-year bear market, with especially sharp drops in the past year. As commodity investors, this begs the question: When will commodities bottom and begin to recover? 

The history of markets suggests that an upward cycle in prices is inevitable. Putting aside the fact that the fundamentals, in general, may support a turnaround, if this is a traditional commodity cycle – and that is a big caveat – investors may continue to wonder when the mayhem will end. We believe that it could be reasonably soon.

Non-fundamental, or technical, analyses can be helpful for timing cycles. Markets often move regardless of what fundamentals may indicate. The third quarter was a prime example of this phenomenon. We saw a huge, sudden fall in commodity prices, but there were no material changes in global demand. Additionally, there was no significant change in China’s economic growth; China’s growth was slowing well before the third quarter and we believe this trend will continue.  

Our Analyses Point to the First Half of 2016

Assuming this is a normal cycle, and unless commodity prices fall much further, most of our analyses suggest a bottom may occur during the first half of 2016, and most likely in the first quarter.

We examined two different indicators: the length of prior cycles and long-term price momentum.

1) Prior Commodity Cycles

First, we looked at commodity cycles historically, as shown below in Chart A. Prior cycles suggest to us that the end of March 2016 might be the time to start buying. Past commodity downturns have generally lasted approximately 18 months. We’re 11 to 12 months into the current downturn, and six months more bring us to March, or the end of the first quarter of 2016.

Chart A: Commodity Cycles Usually Last 18 Months

Measure: CRB Commodity Composite Price Index1  
CRB Commodity Composite Price Index  
Notes: Shaded areas are longer periods of falling commodity prices (> 10 months).  
Source: Financial Times, Haver Analytics, Deutsche Bank Research. Data as of October 2015.  
 

A Closer Look at Oil Prices

Let's look specifically at historical oil prices. WTI crude oil returns are currently near historic lows as shown in Chart B below. The lows of trailing 18-month price returns for WTI have historically been tested at approximately -50%. We have already seen these levels this year: as recently as September, October, and November.

Taking a different perspective on oil, we note that price cycles generally last 15 months. The length of the current downturn is 15 months. At least one prior crude supply/oversupply cycle (1994-2003) suggests getting invested now.

Chart B: Oil Prices Don't Typically Correct More than 50%

Measure: WTI Crude Oil Price Returns, Trailing 18 Months
WTI Crude Oil Price Returns  
Notes: Red Line at -50%: Lows have historically been tested at approximately -50%.  
Dotted Yellow Line at -25%: Longest period of < -25%="" trailing="" return="" is="" 17="" />  
Average period of < -25%="" trailing="" return="" is="" 6="" />  
Current period of < -25%="" trailing="" return="" is="" approximately="" 11="" months="" (nov.="" 2014="" to="" />  
Source: Bloomberg. Data as of September 30, 2015.  

2) Long-Term Price Momentum

We also looked at a long-term commodities momentum signal: the 250-day moving average. This indicator signals a "buy" when the current price is above the 250-day moving average. As shown below in Chart C, the Morningstar Long/Flat Commodity Index (which uses the 250-day moving average) currently is less than 2% invested/long exposure in commodities. Let’s look forward and assume two possible price scenarios: 1) a bullish scenario that assumes prices increase 20%; and 2) a flat scenario that assumes commodity prices stay at current levels. The bullish scenario indicates that the Morningstar Long/Flat Commodity Index signal would be more than 50% invested in commodities by April 2016. The flat scenario pushes this 50% invested date out to August 2016. If you are a bullish investor, we believe the time to invest is some time in the first quarter of 2016, well before the final signal in August should prices stay flat.

Chart C: Using a Longer-Term Signal to Get Reinvested in Commodities

Measure: Morningstar Long/Flat Commodity Index2  
Chart Commodities Momentum Lines  
Notes: Calculation based on current commodity weightings in Index and uses each commodity's 250-day moving average; Index weightings adjusted on third Friday of month.  
Source: Morningstar, Van Eck Research. Data as of November 5, 2015.   

Van Eck's Approach

Here at Van Eck, we are generally bottom-up investors, i.e., we deal in fundamentals. More precisely, we focus most of our attention on companies that can provide shareholder return despite what the markets might be doing. Of course you cannot really escape the markets, but we focus on companies with quality management teams that have the potential to add value.

Supply Drives Markets, Not Demand

Similarly, when we look at commodity markets, we focus primarily on supply. We don’t believe demand drives markets. We think that supply drives markets and that analyzing supply is a bottom-up, fundamental exercise. We look at particular markets for commodities and whether supply will increase or decrease based on the behavior of suppliers and producers.

When it comes to timing cycles, however, fundamentals may not always be the best bet. We believe it makes sense to mix technical and fundamental analyses, and given our current findings, we believe you should give serious thought to allocating to commodities.

Video: Commodities Poised to Rebound in 2016

My colleague Roland Morris, Commodities Strategist, goes into greater depth on how the current supply dynamics in commodity markets are positioning the space for a likely rebound in 2016.

  Watch Video Now »  

 
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Spin-Off in the Spotlight: Treasury Wine Estates (TWE AU) http://www.vaneck.com/blogs/spin-offs/treasury-wine-estates-november-2015/ Treasury Wine Estates (TWE AU) was spun off from Australian beer brewer Foster’s Group in May 2011. We believe it's an excellent example of how spin-offs can create value for shareholders over the long term. 

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Van Eck Blogs 11/23/2015 1:34:57 PM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

Spin-Off Company: Treasury Wine Estates Limited (Ticker: TWE AU)
Parent Company: 
Foster’s Group Limited; Acquired by SABMiller plc (Ticker: SAB LN)  

Spin-off Date: May 10, 2011
GSPIN Index Inclusion Date: July 1, 2011

Treasury Wine Estates (TWE AU) was spun off from beer brewer Foster’s Group in May 2011. The parent company separated its wine business from its beer business in order to allow Foster’s Group to focus on defending and growing its leading market share in Australia. At the time this transaction was announced, the wine business was being negatively impacted by oversupply in Australia and was forced to take an impairment charge1 of more than AUD 1 billion, which was equal to approximately half of the company’s market capitalization of AUD 2.2 billion when it started trading.

In our opinion, management’s view of its company appears to have been correct. After announcing an agreement to acquire Diageo plc’s ("Diageo") (NYSE: DEO) U.S. and UK wine operation in October 2015, and working to optimize its supply chain in Australia and New Zealand, Treasury Wine Estates now trades at a market valuation of AUD 5.3 billion — a 140% increase since it was first spun-off approximately four-and-a-half years ago. We believe that the Diageo acquisition will continue to generate value for the company going forward, as there will likely be significant cost savings unlocked by integrating the new distribution networks with the existing ones.

Treasury Wine Estates is an excellent example of the various ways in which spin-off transactions can create value for shareholders over the long term. In the early stages, one could argue that the company was inefficiently priced given that shares were trading at a nearly 20% discount to a recent buyout offer. Once separated, the assets drew considerable interest from potential acquirers, who were willing to pay prices that would have generated significant returns for investors. Finally, the Treasury Wine Estates spin-off eventually allowed the company to restructure and grow its business, a process that has played out during the nearly five-year time horizon over which the company has been included in the Index.

As of October 31, 2015, Treasury Wine Estates Ltd. represented 1.52% of SPUN's total net assets.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio2   0.62%
Net Expense Ratio2   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly
 
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Munis: “Fed” and Fed Up? http://www.vaneck.com/muni-nation-blog/fed-and-fed-up-11-18-15/ Uncertainty in the markets has left many tax-free investors confused about where to deploy cash in the last weeks of the calendar year. Jim contends that the tactical characteristics of munis merit consideration at this time.

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Van Eck Blogs 11/19/2015 12:00:00 AM Muni Nation: “Fed” and Fed Up?

In the wake of newly released economic indicators, namely large employment gains versus expectations, and the strong suggestion in the Federal Reserve’s (the “Fed’s”) commentary that a rate increase is likely in December, the push and pull of investor sentiment have created further uncertainty for tax-free investors in terms of deploying cash in the last few weeks of the calendar year. It is generally understood that fixed income investors are not fond of uncertainty.

For the past two years, the specter of uncertainty has, in my view, inhibited allocations to the municipal space when conjecture – not fact – has ruled the financial headlines. Factually and fundamentally, a rate rise has already been priced into the muni yield curve. History tells us that the markets overreact to such change. As a recent article on ETF.com reminds us, what remains tactically important about munis are the following:

1. Yields are currently attractive
2. My performance outlook for the asset class is positive
3. Munis have been a good diversifier to portfolios
4. Infrastructure needs should keep up muni issuance
5. Default risk has been historically very low
 

Read Article Now  

Much of what has been said in this space over the past 12-24 months about the relative value and attractiveness of both intermediate and high-yield municipals remains true. With year-to-date returns being mostly positive, the aforementioned attributes may spark consideration for those undecided about what to do as we approach year-end.

Year-to-Date Muni Total Returns
11-18-2015 Fed And Fed Up  
Source: Barclays as of 11/16/15.  

I believe that most investors are fed up with the lingering indecision of the Fed. The opportunity cost of taking no action over past weeks may no longer be worthwhile. In a challenging year for investors, this back-to-basics strategy may be the better course of action.

Post Disclosure  

Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. Barclays High Yield Municipal Bond Index is considered representative of the broad market for below investment grade, tax-exempt municipal bonds with a maturity of at least one year.

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Moat Investing: A Roaring October http://www.vaneck.com/blogs/moat-investor/ Global equities came roaring back in October after September’s difficult performance.  Information technology and consumer discretionary firms helped the U.S. domestic moat Index, while financial exposure drove the international moat Index.

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Van Eck Blogs 11/10/2015 3:03:22 PM

 

For the Month Ending October 31, 2015

Performance Overview  

Global equities came roaring back in October after September's difficult performance. The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) trailed the S&P 500® Index slightly (7.92% vs. 8.44%) and the internationally-focused Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagged the MSCI All Country World Index ex USA (7.10% vs. 7.44%).


Domestic Moats: CAD-Do Attitude  

Among U.S. moat-rated stocks, information technology and consumer discretionary firms drove MWMFTR gains. Autodesk (ADSK US), a design software firm known for its AutoCAD software, was the top performer in MWMFTR and also one of the top performers in the S&P 500 Index for the period. Media firms Twenty-First Century Fox (FOXA US) and Discovery Communications (DISCA US) also rallied in October from the 2015 lows they sank to in September. Polaris Industries (PII US) and ITC Holdings (ITC US) were the only negative performers in MWFMTR for the month.  

 

International Moats: Banking on Financials  

Significant financials exposure, particularly to banks, generally benefited MGEUMFUN in October, along with its only energy sector exposure, Cameco Corporation (CCO CN), a uranium company. Companies from the Netherlands, France, and Mexico performed particularly well for the Index. Millicom International Cellular (MIC SS) was MGEUMFUN's worst performing constituent in October. Millicom has a strong emerging markets footprint.  

 

  

(%) Month Ending 10/31/15

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 10/31/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Top 5 Index Performers
Constituent Ticker Total Return
Autodesk, Inc.
 
ADSK US
 
25.03
Applied Materials, Inc.
 
AMAT US
 
14.16
Twenty-First Century Fox, Inc. Class A
 
FOXA US
 
13.75
Discovery Communications, Inc. Class A
 
DISCA US
 
13.10
Walt Disney Company
 
DIS US 11.29

Bottom 5 Index Performers
Constituent Ticker Total Return
Berkshire Hathaway Inc. Class B
 
BRK.B US
 
4.31
Union Pacific Corporation
 
UNP US
 
1.06
CSX Corporation
 
CSX US
 
0.33
ITC Holdings Corp.
 
ITC US
 
-1.86
Polaris Industries Inc.
 
PII US
 
-6.28

View MOAT’s current constituents

 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Top 5 Index Performers
Constituent Ticker Total Return
CapitaLand Limited   CAPL SP 17.44  
Cameco Corporation CCO CN   16.64  
Royal Philips NV PHIA NA   15.63  
Kering SA KER FP   14.25  
Unilever NV Cert. of shs UNA NA   14.21  

Bottom 5 Index Performers
Constituent Ticker Total Return
State Bank of India SBIN IN 0.43
Lloyds Banking Group plc LLOY LN 0.02
Burberry Group plc BRBY LN -1.02
Svenska Handelsbanken AB Class A SHBA SS -4.27
Millicom International Cellular SA Swedish DR MIC SS -9.91

View MOTI’s current constituents

 
 
 

As of 9/18/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Index Additions  
Added Constituent Ticker
Applied Materials Inc AMAT US
Autodesk Inc ADSK US
CSX Corp CSX US
Emerson Electric Co EMR US
Monsanto Co. MON US
Norfolk Southern Corp NSC US
Procter & Gamble PG US
Qualcomm Inc QCOM US
Time Warner Inc TWX US
Union Pacific Corp UNP US
United Technologies Corp UTX US
Walt Disney Co DIS US
Western Union Co WU US

Index Deletions  
Deleted Constituent Ticker
American Express Co AXP US
Amgen Inc AMGN US
Blackbaud Inc BLKB US
Exxon Mobil Corp XOM US
Google Inc A GOOGL US
Harley-Davidson Inc HOG US
Hershey Foods Corp HSY US
ONEOK Inc OKE US
Spectra Energy Corp SE US
The Williams Companies Inc WMB US
US Bancorp USB US
Varian Medical Systems Inc VAR US
VF Corp VFC US

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents
 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Index Additions  
Added Constituent Ticker
Banco Bilbao Vizcaya Argentaria SA BBVA SM
Bank of China Ltd 3988 HK
BOC Hong Kong (Holdings) Ltd. 2388 HK
Brambles Industries Ltd BXB AU
Burberry Group BRBY LN
Cameco Corp CCO CN
CapitaLand Mall Trust REIT CT SP
Carrefour SA CA FP
Centrica CAN LN
China Construction Bank Corp 3311 HK
Credit Agricole SA ACA FP
Edenred EDEN FP
Grupo Televisa SAB CPO TLEVICPO MM
ICICI Bank Ltd ICICIBC IN
Industrial and Commercial Bank of China 1398 HK
Ioof Hldgs Ltd IFL AU
Johnson, Matthey JMAT LN
Kering KER FP
Platinum Asset Management Limited PTM AU
Power Corporation of Canada POW CN
Power Financial Corp PWF CN
Schneider Electric SE SU FP
Sigma Pharmaceuticals Limited SIP AU
United Overseas Bank UOB SP

Index Deletions  
Deleted Constituent Ticker
America  Movil  SAB de CV L AMXL MM
ANZ Banking Group ANZ AU
Banco de Chile CHILE CI
Bank of Nova Scotia Halifax BNS CN
BG GROUP PLC BG/ LN
Contact Energy Ltd CEN NZ
CSL Ltd CSL AU
Dongfeng Motor  Group Co. Ltd. 489 HK
Eldorado Gold Corp ELD CN
Genesis Energy Limited GNE NZ
Iluka Resources Ltd ILU AU
Kingfisher KGF LN
National Australia Bank Ltd NAB AU
National Bank of Canada NA CN
Nestle SA Reg NESN VX
Precinct Properties New Zealand Ltd PCT NZ
Rogers Communications  Inc B NV RCI/B CN
Sky Network Television Limited SKT NZ
Slater & Gordon Limited SGH AU
Sun Pharmaceutical Industries Ltd SUNP IN
Tata Motors Ltd TTMT IN
Veda Group Limited VED AU
Westpac Banking Corp WBC AU
Wipro Ltd WPRO IN

View Latest MOTI Reconstitution Report
View MOTI’s list of current constituents

 
 


 
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Has Gold’s Cyclical Bear Market Found a Base? http://www.vaneck.com/blogs/gold-commentary-october-2015/ Gold advanced in October and remains highly influenced by market expectations of a U.S. rate increase.Gold companies continue to report improving operational performance with lower expected mining costs.

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Van Eck Blogs 11/9/2015 12:37:54 PM

 

For the month ended October 31, 2015

Gold Markets Eye Fed's December Move

Once again, we must report that the outlook for the Federal Reserve Bank’s (Fed’s) rate decision influenced the movements in the gold price in October. Leaving rates unchanged is considered supportive for gold because it implies weakness in the economy, a lower U.S. dollar, and potentially lower real rates. Gold advanced on October 2 when disappointing September U.S. non-farm payrolls meant lower odds of a Fed rate increase. Gold reached its $1,191 per ounce high for the month on October 15 following retail sales that were below expectations and producer prices that fell more than forecasts predicted. Poor economic results continued with the release of downward pointing monthly reports for durable goods, consumer confidence, and other leading indicators. However, on October 28, the Fed released its post-FOMC (Federal Open Market Committee) meeting statement, which the market interpreted as increasing the likelihood of a December rate hike. In the statement, the Fed dropped previous warnings on global risk and focused on gains in household spending. As a result of the Fed’s comments, the gold price partially lost earlier gains and ended the month with a $27.09 advance (2.4%) at $1,142.16 per ounce.

Gold Stocks Perk Up

Gold stocks perked up in October, although they also saw weakness following the FOMC statement. In October, the NYSE Arca Gold Miners Index1 gained 9.2% while the Market Vectors Junior Gold Miners Index2 advanced 5.1%. Third quarter reporting started in the last week of October and will run into November. So far we are pleased with the sector’s improving operating performance. In our opinion, companies have done a good job driving down costs and early reports suggest this trend is continuing. For example, Agnico Eagle Mines Limited (7.7% of INIVX net assets) lowered the midpoint of its all-in mining cost guidance from $880 per ounce to $850, Newmont (1.9% of net assets) from $950 per ounce to $910, and Eldorado Gold Corporation (4.8% of net assets) from $925 per ounce to $870. [Access a current list of INIVX holdings.]

Positive Trends Since July

A symptom of the economic weakness in China is its foreign exchange (forex) reserves, which have been in decline since June 2014 and are down $329 billion (8.6%) so far this year. Despite this, the Peoples Bank of China (PBOC) continues to buy significant amounts of gold to add to its forex reserves. In July, the PBOC began announcing monthly changes in its official gold reserves. For the third quarter, the PBOC added 50 tonnes, which exceeds its annualized pace of 100 tonnes per year for the last six years. Meanwhile, the Chinese Gold and Silver Exchange Society believes gold consumption may match or exceed the record set in 2013. Robust Chinese demand helps underpin prices in an otherwise weak market.

Since gold fell to its cycle low of $1,072 per ounce in July, we feel it has embarked on a positive trend. Each time gold makes new lows in the bear market, we see a similar pattern, and investors wonder whether this positive trend is sustainable. The recent fundamental drivers have been safe haven3 demand due to jitters over the collapse of the Chinese stock market in August and uncertainty surrounding the Fed’s rate decision. It feels as if markets are being held hostage until the next FOMC meeting in December. Perhaps there will be answers to the multitude of questions that create uncertainty: Will rates be increased? How will markets react? How much is already priced into the gold market? How much is priced into the U.S. dollar? How will emerging economies behave? What will be the pace of rate increases? Will they have to reverse course? Until there is more clarity, it is difficult to say whether this is another false start for gold or the beginning of a lasting trend.

Analyzing Gold and Gold Equities

Many who follow gold stocks are puzzled by the depths to which they have fallen. There are several ways of analyzing this, some of which are misleading. Chart 1 shows the ratio of the NYSE Gold Miners Index (GDM) to gold at all-time lows, well below the levels of the 2008 credit crisis crash or the 1980–2001 secular bear market. This chart depicts the unprecedented decline in gold stocks.

Chart 1: GDM Index/Gold Ratio (2001-2015 Weekly Close)

GDM Gold Ratio - Gold Blog October Commentary

Source: Bloomberg, Van Eck Research. Not illustrative of an investment in the Fund. Historical information is not a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.  

The GDM index saw its cycle low of 348 on September 11, 2015. The last time it was this low was in 2002 when gold was $300 per ounce. We do not believe that this means stocks are anticipating much lower gold prices. The average all-in mining cost for our coverage universe is $920 per ounce. We do not know of any mines that are producing gold for $300 per ounce. In fact, in our view, high cost mines would begin shutting down at around the $1,000 per ounce level and the entire industry would likely to cease to exist long before gold reached $300.

These can be valid ways of looking at markets, however, for gold and gold stocks they are misleading because they fail to capture important changes in the fundamentals of the industry over the past 15 years. To demonstrate and quantify these changes, we look to Chart 2. This chart uses the same data as Chart 1, but displays it as an x-y plot, rather than a ratio.

Chart 2: Gold vs. GDM Index Plot (2001-2015 Weekly Close)

Gold Price Trends - Gold Blog October Commentary

 

Source: Bloomberg, Van Eck Research. Not illustrative of an investment in the Fund. Historical information is not a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

The first thing to notice is that gold and the GDM form three distinct trends over different periods. The transition between trends is shown as open circles. The correlation statistics (R-squared) for each trend is close to a perfect 1.00,4 which means that there is indeed a very strong correlation between gold bullion and gold shares.

Each trend is positioned progressively to the right at higher gold prices. This means that higher gold prices have been required to maintain the same GDM value. Each time the trend shifts from A to B to C, stocks are de-rating due to a loss in value. In the late 1990s, many companies became heavily hedged, locking in future production at low prices. When the bull market started, they were unable to take advantage of higher prices until in the 2000s, when they started spending billions of dollars to buy back their hedge books. As a result of what appear to be irresponsible hedging policies, gold stocks devalued from Trend A to B. The good news is that today the industry remains essentially unhedged, not wanting to repeat the mistakes of the past.

A different type of mistake caused the second devaluation form Trend B to C. The global mining industry was the victim of double-digit cost inflation during the 2008 to 2011 period of Trend B. The gold miners were not immune to this, and shareholders saw profit margins squeezed and capital cost escalations that diminished returns on new projects. Frustrated by the relentless rise in costs and missed expectations, the market de-rated the sector to its current Trend C. As has been the case with hedging, we believe the industry will not repeat the mistakes of the past. Managements are now focused on maintaining operational excellence and preserving margins.

To be fair, in the 1990s there were many companies with policies against hedging, and more recently there have been many with prudent cost controls. We have aimed to generate alpha5 in our portfolios by avoiding hedged producers and investing in companies with low costs and manageable debt. However, the majors have struggled the most with the problems that have plagued the industry. These companies dominate the indices and they are the “go-to” names for large generalist investors. In our view, poor leadership has cast a negative image across the broader industry.

We do not believe the industry will encounter further de-ratings in the future. We believe that a “Trend D” is not in the cards because the hard lessons that have been learned will not be forgotten, and companies should be able to maintain value. It is also unlikely that the industry re-rates higher towards Trend B. In order to create a positive step-change in value, it would take revolutionary technology or substantially more high-grade discoveries that enable low-cost mines to be built. While some companies are likely to make game-changing discoveries, we do not see it happening for the industry as a whole. Budgets have been slashed and geologic limitations have made exploration success harder to come by.

This Cyclical Bear Market Continues to Find a Base

This means that Trend C is probably the “new normal”, and, if so, what can we expect? The stocks are exhibiting considerable beta6 to the gold price. From the September close of $1,142 per ounce, a $100 (8.7%) change in the gold price caused a 36.4% change in the GDM along Trendline C. At higher gold prices the beta diminishes, but is still significant. For example, a $100 (6.2%) change from $1,600 per ounce causes a 13.7% change in the GDM along the trendline. Fundamentally, we explain this through optionality and leverage. At lower gold prices the volatility increases as stocks trade more like pure options. Around the $1,000 per ounce gold price, the industry does not generate any free cash and has little intrinsic value. However, there is still investment demand for the equities as options on higher gold prices.

Leverage at low gold prices also causes increased volatility and beta. Operating leverage increases when earnings and cash flows are at depressed levels. Small changes in the gold price can provide large percentage changes in earnings. For companies with high debt loads, there is also substantial financial leverage at low gold prices because so much of their cash flow is tied up in servicing debt.

While the near-term outlook for gold is murky, we expect to see plenty of volatility as this cyclical bear market continues to find a base.      

Download Commentary PDF »

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Munis: A Better Road for Tomorrow http://www.vaneck.com/muni-nation-blog/a-better-road-for-tomorrow-11-03-15/ Muni Nation invited Thomas G. Doe, President and Founder of Municipal Market Analytics, Inc., to provide this week's commentary. Municipal Market Analytics (MMA) is an independent research firm based in Concord, Massachusetts.

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Van Eck Blogs 11/3/2015 10:01:45 AM A Better Road for TomorrowMuni Nation invited Thomas G. Doe, President and Founder of Municipal Market Analytics, Inc., to provide this week's commentary. Municipal Market Analytics (MMA) is an independent research firm based in Concord, Massachusetts. MMA's core business is strategic market and credit research on the U.S. municipal market and industry.

A Better Road for Tomorrow Could be Built One Driverless Car at a Time  

Automated vehicle companies are in an ideal position to help influence and possibly assist in the funding of short- and medium-term infrastructure investment. Technology requirements likely will dictate that these companies participate in the planning and integration of their technology into existing infrastructure and, perhaps more importantly, new construction. Sections of roads and highways that are vital to the business plans of these companies could be prioritized, as well as improvements funded by private companies. In addition, the evolution of better highways with high speed, safe, and unencumbered vehicles could provide an economical alternative to other public transportation systems, e.g., rail, thus potentially saving scarce budgetary dollars.

States and municipalities control a fundamental asset that is of considerable value to the automobile industry: transportation infrastructure. The public entities should begin to work with the private sector to develop a strategic plan for faster development and integration of new technologies for the public benefit, while also monetizing the value of public infrastructure for the car companies.

Also, the driverless car’s evolution is occurring concurrent to that of drone technology. Therefore automated vehicle participants should have equally motivated partners, i.e., Amazon, FedEx, and UPS, to access established transportation routes that are relatively safe, efficient, and jointly funded by those who use them and those who profit from them. Highways could become multi-layered networks of cars and drones on which goods, services, and people are guided and delivered to specific points with efficiency and effectiveness. But such a future can only be accomplished by the equitable sharing of costs absorbed by both private companies and a taxpaying population – the former profiting from the revenue of products sold and delivered, and the latter from a likely safer and better tomorrow.

Approximately hundreds of millions of dollars have been invested in research programs by the federal government, private car companies, transportation entities, and insurance companies. The public and private investment is already considerable in the future design and projected implementation of the technology into everyday life. Therefore, state and municipal governments have a unique opportunity to leverage their assets to partner with the private driverless car companies, so the companies could gain a return on their current investment and governments will have a committed partner to address the public’s great needs.

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Spin-Off in the Spotlight: PayPal Holdings (PYPL) http://www.vaneck.com/blogs/spinoffs-paypal-october-2015/ PayPal Holdings (PYPL) was spun off from eBay Inc. (EBAY) in July 2015. The transaction was arguably undertaken to improve PayPal’s competitive footing in the rapidly changing online and mobile payments industry.

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Van Eck Blogs 10/19/2015 8:43:38 AM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.                      

Spin-Off Company: PayPal Holdings Ltd. (Ticker: PYPL)
Parent Company: eBay, Inc. (Ticker: EBAY)

Spin-off Date: July 20, 2015
GSPIN Index Inclusion Date: October 1, 2015

PayPal Holdings (NASDAQ: PYPL) was spun off from eBay, Inc. (NASDAQ: EBAY) in July 2015. The transaction was arguably undertaken to improve PayPal’s competitive footing in the rapidly changing online and mobile payments industry. As an independent entity, it is expected that PayPal will have a greater degree of freedom to expand its technology platform, either through acquisition or investment, thus allowing it to better compete with the likes of Apple (NASDAQ: AAPL) and Google/Alphabet (NASDAQ: GOOG). 

The separation also helps eliminate any perceived conflicts of interest; whereby, other online retailers, i.e., competitors of eBay, may have been reluctant to use PayPal for payment processing, for fear that they would be subsidizing a competitor and/or providing it with information about their business. As such, we believe PayPal may have additional organic growth opportunities now that it is an independent company.

Of course, the acquisition of PayPal by a well-capitalized competitor, such as either of the aforementioned tech giants, is a possibility and would likely give that acquirer a significant strategic asset in the payments industry.

At the time of the separation, the revenue growth that PayPal derived from sources outside of eBay was three times the rate of its eBay-related business. With revenues forecast to increase organically at a double-digit rate over the next year, PayPal offers significant future upside potential. Should this expansion materialize, we believe that the spin off transaction could generate additional benefits by allowing the market to value PayPal at a premium multiple relative to the more mature eBay business. When one further considers the strategic advantages of operating as an independent entity, we believe that this spin-off has the potential to create significant value for shareholders.

As of September 30, 2015, PayPal Holdings represented 0.80% of SPUN's total net assets.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio1   0.62%
Net Expense Ratio1   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly

1Expenses for SPUN are capped contractually at 0.55% until at least 2/01/17. Cap excludes certain expenses, such as interest.

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Special Gold Market Update 10/16/15 http://www.vaneck.com/blogs/gold-special-market-update-october-16-2015/ October 16, 2015: I would say that we are into what I call a short-covering rally. There are big short positions in the market, not just gold, but across many commodities. These short-covering rallies are typically driven by financial risks for gold.]]> Van Eck Blogs 10/16/2015 11:21:52 AM

Will Gold's Positive Momentum Continue?

[Excerpted from Joe's 10/13/15 Gold Conference Call]

A Closer Look at July's Selloff

There was a significant selloff in July in the gold market. While we've seen selloffs of this magnitude a number of times over the course of this bear market, I’d like to review this selloff in some detail with you. During our last conference call on July 14, I told you that our near term outlook was favorable for gold. Gold was at cycle lows and we believed that its positioning on COMEX [formerly Commodity Exchange, Inc.] looked favorable. Keep in mind that we had already had a three-plus-year history of selling pressure on gold and gold stocks, and we were seeing the usual summer seasonal weakness traditionally observed in the gold market. We believed that with all that pressure on gold that the near-term looked favorable for a more positive trend.

China is the World's Largest Gold Buyer

On July 17, the People's Bank of China announced that it had increased its gold holdings by 600 tonnes. The last time it had announced its reserves was in 2009. This meant that over the past six years, the Bank had been buying, on average, about 100 tonnes a year, making them the largest gold buyer on the planet. However, while the increase was of significant size, the Bank’s estimates did not meet the markets’ expectations, and it did not meet our expectations. I had expected the Bank to announce something that was at least double what it had announced. The market reacted negatively and the selloff in gold ensued.   

Since then, we have changed our thinking on what the Chinese government is doing with its gold holdings. China owns 1,658 tonnes of gold. That represents 1.6% of China’s forex (foreign exchange) reserves. Previously, I had thought that China was working toward having a gold reserve in terms of forex reserves that was somewhere in the double digits, more on par with what we see in western countries. Germany, France, the U.S., and Italy have gold as a percentage of forex reserves in the 30-70% range. I no longer think that China's being that aggressive. I now think that China is content to have a level of reserves that's more normal for Asia. If you look at Japan or Korea or other Asian countries, they have less than 5% gold in forex reserves.  I believe that's more in line with the range that China is targeting. Having said that, even though China is not as aggressive as we had thought, China is still a significant buyer in the gold market. 

The People’s Bank of China has started announcing changes in its gold position on a monthly basis, like other central banks.  The Bank added 15 tonnes in July and another 19 tonnes in August. The Bank is on track to purchase a few hundred tonnes annualized, making it a huge buyer in the market, and we think these levels will continue into the foreseeable future. Having said that, the announcement of a 600-tonne increase over the last six years in our view was still a disappointment. As a result, we saw very heavy redemptions from gold bullion ETFs. We also saw broader pressure across the commodities complex. Gold was down 6.5% in July, copper was down 9%, and WTI crude oil was down 21%. The additional pressure across the commodities complex put extra pressure on gold. 

July’s Heavy Trading in After-Market Hours

Another peculiar thing that happened in July was heavy trading in off-market hours, and it's very suspicious we feel. On July 19, on a Sunday night, at 11:27 PM, gold fell $62 an ounce in an instant, to its cycle lows of $1,072 an ounce. This is something we've seen before. This was in the middle of the night, when most market participants are in bed. Somebody came in and hit the market with sell orders and drove the price down. In addition to that, I think we're seeing some algorithmic trading kick in here. Everybody knows that when you move a security through certain technical levels, whether higher or lower, trading algorithms can kick in that are monitoring the market 24/7 and automatically take the price lower or higher, in whichever direction the price is being pushed. This is an issue not just for the gold market; it impacts many other commodities markets as well. These activities need to be addressed:  trading in times of very low liquidity and the impact of algorithmic trading. Other metals got hit at the same time as gold. I've looked at the minute-by-minute charts for July 19, and as gold was being hit, so was copper, zinc, silver, and the platinum group. So I'm not sure if this was a specific attack on gold, or an attack on the metals complex more generally, but nonetheless, it did drive gold to new lows. It ended up in a painful selloff for investors.

The gold market has bounced back since July. In August and September gold traded higher on increasing financial risk. In August, it was China. You all saw the crash in the Chinese stock market that resulted in panicked markets around the world, and gold outperformed in August as a perceived safe haven investment. In September, the U.S. Federal Reserve [the "Fed"] didn't raise interest rates, and since then we have started to see markets lose a bit of confidence in the Fed. This has been supportive of gold. The Fed built all these expectations around a rate increase, and then it held back, and that has been a good driver for gold. In August and September, we made up for much of what we lost in July. Since its July lows, gold is up about 6%. Our ETFs are also up: GDX [Market Vectors Gold Miners ETF] and GDXJ [Market Vectors Junior Gold Miners ETF] have posted gains since July.  While certainly not an indication of future results, gold has been gaining momentum over the last couple of months.   

Does this Rally Have Legs?

As we look forward, I would say that we are into what I call a short-covering rally. There are big short positions in the market, not just gold, but across many commodities. These short-covering rallies are typically driven by financial risks for gold. Historically, they haven't lasted in the longer term. In order for the current rally to last, I think we need to see more problems in the U.S. financial system, or with the U.S. economy, or have the market lose more confidence in what the Fed is doing. As we look forward, it is hard to give any clarity right now given that the Fed seems to dominate everything with this rate decision. It is a kind of wall: You can't see through it, and you can't see over it. Once the Fed finally raises rates, the market will likely look forward to say, how high will it raise rates? Will the Fed have to reverse course? Once we know how the market will react to an actual rate rise, we will be able to move on from there.  In my view, the Fed is in a box and will have a hard time doing anything that satisfies the market at this point. If the Fed doesn’t raise rates, I think confidence will erode further, and that would be good for gold. On the other hand, once the Fed does raise rates, it may create problems that increase financial risk.

How do you know if a fundamental event like a Fed rate hike is going to help drive gold in the longer term? It's very difficult to know whether it's another short-covering rally or a longer-term driver. It helps to look at the fundamentals as well as the technicals. 

If you were to run a five-year gold prince chart since mid-2013, you can see that gold has clearly been in a downward trend over the last two-and-a-half years. If you draw a trend line across the top and the bottoms of that gold chart, the top of that channel or trend is $1,230 an ounce. Given this, if we have a fundamental event, a macro event, that causes the gold price to trend through $1,230 an ounce, I would see that as a positive sign, and that might be a point at which we might think about calling an end to this bear market and looking forward to a better performance from gold longer term. By the same token, the bottom of that trend is $1,050. If gold fell through the bottom of that trend line, then obviously that would be negative. I tend to think that the bottom is fairly solid for gold for a couple of reasons. One is that the gold industry at $1,100 an ounce is making a little bit of money. At $1,000 an ounce, many mines are losing money. And as the gold price gets down to $1,000, I think you would see companies start to cut production at their unprofitable mines. 

Gold Price Range Since Mid-2013 

Gold Price Chart October 2015  

Source: Bloomberg  

Glencore is a significant example of this [represented 0% of Van Eck International Investors Gold Fund as of 9/30/15]. Glencore is the largest zinc producer in the world, and several days ago it announced a significant cut in its zinc production. The company is shutting down mines and taking zinc off the market. And most commodities markets reacted positively to Glencore cutting zinc production. I think this is the market coming to realize that these metals prices are not sustainable in the longer term. You can't afford to build new mines at current prices for gold and many other metals. The industry is suffering at current prices. The gold industry isn't in a Glencore-type zinc situation yet, but at $1,000 an ounce, it would be, and at that point, we would start to see significant closures, I believe, in the gold mining industry. 

A U.S. dollar chart is also worth looking at. Obviously, gold has historically had a strong negative correlation with the U.S. dollar. If you look at a 12-month chart, you can see a well-defined trend or a channel in which the dollar has traded since May of this year. We are currently near the bottom of that trend, so the dollar is a bit vulnerable in our view. If something happens to cause the dollar to fall out of that trend on the downside that would be positive for gold in our view, and would definitely get our attention. In the longer term, as I've said before, I believe that the U.S. has mismanaged fiscal and monetary policies for years now. I think it may end badly, and eventually we'll see financial risks come back into the system. If not now, then likely as we enter the next recession.

Dollar Rangebound Since May 2015

  USDollar Chart October 2015  

Source: Bloomberg

Gold Companies: Low Valuations and Efficiency

Moving on to gold stocks, we recently spent time in Colorado at the Denver Gold Show and the Precious Metals Summit. In our view, gold companies are continuing to become increasingly efficient. They're not able to reduce costs as significantly as they were a year or two ago, but they appear to be still finding ways to economize and spend capital more wisely. We believe valuations are still quite favorable. We're at cycle lows in terms of the valuations of many of these gold stocks right now. Given the low valuations and the efficiency of the companies, gold mining stocks looks attractive right now. The one thing we are missing is a higher gold price. 

Another theme that was discussed at Denver, and that been playing out for a while now is the likely impact of currency on cost savings. For gold companies that have operations around the world, for example Brazil or Canada or Australia, over the last couple of years, they have enjoyed probably about 20% in cost savings. A mine cost of $1,000 an ounce in Australia a couple of years ago is now costing around $800 an ounce today in U.S. dollar terms. The mine’s revenues are in U.S. dollars, but its costs are in local currencies. Recent weakness in currencies around the world has enabled many mines to reduce costs. And then when you get the additional savings from efficient mining methods or lower costs from suppliers or EPCM [Engineering, Procurement and Construction Management] contracts, we're seeing significant cost savings across the industry. Right now, we are looking at under $1,000 an ounce as the all-in cost on average for the industry.

Small- and Micro-Cap Activity Seems Promising

Lastly, I will talk about our gold strategy. In terms of portfolio holdings, we have not made many changes over the past quarter; we still have about a third of our holdings in juniors, and we remain underweight in the large-caps.   

We have had a couple of our small-cap companies taken over in the last quarter; two of our juniors: Romarco (RTRAF) and Gold Canyon (GDCRF). Romarco Minerals was taken out by OceanaGold (OCANF). OceanaGold is an Australian-based company, and this was a share deal, so we'll keep the OceanaGold when our Romarco changes into OceanaGold. Gold Canyon Resources is a development project, representing a significant gold deposit in Ontario. It was purchased by a company called First Mining Finance (XTSX:FF). Gold Canyon is not likely to get developed until we see higher gold prices, but if gold prices rise, it should become an attractive project, and that's why we continue to hold it in the portfolio. This is the kind of activity we are beginning to see: smaller companies like Gold Canyon that were out of money, out of luck, and with management that is willing to give up control. First Mining is really a land bank and it has adept management. They have been accumulating gold properties and other metals properties in this market, and they're willing to sit on these properties and wait for higher metals prices. This type of activity in these smaller companies is very encouraging to me, and is something that we want to be involved in.  [As of 9/30/15, the above-mentioned holdings were represented in the Van Eck International Investors Gold Fund as follows: Romarco Minerals 1.12% of the Fund's total net assets; OceanaGold, 0.0%; Gold Canyon Resources, 0.17%; and First Mining Finance, 0.0%. See more details on Fund holdings.]   

 

 

 

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Munis: Value Seen in Muni Bond Closed-End Funds http://www.vaneck.com/muni-nation-blog/value-seen-in-muni-bond-closed-end-funds-10-12-15/ Paul Mazzilli, Independent Fund Consultant and Senior Advisor for S-Network Global Indexes, shares his thoughts on the current attractiveness of municipal bond closed-end funds.

 

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Van Eck Blogs 10/12/2015 10:07:54 AM

Guest Paul Mazzilli, Independent Fund Consultant and Senior Advisor for S-Network Global Indexes, shares his thoughts on the current attractiveness of municipal bond closed-end funds:

  • Their ability to use leverage very effectively;
  • Wide discounts: share price dislocation versus net asset values;
  • The potential impact of the Puerto Rico debt crisis.

Watch Video The Hidden Value in Municipal Bond Closed-Ends Funds  

Watch Now | Video Transcript  

Video Transcript - The Hidden Value in Municipal Bond Closed-End Funds

TOM BUTCHER: I'm here with Paul Mazzilli, Senior Advisor to S-Network Global Indexes. ETF providers often seek to partner with innovative third-party index developers like S-Network. Using his extensive knowledge of the closed-end fund market, Paul was instrumental in the development of the S-Network Municipal Bond Closed-End Fund Index.

Paul, why may municipal bond closed-end funds be attractive for investors right now?

PAUL MAZZILLI:There are three attractive aspects of municipal closed-end funds, all of which are working together right now. The first, as a closed-end fund, they have a set investment, they're run by professional managers, and since they don’t having assets come in and out like an open-end mutual fund, they can buy less-liquid, higher-yielding securities like private placements, non-rated bonds, and they're not forced to sell bonds when people are seeking out liquidity. The next is a unique aspect of municipal closed-end funds. They have the ability to leverage. When a closed-end fund leverages, it will borrow against its own assets and buy more bonds. Here is a simple example: For a $100 million closed-end fund, the most its allowed to borrow is one-third leverage. It can borrow $50 million and buy another $50 million of bonds. The $100 million in assets becomes $150 million invested. If the underlying bonds are yielding 4%, the leveraged fund would yield 6%, approximately, before any incremental costs. You get almost a 50% increase given this ability to leverage one third.

The final thing is that after closed-end funds are issued, they trade as stocks in the marketplace. Based on demand and supply, they can trade rich to their value [at a premium], or they can trade cheap to their value [at a discount]. Right now, they're selling historically cheap at about a 10% average discount. The 25-year average discount is approximately 2%. So when you're selling at a 10% discount, if you're buying a dollar of assets for $0.90, if you had an asset yielding 10%, you're actually getting an 11.1% yield on the money you're putting up.

This fact that they're trading at a discount is happening right now because investors are fearful of the Fed raising rates. They are fearful of the equity markets, they've been raising cash since they've traded stocks, they're selling them, they're not looking at the underlying value, and it's created a real buying opportunity. The discount has one other final advantage: If bonds were to sell off, but you're buying at a 10% discount and it goes to a 5% discount, you actually could have a capital gain, even though the underlying bonds sell off.

BUTCHER: Is the prospect of debt restructuring in Puerto Rico going to have any impact on municipal bond closed-end funds?

MAZZILLI: Very good question. I think there are two different aspects. First, what does Puerto Rico do to the general municipal bond market? It is a significant issuer. It could have some impact in terms of how bonds trade. I personally believe a lot of that is already reflected in the market. Second is, what does it do to our index of municipal closed-end funds [S-Network Municipal Bond Closed-End Fund Index, CEFMX]? Our index currently has a very low exposure of about 0.43% to Puerto Rico. And that comes from two reasons. One: municipal closed-end funds tend to buy higher-quality funds, which would exclude Puerto Rico right now, or in the past. Two, we buy only national municipal closed-end funds, or our index represents only national municipal closed-end funds. And the national funds buy very little Puerto Rico exposure because they have a lot of other ways to diversify.

BUTCHER: Paul, thank you very much for joining me today.

MAZZILLI: Thank you.

 

Post Disclosure

Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested. The S-Network Municipal Bond Closed-End Fund Index is a rules based index intended to serve as a benchmark for closed-end funds listed in the US that are principally engaged in asset management processes designed to produce federally tax-exempt annual yield.

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Moat Investing: Volatility Fuels Turnover in Moat Indices http://www.vaneck.com/blogs/moat-investor-monthly-october-2015/ September was a difficult month for global equity markets and moats were not spared, however, international moats outperformed U.S.moats.

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Van Eck Blogs 10/7/2015 10:39:52 AM


 

For the Month Ending September 30, 2015

Performance Overview  

September was a difficult month for global equity markets and moats were not spared. Although the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) trailed the S&P 500® Index (-4.02% versus -2.47% ), the internationally focused Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) outperformed the MSCI All Country World Index ex USA (-2.88% vs. -4.67%). The main market downer was the U.S. Federal Reserve’s decision to leave interest rates unchanged at its September Federal Open Market Committee (FOMC) meeting.


Domestic Moats: Everyone Loves Chocolate  

For U.S. moat-rated stocks, consumer discretionary and information technology firms were the top detractors from MWMFTR performance. In terms of individual constituents, asset manager Franklin Resources, Inc. (BEN US) was the worst performing constituent in MWMFTR for the month while chocolate producer Hershey Company (HSY US) led the positive performing constituents. Thirteen of 20 constituents were replaced in the Index on September 18, 2015, and this high turnover reflects the impact of increased market volatility throughout the third quarter.  

 

International Moats: Takeover Pressure Boosts Veda  

Financials weighed down MGEUMFUN in September, but strong relative performance from industrials, information technology, and consumer staples companies helped the Index outperform the broader international markets. In terms of individual companies, Australia’s Veda Group Limited (VED AU) soared on takeover pressure from Equifax, and Potash Corporation of Saskatchewan Inc. (POT CN) was the biggest detractor. As in the U.S., high turnover was also the result of MGEUMFUN’s September quarterly Index review. Roughly half of the 50-stock portfolio was replaced on September 18, 2015.  

 

  

(%) Month Ending 09/30/15

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 09/30/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Top 5 Index Performers
Constituent Ticker Total Return
Hershey Company HSY US 3.28
Procter & Gamble Company PG US 2.86
Google Inc. Class A GOOGL US 2.02
ITC Holdings Corp. ITC US 1.96
Union Pacific Corporation UNP US 0.72

Bottom 5 Index Performers
Constituent Ticker Total Return
Blackbaud, Inc. BLKB US -5.15
Merck & Co., Inc. MRK US -7.49
Polaris Industries Inc. PII US -7.70
Applied Materials, Inc. AMAT US -7.78
Franklin Resources, Inc. BEN US -7.81

View MOAT’s current constituents

 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Top 5 Index Performers
Constituent Ticker Total Return
Veda Group Limited VED AU 31.41
Dongfeng Motor Group Co., Ltd. 489 HK 20.64
Genesis Energy Ltd GNE NZ 10.34
Eldorado Gold Corporation ELD CN 7.28
Rogers Communications Inc. RCI/B CN 6.14

Bottom 5 Index Performers
Constituent Ticker Total Return
Cameco Corporation CCO CN -9.22
Edenred SA EDEN FP -9.63
Grupo Televisa S.A.B TLEVICPO MM -10.98
LafargeHolcim Ltd. LHN VX -13.74
Potash Corporation of Saskatchewan Inc. POT CN -20.54

View MOTI’s current constituents

 
 
 

As of 09/18/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Index Additions  
Added Constituent Ticker
Applied Materials Inc AMAT US
Autodesk Inc ADSK US
CSX Corp CSX US
Emerson Electric Co EMR US
Monsanto Co. MON US
Norfolk Southern Corp NSC US
Procter & Gamble PG US
Qualcomm Inc QCOM US
Time Warner Inc TWX US
Union Pacific Corp UNP US
United Technologies Corp UTX US
Walt Disney Co DIS US
Western Union Co WU US

Index Deletions  
Deleted Constituent Ticker
American Express Co AXP US
Amgen Inc AMGN US
Blackbaud Inc BLKB US
Exxon Mobil Corp XOM US
Google Inc A GOOGL US
Harley-Davidson Inc HOG US
Hershey Foods Corp HSY US
ONEOK Inc OKE US
Spectra Energy Corp SE US
The Williams Companies Inc WMB US
US Bancorp USB US
Varian Medical Systems Inc VAR US
VF Corp VFC US

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents
 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Index Additions  
Added Constituent Ticker
Banco Bilbao Vizcaya Argentaria SA BBVA SM
Bank of China Ltd 3988 HK
BOC Hong Kong (Holdings) Ltd. 2388 HK
Brambles Industries Ltd BXB AU
Burberry Group BRBY LN
Cameco Corp CCO CN
CapitaLand Mall Trust REIT CT SP
Carrefour SA CA FP
Centrica CAN LN
China Construction Bank Corp 3311 HK
Credit Agricole SA ACA FP
Edenred EDEN FP
Grupo Televisa SAB CPO TLEVICPO MM
ICICI Bank Ltd ICICIBC IN
Industrial and Commercial Bank of China 1398 HK
Ioof Hldgs Ltd IFL AU
Johnson, Matthey JMAT LN
Kering KER FP
Platinum Asset Management Limited PTM AU
Power Corporation of Canada POW CN
Power Financial Corp PWF CN
Schneider Electric SE SU FP
Sigma Pharmaceuticals Limited SIP AU
United Overseas Bank UOB SP

Index Deletions  
Deleted Constituent Ticker
America  Movil  SAB de CV L AMXL MM
ANZ Banking Group ANZ AU
Banco de Chile CHILE CI
Bank of Nova Scotia Halifax BNS CN
BG GROUP PLC BG/ LN
Contact Energy Ltd CEN NZ
CSL Ltd CSL AU
Dongfeng Motor  Group Co. Ltd. 489 HK
Eldorado Gold Corp ELD CN
Genesis Energy Limited GNE NZ
Iluka Resources Ltd ILU AU
Kingfisher KGF LN
National Australia Bank Ltd NAB AU
National Bank of Canada NA CN
Nestle SA Reg NESN VX
Precinct Properties New Zealand Ltd PCT NZ
Rogers Communications  Inc B NV RCI/B CN
Sky Network Television Limited SKT NZ
Slater & Gordon Limited SGH AU
Sun Pharmaceutical Industries Ltd SUNP IN
Tata Motors Ltd TTMT IN
Veda Group Limited VED AU
Westpac Banking Corp WBC AU
Wipro Ltd WPRO IN

View Latest MOTI Reconstitution Report
View MOTI’s list of current constituents

 
 


 
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Munis: Video Viewpoint with Colby http://www.vaneck.com/muni-nation-blog/video-viewpoint-with-colby-10-06-15/ Watch Jim's latest muni videos on the Fed's decision to postpone a rate hike, Puerto Rico's declaration, and his 4Q'15 outlook.

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Van Eck Blogs 10/6/2015 12:18:32 PM

Take a look at my latest video commentaries: 

Watch Video Municipal Bonds: Fed's September Hike Delay and Puerto Rico Default  

In this first video I discuss the Fed's decision to hold rising interest rates and the impact on munis, as well as Puerto Rico's declaration.

Watch Now | Video Transcript  

Watch Video Munis: 4Q'15 Outlook  

In this second video I provide my fourth quarter outlook and expectations for municipal market performance.

Watch Now | Video Transcript  

Video Transcript - Municipal Bonds: Fed's September Hike Delay and Puerto Rico Default

 

TOM BUTCHER: The Federal Open Market Committee (FOMC) has decided to do nothing with interest rates. How will this affect the muni market going forward?

JAMES COLBY: I think the market is going to be disappointed. We've been waiting for two-and-a-half years for the Federal Reserve (Fed) to make a move. For reasons that are probably pretty clear, they've chosen not to adjust rates. Consequently the municipal market has been on hold for the better part of six months. Flows either have flat lined or have been slightly negative into investments such as muni ETFs and mutual funds. Investors are looking for yield and an opportunity to invest. They're looking for something different and the evidence indicates that perhaps they are looking at other asset classes. Hopefully, in the fourth quarter of this year investors will revisit munis and see the value that is inherent in muni bond investments. I daresay that disappointment will prevail in the short run.

BUTCHER: How can municipal bonds provide investors with stability in a rising interest rate environment?

COLBY: History suggests that if you look back at the asset class in terms of its performance, i.e., its long-term performance versus other asset classes, munis are far less volatile over several different interest rate cycles compared to corporates or equities, for example. The reason for this is perhaps twofold. Number one is the structure of municipal bonds. Bonds tend to be callable and have relatively short calls; therefore their price doesn't vary in a significant way over time. Secondly, individuals own the majority of muni bonds and they often hold onto these bonds and don't sell them, whether they are held as individual securities or through packaged investments such as ETFs or mutual funds. Very few bonds that get issued in this marketplace trade much beyond three, four, or five years from the time of issuance. There is a degree of stability in the municipal marketplace. It's something that investors should consider when deciding how to allocate investments, redistribute volatility, and mute the impact of interest rate changes, which everyone is anticipating.

BUTCHER: Turning to Puerto Rico, do you have any comments on its declaration that debt restructuring needs to take place?

COLBY: It's a proclamation in the sense that the Commonwealth of Puerto Rico now is admitting to the world something that we've all known for some time: They are at best going to struggle to meet their obligations. Presently the Commonwealth likely has no ability to meet its obligations without significant changes, which might be changes to their constitution or changes promulgated in Washington, D.C. to give them the authority and ability to affect restructuring. There is talk right now between one of the prime issuers in the Commonwealth and some significantly large bondholders about restructuring a particular obligation, the electric authority. The rest of the issuers in the Commonwealth have yet to undertake such conversations. It’s unclear exactly how that's going to go. The declaration that came out deals with that. It's a statement that we're to expect negotiations to take place over the next many months; the outcome will be up in the air and uncertain.

BUTCHER: It’s purely a declaration then.

COLBY: Exactly.

BUTCHER: Jim, thank you very much.


Video Transcript - Munis: 4Q'15 Outlook

 

TOM BUTCHER: What is your fourth quarter outlook for munis?

JAMES COLBY: My outlook is very healthy for the municipal marketplace. Why do I say that? Many of the factors that made munis attractive at the end of 2014 are still in place right now. They include certain aspects of the municipal market at large. I think the lower investment-grade and high-yield investments are still very attractively priced relative to the highest credit quality offerings in the municipal marketplace.

Also, one needs to compare munis to other asset classes. At Van Eck we've been looking at the relative value of municipals on a taxable-equivalent basis compared to other asset classes, and to us munis continue to stack up in providing superior income return to the investor. That has been the case for quite some time. I think the attractiveness of munis has been overshadowed by concerns about the economy and what the Federal Reserve is going to do.

Going into the fourth quarter, I believe it's very likely that we'll overcome some of these concerns and focus on positioning portfolios, and investing cash for the remaining three months of the year to generate income and performance for investors who have been otherwise occupied with other concerns in the economy and around the world.

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Gold Bear Market Continues Despite Global Economic Concerns http://www.vaneck.com/blogs/gold/gold-bear-market-continues-september-2015/ In September, gold bullion and gold shares continued to consolidate above the July lows of the year; bullion ended the month at $1,115.07.

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Van Eck Blogs 10/5/2015 12:00:00 AM

Download Commentary PDF  

For the Month Ending September 30, 2015

Gold Bullion and Shares Post Small Losses

Gold bullion and gold shares continued to consolidate above the July lows of the year. Gold traded in a $1,100 to $1,150 per ounce range during September, ending the month with a $19.73 (1.7%) loss at $1,115.07 per ounce. Gold stocks also saw small losses, with the NYSE Arca Gold Miners Index1 down 2.3% and the Market Vectors Junior Gold Miners Index2 declining 3.1%.

After spending much of the past year informing the market of its plans to raise rates, on September 17 the Federal Reserve (Fed) once again put it off until a later, unspecified time. Fed Chair Janet Yellen said "the economy has been performing well", but cited concern over "global economic and financial developments." The Fed lowered its growth and inflation forecasts. Gold responded positively by trending higher, topping out at $1,156 per ounce on September 24.

We attended the 2015 Precious Metals Summit and Denver Gold Forum, which attracts most of the gold companies in our investment universe. The Precious Metals Summit features smaller development companies, explorers, and a few producers. Many companies are shepherding cash and slowing development to ride out the current low gold prices. Lower drilling costs may enable companies to do more with less and we are seeing more thorough and thoughtful planning. We are also seeing companies able to take advantage of the weak market. Companies with attractive properties that have run out of time and capital are becoming willing sellers. Others who have been through these cycles and have better access to capital and expertise, are picking up such properties in preparation for an eventual turnaround in the market.

Somber Mood Dampens Denver Gold Forum

The Denver Gold Forum was not as vibrant as in past years, reflecting the current mood in the market. Austerity was an overriding theme as companies explained how they continue to rein in costs and outlined their plans should gold prices fall further. While no one expects lower prices, contingency plans for prices as low as $900 per ounce were shown. The industry generates positive cash flow at current prices; however, roughly 25% of production becomes unprofitable at $1,000 per ounce, at which point we would expect to see closures. Many regions are seeing a positive currency effect. Currencies at multi-year lows in Canada, Australia, Brazil, and elsewhere effectively reducing costs in U.S. dollar terms, making mines in those areas more profitable. The standouts at this conference were those able to develop mines at current gold prices. Some companies have been able to combine the deflation in development costs with smarter engineering plans and capital deployment to build projects that are better placed than those envisioned and built several years ago at higher gold prices. Examples include developers Roxgold Inc. (0.8% of Fund net assets as of 9/30/2015), Torex Gold Resources Inc. (2.4% of Fund net assets), and Guyana Goldfields Inc. (2.2% of Fund net assets) and mid-tiers Agnico-Eagles Mines Ltd. (7.5% of Fund net assets), B2Gold Corp. (5.2% of Fund net assets), and Randgold Resources Ltd. (5.8% of Fund net assets). The royalty companies also had an impressive showing, as royalties have evolved from niche to mainstream financing.

This is a Cyclical not Secular Bear Market

Given the depth and duration of the gold bear market, many must wonder whether this is the beginning of a secular bear market measured in decades rather than a cyclical bear market that is measured in years. The last secular bear market lasted 21 years from 1980 to 2001. There were a number of cyclical bull markets after 1980, however the longer-term trend was downward for gold. Several major macroeconomic drivers drove the secular bear market. In the early eighties, the Fed raised rates to combat inflation. While this initially caused a difficult recession, it set in motion a long period of disinflation and price stability in the economy. The Reagan presidency further set the economy, in our view, on a positive trajectory with tax cuts and reforms that limited or reduced the regulatory burden on business. The U.S. won the Cold War, with peace and commerce breaking out in many regions of the globe. With strong leadership and prescient policies, there was ample generation of wealth, tail risk3 diminished, and investment demand for gold remained weak.

In our opinion, the conditions that supported that secular bear market could not be more different than today’s. In fact, we would argue they are polar opposites. The stable disinflation that prevailed for over two decades ended with the credit crisis. Since 2008, deflationary concerns have dominated monetary policy decisions. This has intensified with the slowdown in China and commodity weakness. Economic weakness has been met with policies of taxation and austerity. Increasing regulation of finance, health care, and energy capture the headlines, while insidious smaller scale regulations continue to accumulate across most industries. The "Cold War" has returned with proxy battles breaking out in the Middle East. Failed states, refugees, and violence appear to be trending in the wrong direction. The U.S. has seen very limited fallout from the weak global economy and political strife; hence the U.S. dollar and U.S. assets are seen as possible safe havens for now. However, we believe this is a cyclical occurrence for gold, not a secular trend.

The Fed's chronic reluctance to raise rates suggests that it sees the economy as so fragile that it cannot withstand a series of relatively miniscule 25 basis point increases. Quantitative easing and near-zero rate policies have failed to deliver the stronger GDP growth predicted by the Fed. We believe businesses do not want to invest when they do not know the impact of a promised rate hike that never seems to materialize. Yet, these failed policies have been copied by central banks around the world with no better results: Perpetually changing expectations and outlook risks losing market confidence. After six years of economic expansion and a bull market that took the S&P 5004 Index to new highs, it appears that rates could remain near zero into the next recession. The multi-generational low in interest rates has created misallocations of wealth that could bring a rash of unintended consequences that become apparent in the next economic downturn. Artificially low rates incentivize risk-taking, redistribute income to those with financial assets, and distort the allocation of credit. Examples include ballooning levels of student debt, auto loans, margin debt, high-yield debt, commercial real estate, and luxury residential construction.

Brazil is the First to Fall

The first significant economy to fall into recession in the current weak global economy is Brazil. It is reminiscent of the U.S. "dot-com bubble"5 in 2000, when a fall in technology stocks and business activity brought a recession. Around the same time, accounting scandals were revealed and the Enron debacle was exposed. The U.S. dollar embarked on a bear market and the gold bull market ensued. The contemporary Brazilian economy is driven more by commodities than technology, but the result is the same. The commodities bust triggered economic weakness and recession. A massive graft scandal at state-run oil giant Petrobras has sent shock waves through the rest of the economy. S&P cut the nation's debt rating to junk with a negative outlook. Since 2011, the Brazilian real has been in a bear market, and the market has worsened over the past year. The gold price in Brazilian real terms is at all-time highs, gaining 40.7% so far this year.6  

Perhaps the Fed’s trepidation with raising rates is justified. Maybe Brazil is the first domino to fall. Is Japan or China next? Will the U.S. economy be the last to topple? Brazilians have found gold to be a prudent store of wealth. Perhaps it is not too soon for those in many other countries to think about ways of preserving wealth should mainstream investments begin to falter.

INIVX Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned -4.41% for the one-month period ending September 30, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR) returned -2.28% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.                     

Average Annual Total Returns (%) as of September 30, 2015

  1 Mo* 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV -4.41 -34.45 -21.83 -0.22 8.14
INIVX at Max 5.75% sales charge -9.94 -38.19 -22.75 -0.81 8.03
GDMNTR Index -2.28 -35.32 -23.60 -6.09 --

*Monthly returns are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.45%. Expenses are capped contractually until 05/01/16 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: Back to Fundamentals http://www.vaneck.com/muni-nation-blog/back-to-fundamentals-09-30-15/ Take a deep breath and tune out the noise of recent market volatility and chatter about the non-action taken by the Federal Reserve (Fed).

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Van Eck Blogs 9/29/2015 10:58:30 AM September 30, 2015

Take a deep breath and tune out the noise of recent market volatility and chatter about the non-action taken by the Federal Reserve (Fed). To me, the simple message that emerges is that over the long term (10 years in the example below) the municipal asset class has touched what I feel are two very important demands of many investors: low volatility and comparatively attractive returns, particularly on a taxable equivalent basis. Couple those elements with historically low default rates1 and one might say, “Oh yeah, munis have been generally steady, as advertised.”

As we enter the final quarter of the year and put behind us a Summer of Discontent, in which China devalued its currency, Greece tiptoed on the precipice of default, and the U.S. economic recovery continued enigmatically while investors hung upon every syllable the Fed uttered, it occurs to me that investors may want to revisit the potential benefits of the municipal asset class.

If doubt about the economy and movement of interest rates is creating uncertainty for investors, munis should be capable, in my opinion, of helping the undecided chart a near-term strategy. If comparative returns and lower relative volatility are important elements in one’s portfolio design, this chart might be helpful in providing one of those “Ah…ha” moments of discovery. Let’s get back to fundamentals while the rest of the world waits to see what happens.


 

Fixed Income and Equity Index Comparison of Total Return and Risk Over the Past 10 Years

Chart  

  jim_colby_signature  

Post Disclosure
 

Source: FactSet. As of August 31, 2015. Indices are unmanaged and are not securities in which an investment can be made. See below for index descriptions and an explanation of material differences between them. Past performance is not indicative of future results. Standard deviation is the statistical measure of the historical volatility of a portfolio. *Tax-equivalent return is calculated using the 39.6% highest effective federal tax rate. Results would have been substantially lower using lower tax brackets.

The chart shows the return of the Barclays Municipal Bond Indices on a tax-equivalent basis and compares such returns and standard deviations to other asset classes as represented by indexes. Fixed income investments have interest rate risk, which refers to the risk that bond prices generally fall as interest rates rise and vice versa. U.S. government bonds are guaranteed by the full faith and credit of the United States government. Municipal and corporate bonds are not guaranteed by the full faith and credit of the United States and carry the credit risk of the issuer. Municipal bonds are exempt from federal taxes and often state and local taxes. U.S. Treasuries are exempt from state and local taxes, but subject to federal taxes. Other securities listed are subject to federal, state and local taxes. Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. Prices of bonds change in response to factors such as interest rates and issuer’s credit worthiness, among others. Investing in smaller companies involves risks not associated with investing in more established companies such as business risk, stock price fluctuations, and illiquidity.

Van Eck does not provide tax advice or guidance. You should consult your own tax professional about the tax consequences of a particular investment.

The indices listed are unmanaged and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in any Fund. An index’s performance is not illustrative of any Fund’s performance. Indices are not securities in which investments can be made.

1Source: Moody’s Investors Services; “U.S. Municipal Bond Defaults and Recoveries, 1970-2013”

Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index. Barclays U.S. Corporate High Yield Index is the Corporate component of the Barclays U.S. Credit index. The index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. Barclays U.S. Credit Index The index measures the performance of investment grade corporate debt and agency bonds that are dollar denominated and have a remaining maturity of greater than one year. Barclays High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year. Barclays U.S. Treasury Index is the U.S. Treasury component of the Barclays U.S. Government Index. The index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. S&P 500® Index is widely regarded as the best single gauge of the U.S. equities market, including 500 leading companies in major industries of the U.S. economy. MSCI EAFE Index is comprised of the MSCI country indexes capturing large- and mid-cap equities across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of emerging markets.

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Spin-Off in the Spotlight: Cheung Kong Property Holdings Ltd. http://www.vaneck.com/blogs/spundamentals/ Cheung Kong Property Holdings Ltd. was spun off from CK Hutchison Holdings Ltd. in June 2015, the latter being the result of a merger between Cheung Kong (Holdings) Ltd. and its publicly traded subsidiary Hutchison Whampoa Ltd.

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Van Eck Blogs 9/25/2015 10:55:45 AM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.                      

Spin-Off Company: Cheung Kong Property Holdings Ltd. (Ticker: 1113 HK)
Parent Company: CK Hutchison Holdings Ltd. (Ticker: 1 HK)

Spin-off Date: June 2, 2015
GSPIN Index Inclusion Date: July 1, 2015

Cheung Kong Property Holdings Ltd. (“Cheung Kong Property”) (Ticker: 1113 HK) was spun off from CK Hutchison Holdings Ltd. (Ticker: 1 HK) in June 2015, the latter being the result of a merger between Cheung Kong (Holdings) Ltd. and its publicly traded subsidiary Hutchison Whampoa Ltd. The spin-off of Cheung Kong Property separates the real estate assets of Cheung Kong Holdings and Hutchison Whampoa from the remaining conglomerate and will create a pure-play real estate business that we believe should garner a market valuation more reflective of its asset value. The businesses of CK Hutchison Holdings will span utilities, transportation assets, telecommunications, port services, and energy. We expect Li Ka-shing, the richest man in Asia, to continue to own 30% of both entities.

Cheung Kong Property Holdings operates under four segments: property sales, property rentals, hotels and serviced suites, and property and project management. The first segment derives its revenue from the development and sale of real estate, particularly residential properties. The property rental segment generates stable and recurring income from a portfolio of premium commercial real estate located primarily in Hong Kong. Hotels and serviced suites comprise properties in Hong Kong, China, and the Bahamas that are held for short-term leases. The company also owns equity interests in a number of publicly traded real estate investment trusts.

At the time of the spin-off, the company’s real estate portfolio was appraised at a market value of HKD420 billion,1 yet it is recorded on the balance sheet at a value of only HKD275 billion. By making this adjustment, one finds that the current share price represents a 35% discount to net asset value, thus allowing investors to purchase this real estate portfolio at an attractive price and potentially benefit from the value created by future development projects. Though the headwinds facing the Chinese economy are real and may well impact fundamentals for the China- and Hong Kong-based real estate assets, we believe the discount to net asset value at which the shares currently trade appears excessive.

1As appraised by various real estate brokers, including DTZ.

As of August 31, 2015, Cheung Kong Property Holdings Ltd. represented 1.2% of SPUN's total net assets.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio1   0.62%
Net Expense Ratio1   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly

1Expenses for SPUN are capped contractually at 0.55% until at least 2/01/17. Cap excludes certain expenses, such as interest.

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Fed's Rate Delay is Disappointing http://www.vaneck.com/blogs/van-eck-views-september-24-2015/ September 24, 2015: The Fed’s decision was a bit of a surprise to us. We have been monitoring U.S. labor market statistics, and unemployment has been falling steadily. We believe that this was strong enough data for the Fed to start its interest increase cycle...

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Van Eck Blogs 9/24/2015 2:39:26 PM

Thursday, September 24, 2015

Watch Video CEO Jan van Eck: Fed's Rate Delay is Disappointing  

“The Fed’s decision was a bit of a surprise to us, because we had been looking at the U.S. labor market statistics. Unemployment has been falling, and we thought that this was good enough data for the Fed to start its interest rate increase cycle.”

Watch Now  

Video Transcript

Tight U.S. Labor Supports a Rate Increase

TOM BUTCHER: Jan, what is your reaction to the recent decision by the Federal Open Market Committee to hold off on raising interest rates? And what kind of effect is this decision going to have on gold and oil?

JAN VAN ECK: I think that the Fed’s decision was a bit of a surprise to us, because we had been looking at the U.S. labor market statistics. Unemployment has been falling, and we thought that this was good enough data for the Fed, which seems to be data-driven, to start its interest rate increase cycle, which it has been communicating to markets now for many months.

Oil Prices Unaffected

VAN ECK: We don't think the Fed’s decision to keep rates unchanged affects oil prices at all, because we're in a supply-driven commodity cycle, meaning what caused commodity prices to fall over the past several years has been a significant oversupply in global markets. Although this was not always apparent, it's clearly turned out that way. And it usually takes an extended period of time for companies to stop spending money on exploration and for production to actually start tailing off, which it has started to do. I believe there needs to be a lot of pain felt by the commodity markets in order for these oversupply cycles to work themselves out. The Fed’s inaction brought virtually no surprises on the oil side.

Gold Rallied Strongly

VAN ECK: Gold rallied quite strongly in the wake of the Fed’s decision. For gold, lower interest rates are good, because gold competes with, if you will, money in the bank. If money in the bank is paying high interest rates, then that is typically negative for gold. I think there is growing concern that the developed markets may be stuck in a stagnant growth cycle, and there are questions about what central banks would do to help stimulate economies if we were to slide into a global recession. I think this pessimism is helping gold quite a bit right now, but we will have to see. One last point, this is seasonally a good time for gold, as historically the August to December time period has tended to be positive for gold.

2015 is a Waterfall Year for China

BUTCHER: What about two other themes that we've been discussing recently: China and the emerging markets?

VAN ECK: 2015, thus far, has been a waterfall year for China and its interaction with the rest of the world. For its previous 20 years of growth, China had been cut off from global financial markets. China's trade exploded after 2001, when it joined or acceded to the WTO, the World Trade Organization. But the financial markets are basically capital controls in terms of limiting the convertibility of the renminbi and other currencies. We think that China is in a 24-month cycle of opening up its capital account, and this has started to impact global markets, especially as we saw in the summer of 2015. For example, small changes such as a 3-4% devaluation in China's currency had a dramatic ripple effect throughout the world's financial markets. In general, China is decreasing its interest rates over a multi-year cycle, and the Fed is likely to increase interest rates in the near term. This might cause a bit of a seismic mismatch of policies over the next several years. What is interesting is that China is decreasing interest rates at the same time that it is liberalizing its financial markets. So we have these multiple crosscurrents. The point we make is that financial markets, in my view, don't like uncertainty, and that's what we’ve seen coming out of China this year. At the same time, I do think that China's central bank doesn't mind surprising markets. It doesn't tend to pre-announce or to communicate its actions ahead of time, and the world should get used to that.

EM Have Been Expecting Higher U.S. Rates

BUTCHER: What about emerging markets?

VAN ECK: Overall I believe that emerging markets have been reacting to concerns about China’s slowing growth. They have also been anticipating rising interest rates or tighter monetary policy in the United States, because some of their funding is in U.S. dollars. The question is: Is this cycle over or not? We think that emerging markets have become extremely attractive now, especially emerging markets equities. They probably led the world in the recent bottoming out cycle, so we believe it's a good time to look at emerging markets going into 2016.

BUTCHER: Wonderful. Thank you very much Jan.

 
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Moat Investing: Media Sector Not So Darling in August http://www.vaneck.com/blogs/moat-investor-monthly-september-2015/ Negative performance plagued global equity markets in August, and our moat-focused Indices were no exception. In the U.S., moats were hurt by the media industry sell-off on the back of reports of ESPN subscriber losses, which exerted price pressure on the global media industry.

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Van Eck Blogs 9/21/2015 2:13:37 PM


For the Month Ending August 31, 2015

Performance Overview  

August was a difficult month for global equity markets. Both moat-focused Indices trailed their respective benchmarks: the U.S.-oriented Morningstar® Wide Moat Focus IndexSM trailed the S&P 500® Index (-6.96% versus -6.03% ), and the harder hit internationally focused Morningstar® Global ex-US Moat Focus IndexSM trailed the MSCI All Country World Index ex USA (-8.66% vs. -7.64%).


Domestic Equity Markets: Media Slumps Amid Market Sell-Off  

American Express (AXP) was August's sole positive performing constituent in the Morningstar® Wide Moat Focus IndexSM (MWMFTR). AXP remained in the black despite its recent struggles, which were linked to the rising U.S. dollar and the company's split with fellow wide moat-rated firm Costco (COST). MWMFTR’s exposure to media companies Discover Communications (DISCA) and Twenty-First Century Fox (FOXA) was the largest detractor from performance for the month. The media industry sell-off was driven, in part, by reports of ESPN subscriber losses (ESPN is owned by wide moat-rated firm Disney (DIS)), which exerted price pressure on the industry as a whole.


International Equity Markets: Down, Down Under  

Several sector exposures in the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) hurt performance in August, most notably financials; Australian and Asian banks were significant detractors. Strong performance from Indian pharmaceutical firm Sun Pharmaceutical Industries (SUNP) barely mitigated the negative impact Indian companies had on MGEUMFUN. Materials sector firms and Canadian and Hong Kong companies were also a drag on Index performance. International media companies did not escape the “ESPN Effect,” as New Zealand media firm SKY Network Television (SKT) also fell significantly during the month.

 

(%) Month Ending 08/31/15

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 08/31/15

Morningstar
Wide Moat Focus Index

 
Top 5 Index Performers
Constituent Ticker Total Return
American Express Company AXP 0.87
Google Inc. Class A GOOGL -1.47
Spectra Energy Corp SE -2.75
Hershey Company HSY -3.00
Exxon Mobil Corporation XOM -4.12

Bottom 5 Index Performers
Constituent Ticker Total Return
Williams Companies, Inc. WMB -8.16
Franklin Resources, Inc. BEN -10.91
Amgen Inc. AMGN -13.65
Discovery Communications, Inc. Class A DISCA -19.44
Twenty-First Century Fox, Inc. Class A FOXA -20.59

View MOAT’s current constituents

 

Morningstar
Global ex-US Moat Focus Index

 
Top 5 Index Performers
Constituent Ticker Total Return
Sun Pharmaceutical Industries Limited 524715 5.24
Contact Energy Limited CEN 2.84
Canadian Imperial Bank of Commerce CM 1.16
Genesis Energy Ltd GNE -0.21
Banco de Chile CHILE -1.63

Bottom 5 Index Performers
Constituent Ticker Total Return
Ambuja Cements Limited 500425 -13.94
Australia and New Zealand Banking Group Limited ANZ -17.49
Sun Hung Kai Properties Limited 00016 -17.52
Veda Group Limited VED -17.64
SKY Network Television Limited SKT -21.03

View MOTI’s current constituents

 
 
 

As of 06/19/15

Morningstar
Wide Moat Focus Index

 
Index Additions
Added Constituent Ticker
Google Inc Class A GOOGL
ITC Holdings Corp ITC
Berkshire Hathaway Inc Class B BRK.B
The Hershey Co HSY
American Express Co AXP
Blackbaud Inc BLKB
Varian Medical Systems Inc VAR
Twenty-First Century Fox Inc Class A FOXA
U.S. Bancorp USB
Franklin Resources Inc BEN

Index Deletions
Deleted Constituent Ticker
Emerson Electric Co EMR
Baxter International Inc BAX
Express Scripts Holding Co ESRX
Core Laboratories NV CLB
General Electric Co GE
Philip Morris International Inc PM
Schlumberger NV SLB
International Business Machines Corp IBM
Gilead Sciences Inc GILD
W W Grainger Inc GWW

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents

 

Morningstar
Global ex-US Moat Focus Index

 
Index Additions
Added Constituent Ticker
Slater & Gordon Ltd Ord SGH
Iluka Resources Ltd Ord ILU
Westpac Banking Corp Ord WBC
Svenska Handelsbanken SHB A
National Australia Bank Ord NAB
Millicom Intl Cellular Sa Sdr MIC SDB
State Bank Of India Ltd Ord 500112
Koninklijke Philips Nv Ord PHIA
Sun Pharmaceutical Industries Ord SUNP
Wipro Ltd Ord 507685
Toronto Dominion Bank Com TD
Contact Energy Ltd Ord CEN
Nestle Sa Ord Reg NESN
Commonwealth Bank Australia CBA
Csl Ltd Ord CSL
Bg Group Plc Ord BG
Wharf Holdings Ltd Ord 4
Genesis Energy Ltd Ord GNE
Unilever Nv Ord Cert UNA
Bank Of Nova Scotia Com BNS
Banco De Chile Sa Ord CHILE
Capitacommercial Trust Reit Unit CCT

Index Deletions
Deleted Constituent Ticker
Banco Santander Brasil Sa Units SANB11
Cpfl Energia Sa Ord CPFE3
Telefonica Brasil Sa Pfd VIVT4
E On Se Ord EOAN
Banco Bradesco Sa Ord Pfd BBDC4
Itau Unibanco Hldg (Multiplo) Pfd ITUB4
Catamaran Corp Com CTRX
Peyto Exploration & Development PEY
Suncor Energy Inc Com SU
Banco Santander Sa Ord SAN
China Shenhua Energy Co Ltd Ord H 01088
Industrial & Commercial Bk China 01398
China Construction Bank Ord H 00939
Cia Cervecerias Unidas (Ccu) Ord CCU
Rexam Plc Ord REX
Bank Of China Ltd Ord H 03988
Valeant Pharmaceuticals Intl Com VRX
Abb Ltd Ord Reg ABBN
Rio Tinto Plc Ord RIO
Grupo Aeroportuario Pacifico GAP B
Coca Cola Femsa Sab Ord L KOF L
Diageo Plc Ord DGE

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Assessing China's Economy http://www.vaneck.com/blogs/van-eck-views-september-14-2015/ September 14, 2015: Evaluating China is generally not easy for the average investor, or investment committee for that matter. I believe there are three categories of data points that help simplify the process: economic growth, internal re-balancing, and systemic risks.

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Van Eck Blogs 9/14/2015 3:32:19 PM

Monday, September 14, 2015

Economic Growth, Internal Rebalancing, and Systemic Risks

In my June 29 post, I suggested that investors identify credible information sources about China to help make investment decisions. I wrote: "Whether one decides that China equities represent an opportunity or risk to global portfolios, one should have an informed, up-to-date view on China’s economy and markets." I believe China is important to investors and the global economy, regardless of whether one invests in it. This was one of my two overarching messages to investment committees during the summer. The other "soapbox" point I made was that while acknowledging that liquidity is an important concern, predicting asset class illiquidity is a fool’s errand. (More on that point at another time.)

Key Factors to Consider

Evaluating China is generally not easy for the average investor, or investment committee for that matter. I believe there are three categories of data points that help simplify the process:

  1. Economic Growth
  2. Internal Rebalancing
  3. Systemic  Risks

 

1. Economic Growth

GDP is the headline number for economic growth. Given China’s overall size and its share of world GDP and trade, there is no doubt that one should have a view on China’s GDP growth. Given China’s size, economic growth is likely to fall into a multi-year downward trend as the economy moves toward a new equilibrium. There will be fluctuations in this downward trend, but I doubt that anyone will gain much value from watching this statistic alone. 

What then might one watch to monitor China’s growth? 

Contrary to general skepticism about Chinese growth statistics, I am unaware of any independent brokerage research studies or research boutiques that generate meaningfully different Purchasing Manager’s Index [PMI] numbers or other growth statistics from what the Chinese government publishes. Quite a few researchers have estimated what they call China’s "true" economic growth rate, which currently falls in the 6%-6.5% range, not far from China’s official headline number. Although some local governments fudged numbers to meet growth quotas in the past, pressure to overstate growth data has diminished as China’s central government has shifted focus to "quality growth" in the past several years. Still, there are two noteworthy caveats. China's first calendar quarter is generally worth dismissing given the Chinese New Year, a national week-long holiday that may fall in a different month each year. More importantly, however, I believe it is key not to confuse growth statistics that relate to sectors with ones that measure overall growth. For example, some analysts prefer to only focus on coincident indicators, such as electricity/power, which reflect China’s old legacy, commodity-heavy manufacturing sector. These growth statistics alone fail to give the true measure of China's growth.

2. Internal Rebalancing

As China’s growth slows, its economy is rebalancing along a number of dimensions, and investors should monitor these underlying economic transitions: 

  • From state-owned enterprises ("SOE") to private businesses ("SMEs" or small-medium enterprises);
  • From manufacturing and fixed investment-based to services-based (to see the evidence, consider the Caixin China PMI chart, but keep in mind that it’s a sentiment-based indicator and can be significantly influenced by extraneous events such as a stock market decline);
  • From luxury consumption to middle class consumption (and from bigger ticket consumer cyclicals, e.g., housing and autos, to more immediate, "millennial" consumption such as electronics, sportswear, etc.);
  • From coastal city growth (Shenzhen/Shanghai) to the growth of inland provinces and agriculture reform;
  • From export-led growth to internally led growth (with more value being added in the global supply chain).

 

There has been an explosion of commentary about China this summer, triggered by China’s stock market rise and fall, and its mini currency devaluation in August. As long as individual stories and factoids can be understood within the context of the larger narrative of China’s overall transition, I don't believe that investors need be alarmed.  For example, I listened to a great story on National Public Radio (NPR) recently about a cement plant that had gone from 1,000 to 100 workers in a city laced with blocks of unoccupied apartment buildings. The reporter had been in China for 20 years and had not seen anything like it. While alarming at face value, this anecdote makes sense if one recognizes that the "old China" construction sector is currently in a recession. Going forward, more stories like this can be expected, but should not signal undue investor concern, in my opinion.

3. Systemic Risks

In addition to watching growth and rebalancing trends, investors may be served by watching systemic risks in China. Systemic risks are the real danger, in my mind.  The systemic risk of a collapse in the financial system is perhaps one of the most difficult for investors to monitor. The liberalization of interest rates and the renminbi (RMB) pose threats to the SOE banks, which are visible because they are publicly listed. There is also a large informal financial sector outside the SOE banks that includes high-yield privately placed debt and online finance. As a proxy for financial system risk, I suggest looking at the price of Chinese banks (recall that stock prices were a good indicator of the global meltdown of 2008).

The other systemic risk is the debt buildup that has grown since the 2009 financial crisis. The Chinese government has hiked high-yield interest rates to try to help curtail its big debt buildup.  A mysterious lack of defaults or a big drop in the yields of loans to risky mid-size corporates, currently yielding about 13%, would worry me. A third reliable indicator of systemic risk virtually anywhere is mismatched incentives. My biggest concern of late is the lack of market accountability in city and provincial lending; 2014/2015 reforms have attempted to address these issues. Finally, the last systemic risk that concerns me is political risk. After the Russian issues of 2014, I believe investors are more sensitive to political risk. I would say that this risk is unknowable, but when it happens, it is readily apparent from news outlets. 

In sum, I think systemic risks are the hardest risks for casual non-Chinese investors to analyze. Why? We simply don’t have the common sense that comes with daily, China-based experience to ground our judgments. Also, it is not easy to find good explanations of Chinese government policies designed to address systemic risks, given the government’s traditional lack of transparency. Yes, this is changing, but it is evolutionary, not revolutionary. One of the best sources I have found on these policies tends to be reports from macro economists working at Chinese brokerage firms.

Conclusion

I believe that watching overall Chinese growth, understanding how the economy is rebalancing at the sector level, and being aware of systemic risks will give investors insights into China’s likely future impact on the world economy. One could fairly argue that these are false distinctions. A slowing economy can expose more systemic issues and constrain policy tools to deal with them. Also, a failure to re-balance consumption over fixed asset investment may affect overall growth. However, in an economy as large as China’s, it is important, I believe, not to over-stress welcome changes at the sector level that will contribute to larger, positive transitions that support growth. I also think it is key not to confuse the identification and naming of systemic risks with their actual occurrence. 

 
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Gold Reacts Positively to Market Events in China http://www.vaneck.com/blogs/gold-commentary-august-2015/ For the Month Ending 08/31/15: Gold bullion rose 3.6% in August and gold equities posted gains despite declines in many global equity markets, precipitated by negative events unfolding in China.

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Van Eck Blogs 9/8/2015 12:00:00 AM

  Download Commentary PDF  

For the Month Ending August 31, 2015

Gold Bullion Gains 3.6% in August

Gold reacted favorably to the panic that afflicted global financial markets in August. Events unfolding in China brought weakness and volatility to markets around the world. Gold started trending higher on August 11 when the Chinese government made adjustments to the way the yuan is currently managed, enabling the currency to experience its largest two-day decline in more than a decade. Some analysts saw this as a desperate attempt by China to help stimulate its ailing economy through currency devaluation. With confidence waning, on August 18 China’s stock markets began a plunge to new lows for the year, with the Shanghai CSI 100 Index1 declining 24% in six trading days. This reverberated through global markets as commodities, emerging market currencies, and many developed market stock indices declined to new lows.

While the gold market encountered considerable volatility, gold bullion outperformed most asset classes in August with a $38.98 (3.6%) gain, compared to declines of 1.5% for copper, 1.3% for the U.S. Dollar Index (DXY)2, and 6.0% for the S&P 500 Index.3 Gold stocks felt the pressure of the general stock market selloff, however, they were still able to achieve gains for the month, as shown by the 2.06% advance of the NYSE Arca Gold Miners Net Total Return Index (GDMNTR)4 and the 4.66% gain in the Market Vectors Junior Gold Miners Index.4  

Gold Supply Appears Tight

Several indicators suggested tight supplies of physical gold in August. After experiencing heavy redemptions in July, gold bullion exchange-traded products became buyers, Shanghai Gold Exchange premiums trended higher, and gold forward lease rates turned negative. Offsetting these bullish indicators were reports of hedging by gold producers in Australia. With the Australian dollar gold price up 9.8% this year, some producers are seeing an opportunity to use limited hedging (selling gold forward) to ensure cash flows to high cost operations or to service debt.

Investor Panic Supports "Safe Haven" Status

In August, gold performed as a safe haven investment, evidenced by its outperformance against most asset classes in the midst of widespread panic. Investors were afraid that further economic weakness in China might spread to engulf the global economy. Since 2013 gold has experienced several short-covering rallies sparked by geopolitical or financial stress. The last took place in January, when Greek debt problems reemerged and the Swiss broke its currency's peg to the euro. These rallies had no legs because, in our opinion, the risks that drove them posed no real or lasting threat to the global economy, particularly the U.S. economy or financial system.

Now financial risk is again driving gold and we ask, is this another temporary short-covering rally or the beginning of a sustainable trend? Once the short covering has run its course, is there enough investment demand to drive gold?

Have Markets Overreacted to China's Slump?

While the weak Chinese economy certainly bears watching, we believe international markets are overreacting. China has been working with the International Monetary Fund (IMF) and others to enable the yuan to achieve international currency reserve status. The IMF is expected to make a decision, which may come later in 2016, on whether to include the yuan in its currency basket. The recent disclosure of China’s gold reserves and moves to eventually enable the yuan to float freely are part of this process. It looks as though the Chinese government is learning the hard way that changing currency policy in the midst of a stock market rout is not the best timing.

The meteoric rise of the Chinese stock market this year was driven mainly by a change in margin rules that enabled retail investors to speculate. With the market crash, the Chinese government is again learning the hard way what happens when inexperienced investors are given access to loans used to speculate on the market.

While these events are important to China, their fundamental impact on the global economy and financial system dissipates as one moves further from Asia. The Asian crisis of 1997 - 1998 was much worse, eventually triggering a Russian debt default and the implosion of hedge fund management firm, Long Term Capital Management. Yet the U.S. economy survived unscathed and gold’s overall trend was down from 1996 to 1999. Similarly, we don’t believe current events in China can serve as the source of longer-term support for gold as a safe-haven investment in the West.

The Greater Risk Lurks in the U.S.

Rather than focus on China, we see far greater risk elsewhere. The markets are quite nervous, which is not a good backdrop at a time when the Federal Reserve (Fed) is poised to make a historic rate decision. With policy rates near zero, the Fed’s primary tool (rate cuts) to kick start the economy is useless, in our view. This probably accounts for much of the nervousness, as investors must decide whether a shock in Asia can generate a market tsunami that reaches U.S. shores with virtually no policy protection.

Now the rest of the world must wonder whether the Fed will set off a ripple effect with a rate increase that turns into a tsunami on distant shores. The U.S. economy is relatively healthy and could probably withstand a series of rate increases. However, the Japanese economy contracted by 1.6% in the second quarter.5 China’s struggles are widely known. Brazil is in recession. European growth is slow and consumer prices advanced just 0.2% (annualized) in August.6 The price of WTI crude oil fell below $40 per barrel in August and copper is nearing $2.00 per pound. The flow of easy money brought on by quantitative easing7 and the carry trade into emerging markets reversed course when the Fed began to taper a couple of years ago. The world outside of the U.S. is now on the verge of deflation. Will rising rates, a strong U.S. dollar, and economic opportunities in the U.S. suck the remaining economic life (growth capital) out of the global economy? Can the U.S. remain an island of prosperity?

An important difference between now and the period of the 1997 Asian crisis are the imbalances in the global financial system caused by radical monetary and fiscal policies. Imbalances in interest rates, sovereign debt, asset prices, and central bank holdings are currently at unprecedented levels. Raising rates in a weak global economy with macro imbalances has risks. Postponing or eventually reversing course would damage the Fed’s credibility and would risk a loss of confidence.

As we move towards 2016, these are some of the issues that could be supportive of the gold market. The more probable source of systemic risk lies in Washington, D.C., not Beijing.

INIVX Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned 3.25% for the one-month period ending August 31, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR) returned 2.06% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.                     

Average Annual Total Returns (%) as of August 31, 2015

  1 Mo* 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV 3.25 -45.21 -19.73 1.87 8.58
INIVX at Max 5.75% sales charge -2.76 -48.37 -20.67 1.26 8.47
GDMNTR Index 2.06 -46.90 -22.56 -4.39 --


 

*Monthly returns are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.45%. Expenses are capped contractually until 05/01/16 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: Stirred, Not Shaken http://www.vaneck.com/muni-nation-blog/shaken-not-stirred-09-03-15/ A play on the famous catchphrase offered by the fictional James Bond in the movie Goldfinger begins to describe, I believe, the state of the financial markets as August came to a close.  

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Van Eck Blogs 9/3/2015 10:33:46 AM A play on the famous catchphrase offered by the fictional James Bond in the movie Goldfinger begins to describe, I believe, the state of the financial markets as August came to a close.

Yes, the world’s markets have been shaken these past two weeks with declines in asset values that The New York Times1 suggested erased more than $1 trillion of value in the stock markets. Like the aftershocks of an earthquake, the volatility that followed continues to create unease. It is curious that even in the face of precipitous declines in the equity indices, fixed income markets have hovered in a relatively narrow range, neither rising nor falling with the same drama as equities. The rise and fall of the 10-year U.S. Treasury bond during August was in the two and a half point range. However, total return was a positive 0.04% for the month of August, according to the Barclays U.S. Treasury Index. Furthermore, the Barclays Municipal Bond Index rose 0.20%.

What is curious about these results is that the fixed income markets were only slightly stirred by the convulsions of the equity markets. Under different economic conditions, fixed income would have been expected to soar under a “flight to quality” scenario. As we all know, however, the Federal Reserve (Fed) seems to be holding us hostage to its interpretation of economic conditions by continuing to keep rates at or near zero as it has for the past six years, seeking a proper moment to end this “stimulus.” Since that moment is anticipated to arrive sooner rather than later, few dare to commit to an “all in” strategy with fixed income. Still, even the smallest incremental return for fixed income stands in contrast to the negativity that currently permeates other markets. There is some evidence that municipals have continued to deliver what is desired of them during times of uncertainty: modest appreciation and a steady stream of tax-advantaged income. I anticipate that this theme will persist through the remainder of the year.

As of August 31, 2015 1 MO Total Return 3 MO Total Return YTD Total Return
Barclays Municipal Bond Index 0.20% 0.83% 1.04%
Barclays U.S. Treasury Index 0.04% -0.01% 0.91%


 

1The New York Times, Business Section, September 1, 2015

  jim_colby_signature  

Post Disclosure  

The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index. The Barclays U.S. Treasury Index is the U.S. Treasury component of the Barclays U.S. Government Index. The index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more.  

A 10-year U.S. Treasury bond is a debt obligation issued by the United States government that matures in ten years.  

An obligation rated ‘AAA’ has the highest rating assigned by Standard and Poor’s.  

According to Standard and Poor’s, an obligation rated ‘BBB’ exhibits adequate protection parameters and is still considered investment grade.  

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Technology and Innovation in Unconventional Energy http://www.vaneck.com/blogs/van-eck-views-august-2015/ August 31, 2015: Discussion on advances in horizontal drilling and fracking (hydraulic fracturing), and how the adoption of technology factors into our investment analysis.

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Van Eck Blogs 8/31/2015 3:32:19 PM

Monday, August 31, 2015


Watch Video Technology and Innovation in Unconventional Energy  

Shawn Reynolds: "The majors are still stuck in the old model, trying to drill in deepwater megaprojects, which we are now finding out generally don't work and didn't work with oil at $100 a barrel. The independent E&P (exploration and production) companies are now showing that they can be successful, drill great wells, and grow with oil at $30 a barrel."

Watch Now  

 

Transcript

 

Fracking and Horizontal Drilling Combined

TOM BUTCHER: I'm here today with Shawn Reynolds, Co-Portfolio Manager of Van Eck's Global Hard Assets Strategy. Looking back over the past several years, what do you think are some of the most important innovations that you have seen in the unconventional energy space?

SHAWN REYNOLDS: Two of the technologies have been around in basic form for decades. For 50 or 60 years, both horizontal drilling and fracking (hydraulic fracturing) have existed, but what has changed recently is these technologies have been combined and optimized. 

The way I like to think about it is that you have this horizontal shale that might be 100 to 200 feet thick. If you drilled vertically through the shale, there might be a little bit of oil that would come to the borehole and eventually make it to the surface, but you have only accessed the first 200 feet. You know that there is more oil and gas in there, but not much of it is coming to the borehole. If you vertically fracture that borehole, then a little bit more comes up to the surface. Now, with the new technology, you can go into that same borehole and drill horizontally so that you stay within that formation for not just 100 feet or 200 feet, but 1,000 to 10,000 feet. You can now fracture all of it and have economic volumes of oil coming into the borehole and making it to the surface. 

It has been the combination of these two technologies (horizontal drilling and fracking) that has allowed this to happen. The most fascinating part of it to me is that if you go back 15 years most wells were drilled vertically. The whole idea behind drilling vertically was to keep weight off the drill bit. As with any drill, if you push too hard, it will bind up so you have to keep weight off the bit when you drill vertically. When you turn that corner and switch to horizontal drilling, you have to put weight on the drill bit. That is a big deal and you also have to make sure that when you drill horizontally you stay within your target zone. Drillers now have the ability to snake the drill through because not all beds are completely flat and horizontal. They can undulate through the shale as there are usually faults. Sometimes they have to drop down 100 feet and directionally steer the drill to stay within a horizon that may be more than a mile and a half down and two miles out. 

BUTCHER: Are the E&P companies also optimizing based on their use of different types of sands and fluids? What else can they optimize?

REYNOLDS: That is the fracking aspect of it, i.e., the sand and the fluid combination. Each situation calls for a unique recipe given that every rock differs and has varying chemical compounds and chemical makeup. You need to understand how you can maximize the fracture stimulation, which is putting the cracks in the rock and then keeping those cracks open while not damaging the rock. The amount, size, and quality of the sand and the chemical makeup of the fluid that transports the sand into the rock determine what then comes back out. The fluid will always interact with the chemical makeup of the rock and sometimes it can damage the formation and shut it down. There are a real art and science to figuring out the perfect recipe for not just the different formations on a geographic basis, but even different parts of the same formation in the same basin.

Oil Drilling Speeds Are Faster

BUTCHER: Are people in general drilling much faster as well?

REYNOLDS: Absolutely. Quite often you start off doing a lot of scientific work and exploration. It may take 30 to 40 days to get the first well down, but now they have gotten the timing down to ten, seven, or sometimes even four days to drill some of these wells. We believe this is a big progression in terms of productivity.

BUTCHER: Do you think we might see any sort of radical advances in the next couple of years, or a black swan event that we had not even thought about before that might help us?

REYNOLDS: I think it is fair to say we have seen a black swan event.  Seven or eight years ago no one would have predicted that we would have been able to add 5 million barrels a day to production in just five years. That is staggering. I do not think that has ever happened in the modern history of the oil industry. Going back to the 1970s, no country outside of the Organization of the Petroleum Exporting Countries (OPEC) has ramped up production that quickly.

At this point, I see production technology as more evolutionary today. I think we will continue to see improvements in fracking techniques and gain even more precision in drilling. Many of the tools that take the different logging measurements, such as resistivity, sonic, and nuclear, are in our view getting better all the time. The resolution is improving so that you are actually able to measure on a millimeter basis, and that generally makes everything much more accurate.

Technology's Growing Impact on Valuations

BUTCHER: With the importance of technology, when you are looking at the valuations of various E&P companies, do you look at the technologies that they deploy as part of the valuation process?

REYNOLDS: Absolutely. Technology is a critical part of what we do every day, particularly right now with current oil prices down. Cash flow is at a premium and balance sheets are stretched for many companies. We believe it is important for companies to continue to push the edge on technology to help lower costs or to raise returns. However, if you have a stretched balance sheet and your cash flow is tight, you are likely not going to push the envelope on technology. You will likely continue to do exactly what you did yesterday and last year because you know it works and could provide a bridge to the next cycle. 

If you have a great balance sheet with some cash flow, I would continue to push on technology. We have seen time and time again that the companies that push technology are often the ones that raise returns, do a better job in drilling, and add significant chunks of reserves. At the end of the day, this is how we believe the most value is created. 

Management Needs to Embrace New Business Model

BUTCHER:  Technology is one of the factors that make a top-rated unconventional E&P company. What are the other factors?

REYNOLDS: Using technology not just to drill, but to help get you in the right position to begin with. That gets back to having some good geologic work. I also think it is key to have a management team that embraces virtually all of this. We discussed how the traditional business model has done a 180. Many of the individuals who are running the companies now have been around since we were doing more conventional stuff, and they have had to embrace this different view of the geology, risk parameters, and day-to-day operations. I think they would benefit from bringing it all together and driving it as a new business model and strategy. 

It has been fairly impressive how quickly the industry has adapted. Look at the majors versus the U.S. independents.  Many of the majors are still stuck in the old model, trying to drill in deepwater megaprojects, which we are now finding out usually don't work and didn't work with oil at $100 a barrel, while some of the independent E&P companies are now showing that they can be successful, drill great wells, and grow with oil at $30 a barrel. 

Flexibility Among Today's Unconventional E&Ps

BUTCHER: Thinking about this in the current environment of low oil prices: Is the ability of the top ranked E&P companies to change what they are doing quickly one of the reasons they are surviving?

REYNOLDS: They're certainly more nimble, much more nimble than they were 15 years ago, more nimble than the majors, in my opinion. It's the business model, the business strategy, and the ability to throttle on and throttle off with shale. When you have the conventional stuff, you found it, you knew how much was there, and you knew you had to replace it. You're always out drilling for new replacements. With shale, you know what the reserve and resource potential is. You have to work the engineering problem around it, with prices and costs, and get it to an economic state. I see much more flexibility to throttle on and off than in the past. 

BUTCHER: Shawn, thank you very much.

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Spin-Off in the Spotlight: Howard Hughes Corp. http://www.vaneck.com/blogs/spin-offs-august-2015/ Howard Hughes Corp. (NYSE: HHC), a GSPIN constituent, is a real estate development company that was spun off from General Growth Properties (NYSE: GGP), a mall REIT emerging from bankruptcy in 2010.

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Van Eck Blogs 8/30/2015 3:32:19 PM

Written by Horizon Kinetics' Research Analysts and CFAs Ryan Casey and Salvator Tiano, who bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

 

Spin-Off Company: Howard Hughes Corp. (NYSE: HHC)
Parent Company: General Growth Properties Inc. (NYSE: GGP)

Spin-off Date: November 2010
GSPIN Index Inclusion Date: January 1, 2011

In 2010 Howard Hughes Corp. (NYSE: HHC), a real estate development company, was spun off from General Growth Properties (NYSE: GGP), a mall Real Estate Investment Trust (REIT) emerging from bankruptcy. At the time, the company was trading at a significant discount (as much as ~50%) to book value, while the book value itself represented assets recorded at valuations far below fair value, having been acquired decades, even generations, earlier. The South Street Seaport property in lower Manhattan, for example, was carried on the balance sheet at approximately $3 million, about the price of a decent sized apartment in that area.

Early in the company’s life as an independent entity, one could have argued that the land and property portfolio was worth significantly more than the market capitalization of the company. In addition, it was clear that the very purpose of the spin-off was to properly develop these properties, a number of them having unusually significant redevelopment value. Early confirmation of this thesis was illumined when the management team hired to run this company was required (and, obviously, agreed to) invest $19 million of their own capital in warrants that were locked up for seven years and priced, effectively, significantly out of the money – in essence, a negative sign-on bonus, perhaps unique in the annals of senior executive hiring. Clearly these insiders, with decades of industry experience and with access to all of the company’s information, believed deeply in the long-term value of these assets.

Howard Hughes has already had success; however, the development of these assets is still in the early stages. For example, based on the recent prices paid for lots throughout the Master Planned Community segment of its portfolio, we believe the value of its land in this segment justifies the current valuation of the entire company. Similarly, we believe recent prices paid for its planned developments in Hawaii again justify the valuation of the entire company, and the scope of the South Street Seaport development continues to grow as the company identifies additional value-creating opportunities.

 

As of July 31, Howard Hughes Corp. represented 1.3% of SPUN's total net assets.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio1   0.62%
Net Expense Ratio1   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly

1Expenses for SPUN are capped contractually at 0.55% until at least 2/01/17. Cap excludes certain expenses, such as interest.

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Moat Investing: Goes Global http://www.vaneck.com/blogs/moat-investor-monthly-august-2015/ For the Month Ending 07/31/15: The new Moat Investor Monthly highlights key insights and performance trends impacting global moat investing. Internationally-focused MOTI joins U.S.-focused MOAT to provide investors with global exposure to Morningstar’s moat methodology and valuation principals.

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Van Eck Blogs 8/30/2015 3:32:19 PM

 

For the Month Ending July 31, 2015

Performance Overview  

July showed contrasting results for the two Morningstar indices, although both were negatively impacted by the deepening weakness in the energy sector. For U.S. equities, the Morningstar® Wide Moat Focus IndexSM outperformed the S&P 500® Index (+2.27% versus +2.10%). By contrast, for international equities the Morningstar® Global ex-US Moat Focus IndexSM trailed the MSCI All Country World Index ex USA (-1.80% vs. -0.28%).


Domestic Equity Markets: GOOGL and AMGN Shine  

Tech giant Google, Inc. (GOOGL) was the top performer for U.S.-centric Morningstar Wide Moat Focus Index (MWMFTR) posting total return performance of +21.75%. Biotech giant Amgen (AMGN) also performed notably well (+15.03%), and had its fair value estimate raised by Morningstar analysts in July. By contrast, several of the Index’s energy sector firms struggled in July, including Williams (WMB) and Spectra (SE), which declined 8.56% and 7.18% respectively.


International Equity Markets: Energy Was Draining  

Many of the constituent companies within internationally-focused Morningstar Global ex-US Moat Focus Index (MGEUMFUN), were subjected to the broad sell-off in commodities last month, notably gold miner Eldorado Gold Corp. (EGO) and agribusiness company Potash Corp. (POT). Mexico, Hong Kong, and Canada all weighed down Index performance for the month. Bu contrast, several international moat-rated companies supported the Index, led by industrials and consumer staples companies.

 

(%) Month Ending 07/31/15

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 07/31/15

Morningstar
Wide Moat Focus Index

 
Top 5 Index Performers
Constituent Ticker Total Return
Google Inc. Class A GOOGL 21.75
Amgen Inc. AMGN 15.03
V.F. Corporation VFC 10.54
Blackbaud, Inc. BLKB 7.39
Twenty-First Century Fox, Inc. Class A FOXA 5.98

Bottom 5 Index Performers
Constituent Ticker Total Return
Exxon Mobil Corporation. XOM -4.80
Franklin Resources, Inc. BEN -7.10
Spectra Energy Corp SE -7.18
Polaris Industries Inc. PII -7.46
Williams Companies, Inc. WMB -8.56

View MOAT’s current constituents

 

Morningstar
Global ex-US Moat Focus Index

 
Top 5 Index Performers
Constituent Ticker Total Return
Royal Philips NV PHIA 10.00
CSL Limited CSL 9.34
Unilever NV Cert. of shs UNA 8.33
Lafarge SA LG 7.65
Svenska Handelsbanken AB Class A SHB A 5.56

Bottom 5 Index Performers
Constituent Ticker Total Return
Potash Corporation of Saskatchewan Inc. POT -10.58
Agricultural Bank of China Limited Class H 01288 -11.15
Tata Motors Limited 500570 -12.16
Dongfeng Motor Group Co., Ltd. Class H 00489 -14.13
Eldorado Gold Corporation ELD -16.63

View MOTI’s current constituents

 
 
 

As of 06/19/15

Morningstar
Wide Moat Focus Index

 
Index Additions
Added Constituent Ticker
Google Inc Class A GOOGL
ITC Holdings Corp ITC
Berkshire Hathaway Inc Class B BRK.B
The Hershey Co HSY
American Express Co AXP
Blackbaud Inc BLKB
Varian Medical Systems Inc VAR
Twenty-First Century Fox Inc Class A FOXA
U.S. Bancorp USB
Franklin Resources Inc BEN

Index Deletions
Deleted Constituent Ticker
Emerson Electric Co EMR
Baxter International Inc BAX
Express Scripts Holding Co ESRX
Core Laboratories NV CLB
General Electric Co GE
Philip Morris International Inc PM
Schlumberger NV SLB
International Business Machines Corp IBM
Gilead Sciences Inc GILD
W W Grainger Inc GWW

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents

 

Morningstar
Global ex-US Moat Focus Index

 
Index Additions
Added Constituent Ticker
Slater & Gordon Ltd Ord SGH
Iluka Resources Ltd Ord ILU
Westpac Banking Corp Ord WBC
Svenska Handelsbanken SHB A
National Australia Bank Ord NAB
Millicom Intl Cellular Sa Sdr MIC SDB
State Bank Of India Ltd Ord 500112
Koninklijke Philips Nv Ord PHIA
Sun Pharmaceutical Industries Ord SUNP
Wipro Ltd Ord 507685
Toronto Dominion Bank Com TD
Contact Energy Ltd Ord CEN
Nestle Sa Ord Reg NESN
Commonwealth Bank Australia CBA
Csl Ltd Ord CSL
Bg Group Plc Ord BG
Wharf Holdings Ltd Ord 4
Genesis Energy Ltd Ord GNE
Unilever Nv Ord Cert UNA
Bank Of Nova Scotia Com BNS
Banco De Chile Sa Ord CHILE
Capitacommercial Trust Reit Unit CCT

Index Deletions
Deleted Constituent Ticker
Banco Santander Brasil Sa Units SANB11
Cpfl Energia Sa Ord CPFE3
Telefonica Brasil Sa Pfd VIVT4
E On Se Ord EOAN
Banco Bradesco Sa Ord Pfd BBDC4
Itau Unibanco Hldg (Multiplo) Pfd ITUB4
Catamaran Corp Com CTRX
Peyto Exploration & Development PEY
Suncor Energy Inc Com SU
Banco Santander Sa Ord SAN
China Shenhua Energy Co Ltd Ord H 01088
Industrial & Commercial Bk China 01398
China Construction Bank Ord H 00939
Cia Cervecerias Unidas (Ccu) Ord CCU
Rexam Plc Ord REX
Bank Of China Ltd Ord H 03988
Valeant Pharmaceuticals Intl Com VRX
Abb Ltd Ord Reg ABBN
Rio Tinto Plc Ord RIO
Grupo Aeroportuario Pacifico GAP B
Coca Cola Femsa Sab Ord L KOF L
Diageo Plc Ord DGE

View Latest MOTI Reconstitution Report
View MOTI’s list of current constituents

 

Source: Morningstar. View MOAT's list of current constituents  

Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any security.



 
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Munis: Summer of Discontent http://www.vaneck.com/muni-nation-blog/summer-of-discontent-08-19-15/ Although summer is not yet over, the "vacation" that many investors seem to have taken with respect to their muni investment perspective may well be coming to an end.   

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Van Eck Blogs 8/19/2015 3:16:43 PM August 19, 2015

Summer of DiscontentAlthough summer is not yet over, the "vacation" that many investors seem to have taken with respect to their muni investment perspective may well be coming to an end.

The timeline leading up to the summer months included headline-generating withdrawals from mutual funds and a calendar of newly issued bonds that may push the 2015 yearend totals beyond those of last year. Even though rates were pushed higher by these elements and concerns for Puerto Rico and Illinois, the apparent reticence of investors to engage seems to have created a better landscape for buyers of municipals now than earlier in the year

I believe this 2015 summer of discontent should now be viewed in the context of opportunity, not avoidance.

It should be clear that the vast diversity of the marketplace appears to have remained little changed by the select and unfortunate affairs plaguing the governments of Puerto Rico and Illinois. It should also be clear that whether it is the devaluation of the Chinese Yuan or the drop in oil prices cutting revenue and investment in Canada and the U.S., the Federal Reserve is left with little room to effect more than a small rise in short-term rates through the remainder of the year, in my opinion. That specific concern, over a potential Federal Reserve rate hike, has overshadowed the other events this summer mentioned above. But now it appears the focus should be on fundamentals and opportunity. One month ago (see post from Thursday, 7/16/2015) I summarized the rise in rates to date for investment grade municipals. I feel it is not a stretch to view that move as complementary to any rate move by the Federal Reserve.

Barclays notes that currently its Municipal Bond Index is positive for the month of August, as well as positive (+1.00%) for the past three months. Its summary of July shows, again, that risk-adjusted returns for investment grade municipals continue to stand out versus other asset classes.

It is time to renew the search for opportunity within the muni asset class. I believe the ETF vehicle is well suited to maximizing current returns with the added liquidity of the stock market.

With still six weeks of summer remaining, removing the "dis" from “content” seems to be an achievable goal.

 

  jim_colby_signature  

 

Post Disclosure

The Barclays Municipal Bond Index is a broad market performance benchmark for the tax-exempt bond market; the bonds included in this index must have a minimum credit rating of at least Baa.

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Gold Market Declines on Disappointing China Reserves Announcement http://www.vaneck.com/gold-commentary-july-2015/ For the Month Ending 07/31/15: The gold market was met with selling pressure following the July 17 release by the People’s Bank of China (PBOC) of its official gold holdings.]]> Van Eck Blogs 8/5/2015 12:00:00 AM

Download Commentary PDF  

For the Month Ending July 31, 2015

Reserves Figure Lower than Expected

The gold market was met with selling pressure following the July 17 release by the People’s Bank of China (PBOC) of its official gold holdings. The PBOC announced a 57% increase in gold reserves since its last announcement in 2009. China now holds 1,658 tonnes of gold in its foreign currency (forex) reserve, which is sixth highest globally behind the U.S., Germany, the International Monetary Fund (IMF), Italy, and France. This confirms suspicion surrounding China’s official gold purchases and the PBOC remarked that gold is a unique asset and recognized that gold has always been a key part of reserve management and diversification.

The market, however, was disappointed because many analysts had expected to see much higher gold holdings. There have been estimates based on gold flows through Hong Kong and domestic production that suggest that since 2009 there has been a significant amount of gold in China, perhaps over 2,000 tonnes, that is unaccounted for. We now know that not all of this purported surplus has gone into the PBOC vaults. There are pockets of the gold market that are opaque to market observers, and we can assume that more Chinese gold than previously thought has gone to individuals, institutions, or other government entities as jewelry, bars, and coins, or for use as collateral.

Gold represents 1.65% of China’s forex reserves, which is a slight increase from 1.5% in 2009. We had thought China might be targeting gold reserves in the double-digit range like many of its Western counterparts. However, this announcement suggests the PBOC is content to maintain gold reserves at a percentage that is comparable to its Asian neighbors.

Gold experienced heavy redemptions in the bullion exchange-traded products beginning on July 17 that continued to month-end. Also weighing on gold was weakness in the overall commodities complex brought on by the collapse of the Chinese stock market, as West Texas Intermediate (WTI) crude fell 20.8% and copper declined 9.3% in July. On July 20, gold fell through the technically important $1,100 per ounce level and reached a new cycle low of $1,072 per ounce. In the midst of summer seasonal weakness, there hasn’t been much anecdotal evidence of a demand response to the new lows from India or China. Gold finished the month at $1,095.82 per ounce for a loss of $76.60 (6.5%).

Cyclical Bear Market Persists for Now

Gold stocks took a hard fall as gold was making new lows. The NYSE Arca Gold Miners Index (GDMNTR) suffered a 22.5% decline, while the Market Vectors Junior Gold Miners Index (MVGDMJTR) fell 19.7% for the month. This might be the worst cyclical bear market for gold equities ever. It is certainly the worst since gold became freely trading in the post-Bretton-Woods era of fiat currency. We looked at the Barron’s Gold Mining Index (BMGI) and found that since 1971 there have been six cyclical bear markets with peak-to-trough declines ranging from 53.8% to 79.3%, with -79.3% being the current bear. In terms of duration this market —at 51 months—ranks third longest within a range from 20 months to 64 months. Over those same bear markets, gold bullion has seen peak-to-trough declines ranging from 33.7% to 56.2%, with the current market coming in second worst at -44.2%. The last time the BMGI traded at the current lows was the beginning of the last bull market in January 2002, when gold was $280 per ounce.

This analysis demonstrates that gold and gold shares have fallen to historically extreme levels. While there is always potential for further losses, it suggests that the bear market is capitulating and that a turning point could be on the horizon. What we believe many market observers are missing is that gold is broadcasting a warning. It is the antithesis of a euphoric market bubble. Gold’s collapse is the market’s expression of extreme complacency towards systemic financial risk. Gold is being shunned as a universal safe haven because there is unbridled confidence in the Federal Reserve Bank’s (Fed) ability to steer the economy to lasting health, as evidenced by the strength of the U.S. dollar, the U.S. stock market, and demand for U.S. Treasuries.

Is the Glass Half Full...?

It is difficult to identify a catalyst that marks an end to the gold bear market. Perhaps once the much anticipated Fed rate increase finally happens, the markets might adjust their risk outlook. Normally central banks raise rates to extinguish inflation or cool an overheated economy. However, the recovery from the Great Recession has been the weakest in the post-war era with virtually no signs of unwanted inflation. Never has the Fed raised rates for no reason other than a desire for them to return to historic norms. With current rates near zero, it lacks sufficient power to stimulate the economy if another downturn materializes.

Markets are obsessed with this Fed rate decision because it is virtually impossible to tell whether the glass is half full or half empty. The economy has been growing, albeit slowly, and full employment is within reach. Household balance sheets have returned to health and fuel prices are low. The economic mood we see across the country is generally positive and some areas are booming. Tax receipts are up and the fiscal deficit is declining. Perhaps the economic momentum is strong enough to continue through a series of rate increases. In our view, the glass must be half full.

...or Half Empty?

On July 7, the IMF warned of the risk of stalling the U.S. economy by raising rates too early and speculated that the Fed may be forced to reverse course. The IMF also downgraded its forecast for global growth to its weakest since the financial crisis. The Fed has consistently had to downgrade its U.S. growth forecasts, and this year is no exception, with first half GDP growth coming in at less than 2%.

The IMF’s chief economist stated “The post-crisis world is one of high debt and it doesn’t take much with these debt dynamics to go wrong.” While the U.S. budget deficit is no longer in the trillion dollar neighborhood, at $431 billion, it remains a growing burden as federal spending keeps rising.

Improvements in the U.S. unemployment rate have come largely from working-age people dropping out of the labor force, dragging the labor participation rate to 62.6%, a 38-year low. Meanwhile, productivity growth has been much weaker than normal. In our view, these are not signs of a robust economy. They are signs that the glass is half empty.

The Glass May be Cracked

In the longer term, we believe the glass is cracked, completely empty. Economies have been permanently disabled by a regulatory and tax regime that has become so overwhelming that we feel it stifles innovation, business creation, and growth. Government entitlements keep growing and we expect that the next generation in line will face retirement and medical programs that will likely have become bankrupt. The massive growth in the supply of money in the U.S., Japan, and Europe has not generated the intended economic growth. Instead, it has burdened our central banks with hordes of government debt and other securities. Artificially low, near-zero interest rates have distorted investment decisions and promoted asset inflation. The recent intervention the Chinese government imposed on its stock markets is just the latest example of the heavy-handed tactics that governments (communist, socialist, democratic, or autocratic) impose when things don’t perform as they wish. The efficiency and discipline of free markets are being forever compromised.

Because none of this is new, we are astonished by the depth and length of the gold bear market. We can only conclude that the most prominent barometer of the utter complacency towards systemic risk in the markets is the depressed prices of gold and gold equities.

Austerity for Gold Miners

The sub-$1,100 per ounce gold price will likely throw the gold miners into a new realm of austerity. The efforts to lower costs on all fronts we have seen over the past several years continues. We expect further cuts to General and Administrative (G&A) expenses, exploration, and dividends. Capital projects will be stretched out further or postponed. While we had earlier felt that sub-$1,100 per ounce gold prices were a low probability, we nonetheless positioned the portfolio to weather much lower prices. The average all-in mining cost for the companies we track (excluding royalty/streaming companies) is $863 per ounce. The companies in our portfolio operate 103 mines, of which only five have all-in mining costs of over $1,100 per ounce. The companies in our coverage universe operate 191 mines, of which 30 have all-in costs over $1,100 per ounce. If gold prices remain at current levels for long, companies will be forced to curtail unprofitable production.

INIVX Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned -19.4% for the one-month period ending July 31, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR) returned -22.5% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.  

 

Quarter End: Average Annual Total Returns (%) as of July 31, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV -19.40 -45.86 -18.42 2.08 8.58
INIVX at Max 5.75% sales charge -24.07 -48.96 -19.38 1.48 8.47
GDMNTR Index -22.45 -46.48 -21.25 -4.13 --


 

^Monthly returns are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.45%. Expenses are capped contractually until 05/01/16 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Markets in Flux: China, Gold, and Oil http://www.vaneck.com/blogs/van-eck-views-july-2015/ July 31, 2015: As we look back at the past six months for China's equity markets, we saw tremendous appreciation and then a correction, and almost panic among investors...

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Van Eck Blogs 7/31/2015 3:32:19 PM

Friday, July 31, 2015

Watch VideoCEO Jan van Eck: China, Gold, and Oil  

Jan van Eck, CEO: "Commodity markets, in particular, are driven more by supply than demand. Too much supply was created, perhaps fueled by dreams of China's growth….It may take years for that pricing discipline to work and for supply to contract, and for investment to contract."

Watch Now  

 

Video Transcript

 

China's Equity Markets

TOM BUTCHER: Jan, do you believe that the recent Chinese government actions are going to be effective in possibly preventing any further rout in the country's stock markets?

JAN VAN ECK: As we look back at the past six months for China's equity markets, we saw tremendous appreciation and then a correction, and almost panic among investors as the markets underwent the correction. We still believe that the reform efforts to internationalize the Renminbi and to free interest rates within China are very much on track. I think the concern that the Chinese government had about the equity markets and some of the steps it took have been over-interpreted by investors. Some of the steps are ones that have been taken in many other markets. In other words, there are many markets where funds were set up to buy into equity markets to provide support. There have been markets where short selling was banned, and it wasn't in China, factually speaking.  The practice has been reconsidered, but it actually was stopped in the developed markets during the financial crisis. There seems to be a little bit of looking for worse news in this bad news phenomenon. I think it will take more time for investors to get more comfortable with China's equity story. 

Our view is that the systemic risks have been addressed through China's reforms over the last two years and that the reform movement will continue; we'll see what happens in the second half of this year. China is making strides to internationalize the Renminbi. The declaration of the Renminbi as a reserve currency [by the IMF] is something that the Chinese government is hoping for in the next 12 months or so.

BUTCHER: Going forward it looks as if things are on a bit more solid ground for the second half? 

VAN ECK: Our point is that there's a lot of noise, but the one thing to look at when you're investing in equities is valuations. It's like anything you buy in life: What are you paying for it? We think valuations are the key to looking at Chinese equities. We thought that they were way too cheap at something like 10 times earnings a year ago. They got more fairly valued, but we think that's a good guide. In our actively managed strategies as well, it's really important what you pay [for holdings]. We are looking for growth situations in China and elsewhere in the emerging markets, but I think you want to pay the right price and have that as a discipline. I believe that's a good guide for both mutual fund and ETF investors.

Gold's Decline

BUTCHER: Jan, what is going on in the gold market at the moment?

VAN ECK: I think it's virtually impossible to predict the short-term movements of any particular commodity. Gold does tend to trade on technicals as much as sentiment, and I think it's being impacted by the concern over deflation and rising interest rates. I think there are a number of asset classes that are probably overdone, and we just need to get through the first rate hike by the Fed [U.S. Federal Reserve] and then we will likely have a better idea of how things shakeout. Right now many asset classes are acting in anticipation of a potential rate hike. I think some investors just can't wait for it to happen.

Oil: Supply and Demand

BUTCHER: Looking at the energy market, would you expect to see any rise in the amount of Iranian oil going into the market anytime soon? 

VAN ECK: The energy markets, as our experts will tell you, are affected by many different factors. I think what's caused the latest hiccup in July has been the prospect of Iranian oil coming on the market. In general, supply has to be taken out of the markets and projects have to be stopped, and funding has to come to an end. That is slowly happening, but we believe it's going to be a slower recovery in price. We think that recovery will happen. We have seen price lows, as we've said before, but it's going to be a choppy experience going forward.

We're seeing some pressure now, so I think it's a little bit hard to predict prices. We see $60 a barrel, and maybe a little higher, as the target in the medium term, and that is the range we are looking at for next year. We reached $60 temporarily [in May], and it's not surprising that we've had a setback, but we are now headed in the right direction.

Second Half Outlook

BUTCHER: Would that lead to a choppy second half of this year? 

VAN ECK: I think commodities are in a bear market that started in the financial crisis, and have yet to recover. That extends to energy, base metals, and precious metals; they are all under pressure. It's what our house view has been for the last several years, which is that we're in a lower-inflation, high-debt market characterized by low interest rates and a financial system that is working through some of its excesses. 

Commodity markets, in particular, appear to be driven more by supply than demand. There was way too much supply that was created, perhaps fueled by dreams of China's growth, or dreams of other things. It can take years for a pricing discipline to work and for supply to contract, and for investment to contract. We're in that process of healing in the energy markets and other markets, but it takes time. 

BUTCHER: Jan, thank you.

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Spin-Off in the Spotlight: South32 http://www.vaneck.com/blogs/spin-offs-july-2015/ GSPIN constituent South32 Limited (S32.AU) was spun off from BHP Billiton Limited (NYSE: BHP) in May 2015. BHP Billiton, the world’s largest diversified metals and mining company, pursued the spin-off as a way to simplify its portfolio...

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Van Eck Blogs 7/31/2015 3:32:19 PM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who together bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

Spin-Off Company: South32 Limited (S32.AU)
Parent Company: BHP Billiton Limited (NYSE: BHP)

Spin-off Date: May 18, 2015
Index Inclusion Date: July 1, 2015

GSPIN constituent South32 Limited (S32.AU) was spun off from BHP Billiton Limited (NYSE: BHP) in May 2015. BHP Billiton, the world’s largest diversified metals and mining company, pursued the spin-off as a way to simplify its portfolio by focusing on its four "pillars", i.e., iron ore, copper, petroleum, and coal, as well as on higher margin and longer reserve life assets. South32 is a diversified metals and mining company focused primarily on base metals. Its 11 mines are located in Australia, South Africa, and South America, and produce aluminum, manganese, metallurgical and thermal coal, nickel, silver, lead, and zinc.

The streamlining of BHP Billiton’s business seems appropriate given that the non-core assets that are transferred to South32 represent a wider range of commodities, compared to BHP Billiton's four pillars, while generating only 6% of the company's fiscal 2014 underlying EBITDA. From that perspective, we believe that these assets only serve as a distraction to BHP Billiton’s management, whose time would be better spent overseeing the resources generating the vast majority of the parent company's profits.The demerger may also benefit shareholders in the newly created company. For reasons detailed above, it is likely that South32's assets lacked appropriate oversight as part of BHP Billiton.

The spin-off will most likely lead to increased management attention and better decision making. South32 should gain independent access to both debt and equity capital. That is another critical aspect that justifies the demerger. As part of BHP Billiton, South32's assets competed internally for resources with other BHP Billiton projects that typically offered significant returns and based on fundamental corporate finance principles, were attracting the bulk of the company’s investments.

While South32's assets are not of the same quality both in terms of profitability and reserve life as those of its former parent, most of them are situated at the bottom half of its respective industry peer group's cost curves. The new company is well capitalized, with limited debt and access to an undrawn credit facility. Given that the fundamentals for most of South32's commodities are currently weak and their prices are well below their 10-year averages, South32 has the opportunity to use its financial flexibility for accretive acquisitions at the low point of the cycle.

In a nutshell, the separation of South32 from BHP Billiton with the demerger of non-core, underperforming assets, the potential for increased management attention, and a successful turnaround, has many characteristics of a "typical" spin-off.

 

As of July 28, 2015, South32 represented 1.19% of SPUN's total net assets. 

View Current Fund Holdings  

View Current Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio1   0.62%
Net Expense Ratio1   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly

1Expenses for SPUN are capped contractually at 0.55% until at least 2/01/17. Cap excludes certain expenses, such as interest.

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Moat Investing: A Month of Notable Index Additions http://www.vaneck.com/blogs/moat-investor-monthly-template/ Ten companies were added to the Index in late June 2015. Several well-known firms headlined the group of new constituents including Google, Inc. (GOOGL), American Express Co. (AXP), Berkshire Hathaway Inc. (BRK.B), The Hershey Co. (HSY), and Twenty-First Century Fox, Inc. (FOXA).

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Van Eck Blogs 7/31/2015 10:33:46 AM

 

For the Month Ending June 30, 2015

Ten companies were added to the Index after the close of markets on June 19, 2015. Several well-known firms headlined the group of new constituents, including Google, Inc. (GOOGL), American Express Co. (AXP), Berkshire Hathaway, Inc. (BRK.B), The Hershey Co. (HSY), and Twenty-First Century Fox, Inc. (FOXA).

 

Several health care and energy firms were on the list of those companies removed from the Index this quarter due to their valuations increasing relative to the eligible wide-moat universe.

Please see below for index data including performance, top/bottom performers and composition.



 

(%) as of 06/30/15

Domestic Equity Market

 

International Equity Markets

 

(%) 1-Month Ending 06/30/15

Morningstar®
Wide Moat Focus IndexSM

 
Top 5 Index Performers
Constituent Ticker Total Return
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29
Sciences, Inc. EMR 4.39
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29

Bottom 5 Index Performers
Constituent Ticker Total Return
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29
Sciences, Inc. EMR 4.39
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29

View MOAT’s current constituents

 

Morningstar®
Global ex-US Moat Focus IndexSM

 
Top 5 Index Performers
Constituent Ticker Total Return
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29
Sciences, Inc. EMR 4.39
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29

Bottom 5 Index Performers
Constituent Ticker Total Return
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29
Sciences, Inc. EMR 4.39
Gilead Sciences, Inc. GILD 10.29
Gilead, Inc. ESRX 12.29

View MOTI’s current constituents

 
 
 

as of 06/30/15

Morningstar®
Wide Moat Focus IndexSM

 
Index Additions
Added Constituent Ticker
Gilead Sciences, Inc. GILD
Gilead, Inc. ESRX
Sciences, Inc. EMR

Index Deletions
Added Constituent Ticker
Gilead Sciences, Inc. GILD
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents

 

Morningstar®
Global ex-US Moat Focus IndexSM

 
Index Additions
Added Constituent Ticker
Gilead Sciences, Inc. GILD
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR

Index Deletions
Added Constituent Ticker
Gilead Sciences, Inc. GILD
Gilead, Inc. ESRX
Sciences, Inc. EMR
Added Constituent Ticker
Gilead Sciences, Inc. GILD
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR
Gilead, Inc. ESRX
Sciences, Inc. EMR

View Latest MOTI Reconstitution Report
View MOTI’s list of current constituents

 

Source: Morningstar. View MOAT's list of current constituents  

Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any security.



 
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Munis: No Summer Doldrums http://www.vaneck.com/muni-nation-blog/no-summer-doldrums-07-30-15/ The muni market has been receiving a great deal of mostly hard-earned attention in all sorts of media this summer. Possibly the spotlight will enlighten an investing population on how tightly woven municipal bonds are...

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Van Eck Blogs 7/30/2015 3:25:14 PM July 30, 2015

No Summer DoldrumsThe municipal market has been receiving a great deal of mostly hard-earned attention in all sorts of media venues this summer. Possibly the spotlight will enlighten an investing population on how tightly woven municipal bonds are to the broad fabric of our country’s growth and well-being. These are some of the issues that have come into focus:

  • Puerto Rico’s current fiscal and financial troubles and credit downgrades;
  • The nation’s failing infrastructure and funding woes;
  • The emergence of the rising burden of pension obligations for states and municipalities;
  • The near failure of the political process in state and local government (such as Illinois) to reach a budget accord to meet its obligations.

In our view, the success of municipal finance is becoming clearer with each new article discussing these and other points. It would appear that there is no summer escape to a quiet paradise for anyone involved in this asset class.

Amidst all the discussions it is instructive to note that I believe the market itself is resilient. Investors have not deterred from allocating a great deal of cash to municipals for reinvestment. Actually, despite the increase in the pace of newly issued bonds year-over-year (we are already at 78% of the 2014 total) and the recent outflows emanating from mutual funds, individual investors (mostly individual investors and separately managed account platforms) appear to continue to consume available supply. As pointed out to me by a leading municipal securities dealer firm, the buy-to-sell ratio for its retail market has consistently been at 2.5% to 3%, which to me has historically indicated healthy demand for the municipal asset class.

Despite the intrusions of the important issues mentioned above, the market seems to receive continued support and interest from investors. As noted in her recent commentary from July 27, Natalie Cohen, Head of Municipal Research at Wells Fargo, reminds us that despite the image that mutual funds currently present, they held only 28% of outstanding municipal securities as of the end of 1Q'15. The household/retail sector still dominates with 42% ownership, also as of the end of 1Q'15. In my view then, the market remains on solid footing with the household sector taking us through potentially challenging times.

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Special Gold Market Update 07/28/15 http://www.vaneck.com/blogs/gold-special-market-update-july-28-2015/ July 28, 2015: While we believe gold stocks are radically oversold, the market is very out of favor with investors and a more gold-positive environment is needed for a turnaround. Gold responds to events that pose a risk to the U.S. or global financial system.

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Van Eck Blogs 7/28/2015 4:11:21 PM

July 28, 2015

Gold Slides as China Fails to Meet Expectations

In the past few weeks, the gold market has suffered a significant decline, triggered mainly by heavy selling following China's disclosure of its official gold reserves on July 17. The People's Bank of China announced a 57% increase in gold reserves to 1,658 tonnes since it last reported in 2009. While this increase shows that China has indeed been accumulating significant amounts of reserve gold, which it views as an important element of its monetary system, the amount fell short of market expectations. 1,658 tonnes represent just 1.6% of China's currency reserves, indicating that the Chinese may not be targeting the higher double-digit percentage of gold reserves held by some of its counterparts in the West. In addition, the stronger U.S. dollar and improved investor sentiment in financial markets have put pressure on gold.

The Final Capitulation?

Our view is that this may be the final capitulation phase of the bear market. As a result of the selloff to a cycle low of $1,072, gold has fallen through the technically important $1,100 level and remains vulnerable to further selling pressure. In the broader context of the cyclical bear market that is nearly four years old, it is now one of the longest and deepest cyclical bears on record. Gold stocks have been hit especially hard and the Philadelphia Stock Exchange Gold and Silver Index is now at levels last seen in 2001 when the gold price bottomed at $254 per ounce.

Gold Stocks are Radically Oversold

While we believe gold stocks are radically oversold, the market is very out of favor with investors and a more gold-positive environment is needed for a turnaround. Gold responds to events that pose a risk to the U.S. or global financial system. While headline-grabbing events in Greece, Ukraine, and the Middle East generate risk locally, they have yet to impact the financial health of the U.S. or global economy. For that we look for the more mundane machinations emanating from the Central Banks. The looming shift in Fed interest rate policies and outlook could have ominous consequences for sovereign debt service, currency values, and investment flows that introduce financial risks or unintended outcomes. This would all be supportive for gold bullion and gold equities.

In terms of our gold investment portfolios, we believe that our gold portfolio investments are financially sound at current gold prices and could withstand further downside. The average all-in mining cost for our portfolio is $863 per ounce. Across the broader industry, gold prices are impinging on the marginal cost of production. If prices remain below $1,100 for a prolonged period, we would anticipate announcements of cuts in unprofitable production or mine closures. 

We will all stay tuned.

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Munis: Value in Municipal Closed-End Funds? http://www.vaneck.com/muni-nation-blog/value-in-municipal-closed-end-funds-07-24-15/ I believe there may be potential value in municipal bond closed-end funds at this point in time. Here are some reasons why.

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Van Eck Blogs 7/24/2015 1:40:37 PM July 24, 2015

Why I like municipal bond closed-end funds (CEFs) now:  

  • Muni CEFs are currently trading at an average discount of 9.35% to their net asset values (NAVs).
  • These significant discounts can represent value in a world where value appears scarce.
  • Buying funds at a discount may enhance the yield investors receive.
  • Yields are currently attractive, averaging approximately 5.8% (at share price), which on a taxable equivalent basis was 6.4% and 9.6% for those investors in the lowest (10%) and highest (39.6%) tax brackets, respectively, on July 22.

 

Premium Discount Graph

 

Source: Van Eck Global Research. As of 7/22/15. This chart does not represent XMPT's premium/discount. It represents the weighted average premium/discount of the underlying closed-end funds (CEFs) held by XMPT. There are many factors that influence the up-down movement of a closed-end fund's share price, such as the fund's yield, performance, and investor demand.  

 

Why I like the Market Vectors® CEF Municipal Income ETF (XMPT) to access CEFs:  

  • XMPT is a portfolio of 84 CEFs in a single trade, offering diversification by fund manager, CEF active investment strategy, and underlying muni bond assets.
  • It offers the benefits of an ETF, including an attractive management fee and tax efficiency.
  • It also offers monthly distributions.
  • The ETF seeks to track an intelligent Index designed to take advantage of CEF’s propensity to shift between premiums and discounts.

 

For more information visit XMPT now.

  jim_colby_signature  

 Post Disclosure  

Securities and holdings of the Fund mentioned in this piece may vary. Diversification neither assures profit nor protects against loss. Fund shares are not individually redeemable and will be issued and redeemed at their net asset value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.  

XMPT’s performance, because it is a fund of funds, is dependent on the performance of the Underlying Funds. The Fund is subject to the risks of the Underlying Funds’ investments, and the Fund’s shareholders will indirectly bear the expenses of the Underlying Funds. In addition, at times certain segments of the market represented by the Underlying Funds may be out of favor and underperform other segments. The shares of a closed-end fund may trade at a discount or premium to its net asset value (“NAV”). Additionally, the securities of closed-end investment companies in which the Fund will invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of closed-end investment companies that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Fund’s long-term returns on such securities (and, indirectly, the long-term returns of the Shares) will be diminished. Investment in the underlying funds may be subject to municipal securities risk, high-yield securities risk, fixed-income securities risk, tax risk, liquidity risk, leverage risk and anti-takeover measures risk. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value.  

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Munis: Halftime Perspective http://www.vaneck.com/muni-nation-blog/halftime-perspective-07-16-15/ We have crossed over into the second half of the 2015 calendar year and with that, it is an academic – but instructive – exercise to see where we have been and how we have performed.

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Van Eck Blogs 7/16/2015 3:41:45 PM We have crossed over into the second half of the 2015 calendar year and with that, it is an academic—but instructive—exercise to see where we have been and how we have performed. Because the thesis of this post is that investors are flush with cash from a variety of sources, I hope to make the point that they will have ample opportunity to deploy that cash into a muni market that is more welcoming than at the first of the year.

Let's Review the Data  

The total return for the Barclays Municipal Bond Index for the first six months of the year ending June 30 was 0.11% and for the Barlcays High Yield Municipal Bond Index it was -1.92%. Issuance of municipal bonds was higher by 3.30% year-over-year and outflows, as indicated by The Investment Company Institute (ICI), accelerated through the end of June, contributing to negative headlines and volatility in fixed income markets. Nevertheless, municipals managed a slight gain despite prevailing sentiment.

The table below makes it clear that whether the rate rise was anticipatory of a Federal Reserve (“Fed”) move or in response to market conditions, investors will be rewarded for their patience with an opportunity to garner nearly 50% more yield from muni income products than was available at the start of the year.

 

Investment Grade Municipal Yield Curve Changes

 

Maturity 12/31/2014 6/30/2015 Change
5 Year 1.32% 1.38% 6 basis points
10 Year 2.04% 2.28% 24 basis points
15 Year 2.33% 2.77% 44 basis points
20 Year 2.58% 3.01% 43 basis points
25 Year 2.77% 3.20% 43 basis points
30 Year 2.86% 3.28% 42 basis points

Source: Municipal Market Data (MMD) as of June 30, 2015.  

 

By every measure ( see post from Thursday, 05/28/2015) I believe cash available for reinvestment in muni portfolios will continue to outstrip new issuance through the summer months (negative $5 billion-$10 billion), setting the stage for a potentially stronger finish, in which demand surpasses supply, to the calendar year-end. This scenario is not too dissimilar to that of 2013-2014, when good performance emerged at the end of the 2013 year.

Finally, another backward-looking but positive longer term sign for the muni market: According to Smith’s Research & Gradings, the major agencies that rate municipal debt upgraded 447 issuers while downgrading 402 during the first six months of 2015. By comparison, in 2014 upgrades versus downgrades were 988 to 682, respectively. The inference drawn from these numbers is that the underlying economic environment is improving for those municipalities that issue debt. This is good news for investors who should be encouraged to know that credit quality continued to improve broadly across the spectrum of municipal bonds.

  jim_colby_signature  

 

Post Disclosure

The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The Barclays High Yield Municipal Bond Index is considered representative of the broad market for below investment grade, tax-exempt municipal bonds with a maturity of at least one year.

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Gold Range-Bound as China Initiatives Show Promise http://www.vaneck.com/gold-commentary-june-2015/ For the Month Ending 06/30/15: Gold traded in a relatively tight $70 per ounce range in Q2; there were no significant changes that would have pushed the price further in either direction.

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Van Eck Blogs 7/3/2015 12:00:00 AM

Download Commentary PDF

For the Month Ending June 30, 2015

Gold Traded in a Tight Range

Gold traded in a relatively tight $70 per ounce range throughout the second quarter. There were no significant second quarter changes in financial risks, economic outlook, or physical demand that would have driven the price further in either direction. Some investors wonder why gold hasn’t reacted to the worsening situation in Greece that has led to a default on International Monetary Fund (IMF) debt and a July 5 referendum on whether to accept the bailout terms set out by the European Union (EU). The reason gold has languished, in our view, is that the worst-case scenario for Greece would likely have a minimal economic impact on Europe and no discernable impact on the rest of the world. During the European sovereign debt crisis a few years ago, Greek debt was held broadly by banks and other investors. Now, most Greek debt is held within the IMF and European Central Bank (ECB) which limits the scope for contagion. The ECB is now engaged in large-scale quantitative easing, providing ample liquidity to the European economy. Also, Greek Gross Domestic Product (GDP) is but a small fraction of total European GDP.

On the other hand, the potential failure of Greece as an EU member could have longer-term implications regarding the viability of the EU and the Euro if it ultimately devolves into a broader failure. In our opinion, such a break-up of the EU would likely create financial upheaval, risks, and uncertainty that are likely to drive gold higher in the longer term.

Markets React to Fed Signals on Rates

For now, gold moves up or down, on decreases or increases, on the chances of a Federal Reserve (the “Fed”) rate increase. On June 5, a strong payroll report increased expectations for a rate increase and gold fell to its June intraday low of $1,162 per ounce. On June 17, the Fed cut its 2015 GDP growth estimates and Fed Chair Janet Yellen made dovish comments that decreased expectations for a rate increase. Gold rose to its June intraday high of $1,206 per ounce on June 18. For the month, gold declined $18.13 (-1.5%) to $1,172.42 per ounce.

A gold market with low volatility and no direction has resulted in a lack of interest in gold stocks. The NYSE Arca Gold Miners Index (GDMNTR) lost 9.38% in June, while the Market Vectors Junior Gold Miners Index (MVGDXJTR) fell 6.58%. 

Positive Corporate Activity Among Gold Miners

Despite the lack of interest in the market, there remains an abundance of positive activity in the gold industry. Low gold prices have brought hardship on companies with excessive levels of debt. We believe many of the large-cap companies took on too much debt during the bull market and are now in the process of reducing it with cash generated from operations and sales of non-core assets. We have been surprised by the positive outcome generated by companies who have acquired gold mines and projects from the majors. A common misperception is that properties offered for sale would come with issues, such as short mine lives, high costs, or operating difficulties associated with aged assets. The list of companies that have bought such operating assets include Northern Star (0% of Fund net assets as of 6/30/15) and Evolution Mining (2.2% of Fund net assets) in Australia, and Coeur Mining (0% of Fund net assets) and Silver Standard (0% of Fund net assets) in North America. In each case, these junior or mid-tier companies are finding ways to cut costs and extend the mine lives of their new acquisitions. A common target for savings is the overhead costs that large companies impose on operations. Such costs may make sense for a large project, but may be wasted at smaller, second-tier assets. The purchasing companies have found that the bureaucracy and many of the services that large companies provide to operations are not necessary or can be contracted out and streamlined.

There was a successful IPO in June by new junior, TMAC Resources (1.0% of Fund net assets as of 6/30/15). TMAC’s history begins in 2008 with Newmont’s (1.4% of Fund net assets) $1.2 billion acquisition of Miramar Mining (0% of Fund net assets) for the Hope Bay project in Nunavut Territory, Canada. Newmont then spent another billion dollars on infrastructure and development only to find that the project could not support the operational size requirements of a major. A few years ago Newmont spun the project into a private company, TMAC. TMAC has assembled an experienced team of mine builders and operators. The IPO raised $109 million and the firm needed to build a modest sized high-grade underground mine that plans to produce just over 150,000 ounces per year. With a resource of over five million ounces, we think the project should have plenty of room to expand and become a “company maker” asset for TMAC.

Newmont was also in the news during June for an asset purchase. The company bought the Cripple Creek & Victor Mine in Colorado from fellow major AngloGold Ashanti (0% of Fund net assets). AngloGold received $820 million to help pay down its debt. Newmont raised equity to pay for the deal which proved challenging in a gold market that is currently out of favor. Nonetheless, Newmont has gained a world class operation on its home turf. This is basically shifting an asset from one major to another, which does not necessarily create value for shareholders. However, Newmont believes it can find efficiencies to reduce costs and make the deal accretive. We shall see. Newmont has shown good progress in reducing its debt load and this acquisition may represent a turning point for the company.

Gold Supported by Increased Demand from China

The bear market in metals has been driven mainly by a drop in Chinese demand. The lone exception is gold, where low prices have largely been driven by weak investment demand in the West. Gold is the only metal that has seen increased Chinese demand in this metals bear market. In our April update, we commented on China’s official gold reserves and the Yuan’s pending potential inclusion in the IMF currency basket. Many believe the Chinese government has been accumulating gold that could play a future role in its monetary system.

Several other developments give a strong indication of the importance of gold to China. On June 22, the Bank of China became the first Chinese bank to join the auction process that sets the gold price in the London market. On July 1, the London Bullion Market Association agreed to specifications set by the Shanghai Gold Exchange to facilitate trading of the 9999 (99.99% fine) kilobar market that is popular in Asia.

Beijing's New Silk Road Initiative

Beijing is also spearheading a “New Silk Road” initiative to facilitate development across Central Asia and parts of the Middle East and Europe. On June 30, 2015, the China Business Review reported that Chinese state-owned conglomerate CITIC Ltd. will invest upwards of $113 billion on projects that include the construction of railways, highways, power grids, pipelines, and internet networks, in conjunction with this initiative. Annual trade among Silk Road countries is targeted to reach $2.5 trillion in ten years. According to the Financial Times, deals worth $46 billion have been signed with Afghanistan, while the Pakistan army has agreed to raise a new division to protect Chinese workers. Meanwhile, Russian gold producer Polyus Gold (0% of Fund net assets) signed a cooperation agreement with China National Gold (0% of Fund net assets) in a ceremony attended by the presidents of both countries. In our view, this suggests the Russians are on board with the New Silk Road.

It remains to be seen whether this bold market initiative can be successful, given the remoteness, cultural differences, and political divisions in this vast region. What is interesting to us is that China has also announced the establishment of an international gold fund with more than 60 countries as members. The project is expected to raise $16 billion to develop gold projects across the New Silk Road. According to Xinhua, the official Chinese news agency, the project will facilitate the acquisition of gold by the central banks of member states. Chinese mining companies Shandong Gold (0% of Fund net assets) and Shaanxi Gold (0% of Fund net assets) would take a combined 60% stake, with the rest owned by financial institutions.

Other Chinese gold companies have been taking advantage of attractive valuations to expand their business. Zijin Mining (0% of Fund net assets) has made nearly $1 billion in acquisitions in the past year, one of which is a 50% interest in Porgera, one of Barrick’s (0.5% of Fund net assets) mines in Papua New Guinea.

Shifting the Center of Gold Pricing to Asia?

All of this indicates to us that China is: 1) striving to place Shanghai on an equal footing in the global gold market with Tokyo, New York, and London; 2) working to transfer the center of gravity for gold pricing from the futures exchange in New York to Asia, where the largest physical markets are located; and 3) establishing a pipeline of gold production to refineries and exchanges that ensures that Asians have access to the gold market if and when the flow of gold from the West to the East dries up. Further development of the gold market in Asia will likely facilitate demand for gold jewelry, investments, and monetary reserves. Thomson Reuters GFMS reported that in 2012, Chinese gold consumption per capita was about 50% of the U.S. and about 65% of Korean per capita consumption. Total gold demand in China in 2012 was 865 tonnes, compared to demand in the U.S. of 190 tonnes. The scope for further demand in Asia could underpin the gold prices for years to come.

 

INIVX Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned -8.07% for the one-month period ending June 30, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR) returned -9.38% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.  

 

Quarter End: Average Annual Total Returns (%) as of June 30, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV -8.07 -34.17 -15.43 4.14 8.58
INIVX at Max 5.75% sales charge -13.39 -37.97 -16.43 3.52 8.47
GDMNTR Index -9.38 -32.16 -18.35 -1.90 --


 

^Monthly returns are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.45%. Expenses are capped contractually until 05/01/16 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: Puerto Rico at a Crossroads http://www.vaneck.com/muni-nation-blog/puerto-rico-at-a-crossroads-07-01-15/ This past weekend Governor Padilla of Puerto Rico inspired this headline in the New York Times “Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable.’”

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Van Eck Blogs 6/30/2015 4:49:45 PM PR FlagThis past weekend Governor Alejandro García Padilla of Puerto Rico inspired this headline in The New York Times: “Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable.’” In an about face, the governor said that the Commonwealth cannot meet its obligations of approximately $72 billion despite non-stop efforts to find a fiscal and monetary solution he thought was reachable when he came to office in 2013.

Historically Puerto Rico has been one of the largest issuers of municipal bonds; this apparent concession, in my view, has significant implications—but no solutions as yet—for investors. It should be recognized that the distribution of Puerto Rico debt has changed significantly in the past two years, appearing to move away from the individual bondholder to the world of hedge funds and private equity.

As we have seen in the past, the municipal market has shown resilience under pressure that, in my opinion, is unsurpassed by many other asset classes. Puerto Rico, depending upon what solutions and actions are to be undertaken, promises to test that premise.

Due to the migration of the credit quality of most Puerto Rico issuers to below investment grade, our municipal high-yield ETFs own the debt of the Commonwealth. As of June 26, the Funds had a modest exposure represented in the table below.

Puerto Rico Exposure
Fund Weight (%)
Market Vectors High-Yield Municipal Index ETF (HYD) 3.12
Market Vectors Short High-Yield Municipal Index ETF (SHYD) 5.37

Source: Van Eck Global. As of 6/26/2015.

Importantly, these ETFs are constructed with considerable diversification across many different issuers to help limit exposure (good and bad). The second table demonstrates this point, detailing holdings from 11 of the public corporations and that of the general obligation bonds of the Commonwealth itself.

Puerto Rico Issuer Weights in Market Vectors High-Yield Municipal Bond ETFs
Market Vectors High-Yield Municipal Index ETF (HYD)
Issuer Weight (%)
PUERTO RICO COMMONWEALTH GENERAL OBLIGATION 0.72
PUERTO RICO HIGHWAY & TRANSPORTATION 0.57
PUERTO RICO COMMONWEALTH AQUEDUCT & SEWER 0.40
PUERTO RICO PUBLIC BUILDINGS AUTHORITY 0.38
PUERTO RICO ELECTRIC POWER AUTHORITY 0.31
PUERTO RICO INFRASTRUCTURE FINANCE 0.24
PUERTO RICO PUBLIC FINANCING CORPORATION 0.15
PUERTO RICO SALES TAX FINANCING CORPORATION 0.13
THE CHILDRENS TRUST FUND PUERTO RICO TOBACCO SETTLEMENT 0.08
UNIVERSITY OF PUERTO RICO 0.05
PUERTO RICO CONVENTION CENTER 0.05
PUERTO RICO COMMONWEALTH GOVT DEVELOPMENT BANK 0.04
Grand Total 3.12
Market Vectors Short High-Yield Municipal Index ETF (SHYD)
Issuer Weight (%)
PUERTO RICO COMMONWEALTH GENERAL OBLIGATION 1.84
PUERTO RICO HIGHWAY & TRANSPORTATION 0.86
PUERTO RICO PUBLIC BUILDINGS AUTHORITY 0.70
UNIVERSITY OF PUERTO RICO 0.65
PUERTO RICO SALES TAX FINANCING CORPORATION 0.37
PUERTO RICO ELECTRIC POWER AUTHORITY 0.35
PUERTO RICO COMMONWEALTH GOVT DEVELOPMENT BANK 0.35
PUERTO RICO CONVENTION CENTER 0.15
PUERTO RICO INFRASTRUCTURE FINANCE 0.11
Grand Total 5.37

Source: Van Eck Global. As of 6/26/2015. These are not recommendations to buy or sell any security.  

On Monday, June 29, a report produced by the former World Bank Chief Economist and former Deputy Director of the International Monetary Fund (IMF), Dr. Anne Krueger, outlined the current conditions and called for significant change, including debt restructuring, to help the Commonwealth return to economic health. That Puerto Rico is at a clearly delineated crossroad is no longer in doubt. We wait to see what path it chooses to follow.

  jim_colby_signature  

Post Disclosure  

Securities and holdings of the Funds mentioned in this piece may vary. Diversification neither assures profit nor protects against loss. Fund shares are not individually redeemable and will be issued and redeemed at their net asset value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

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Spin-Off in the Spotlight: Liberty Broadband http://www.vaneck.com/blogs/spin-offs-june-2015/ GSPIN index constituent Liberty Broadband was spun off from Liberty Media in late 2014 in the most recent move by Chairman John Malone to maximize shareholder value at his various entities. Liberty Broadband’s largest asset is its 25.7% equity interest in Charter Communications.

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Van Eck Blogs 6/30/2015 3:32:19 PM

Written by Horizon Kinetics' Research Analysts and CFAs Ryan Casey and Salvator Tiano, who together bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.  

 

GSPIN index constituent Liberty Broadband (Nasdaq: LBRDA, LBRDK) was spun off from Liberty Media (Nasdaq: LMCA, LMCB, LMCK) in late 2014 in the most recent move by Chairman John Malone to maximize shareholder value at his various entities. Liberty Broadband’s largest asset is its 25.7% equity interest in Charter Communications (NASDAQ: CHTR).

Charter Communications is one of the largest cable operators in the United States. However, the company has lagged competitors in offering its clients a full suite of digital services, such as on-demand movies, phone, and high-speed internet. As a result, the average revenue it earns from its subscribers has been below that of comparable companies. Liberty Media recognized an investment opportunity within Charter Communications: relatively straightforward investments in infrastructure could allow the cable company to meaningfully increase its revenues, but also realized that Charter had the potential to be used as a vehicle to consolidate the cable industry. Liberty Media acquired its equity stake in Charter in 2013 and effectively inserted itself as Charter Communications' controlling stakeholder, allowing it to direct investments and, potentially, invest capital on more favorable terms than would otherwise be available to shareholders of Charter Communications.

Liberty Media’s stake in Charter (along with TruePosition, a wholly owned subsidiary, and a position in Time Warner Cable) were spun off as Liberty Broadband so that the spun off entity would have the ability to raise the capital necessary to roll up cable providers without burdening the remaining Liberty Media businesses with debt or potentially diluting its shareholders. In fact, immediately following the separation, Liberty Broadband raised $700 million via a rights offering to its shareholders.

The roll-up strategy has already begun in earnest, with Charter Communications announcing the pending acquisition of Bright House Networks in March 2015, followed by the proposed merger with Time Warner Cable in May 2015. Liberty Broadband has committed financing for both of these transactions and is expected to control 25% of the merged company once the acquisitions close. These transactions are expected to bring updated systems to the legacy Charter Communications business, provide a number of synergies that should reduce operating expenses across the three businesses, and potentially give the new, consolidated company a significant degree of negotiating leverage in future content deals. Liberty Broadband shareholders have the potential to benefit from these improvements to a greater degree than shareholders of Charter Communications, as Liberty Broadband is effectively a leveraged equity investment in Charter Communications.

View Current Fund Holdings  

View Current Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio1   0.62%
Net Expense Ratio1   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly

1Expenses for SPUN are capped contractually at 0.55% until at least 2/01/17. Cap excludes certain expenses, such as interest.

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The Right Way to Analyze China Equities http://www.vaneck.com/van-eck-views-june-2015/ June 29, 2015: The bottom line is that long term investors should have global equities in their portfolios and China is an important market. But given the volatility of China equities, we believe it is best to incrementally add shares.

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Van Eck Blogs 6/29/2015 3:32:19 PM

Monday, June 29, 2015

China Market Correction Creates Opportunity

The China equity market fell hard last week. Large caps declined 20% from their peak on June 12 and the Shenzhen market dropped 25%.1 Let’s revisit some of the basic fundamentals. The Renminbi [RMB] has been stable this year. Real interest rates in China are currently among the highest in the world. Interest rates in general are on a multi-year decline in our view. China's economic growth is in a steady decline. The manufacturing sectors are definitely under pressure but with services comprising the largest part of China's economy and unemployment remaining low, the economy can handle negative shocks.2

China's stock market run-up was very unhealthy and, in our view, was on the verge of undermining the government’s reform agenda. Stock market regulators have seemed happy to allow several factors to take the air out of the market: pressure on margin lending; new IPOs; equity issuance by companies such as banks; sales of government stakes in companies; and increased use of short selling.

When considering China, we believe that investors should not fixate on interest rate cuts and macro indicators such as GDP growth. Why? China policymakers are more focused on their reform agenda, which involves internationalization of the RMB, reforming the financial sector, and addressing the risks of a credit bubble.

We believe that the smartest thing for investors right now is to consider valuations. Large-cap China equities today aren’t more expensive than U.S. equities.

The bottom line is that long term investors should have global equities in their portfolios and China is an important market. But given the volatility of China equities, we believe it is best to incrementally add shares.

This correction may offer a good entry point in the coming weeks and months, and here is why.

China is the World's Largest Consumer Market

Jack Ma, founder of Alibaba, stated last month that China has become the number one consumer market in the world. It became the number one consumer of metals several years ago (iron ore and copper in 2004). It appears that sooner or later — unless the China Securities Regulatory Commission stops IPOs again — China will become the world’s largest equity market as well.

Investors may want answers to some basic questions.

First, How Much China Should One Own?

After 100 years of extreme government over-management, China has regained its historical share of the global economy (roughly 16%, according to Bloomberg). Will U.S. investors actually equal weight their China and U.S. exposures if China's share of global GDP is the same as that of the U.S.? It seems highly unlikely. China deserves a political risk discount as well as a foreign currency risk discount. These are contributing factors to the perception of China as an emerging market. Perhaps there should be some kind of country cap weighting to international portfolios. This is an issue that U.S. investors haven’t had to address in our history. Perhaps one guidepost to portfolio weights is European investment into the U.S.; we estimate that as of early 2015, Europeans had approximately 10.5% of their total equity fund holdings invested in U.S. equities3. One line of thought that I find nonpersuasive is that China's market is too "immature" or overly driven by retail investors to be taken seriously.

Second, How Should One Access China Equities?

Generally speaking, we believe one is likely to invest a certain amount of money through index exposure that may be provided through investments such as ETFs. For actively managed portfolios, however, there are virtually no established U.S. managers with track records in mainland China equities. The default solution is to wait for existing emerging markets managers to expand their capabilities in China. But how long will this take? Foreign managers have little presence and by definition no track record in domestic China equities. Chinese fund managers have experience but they suffer from high portfolio manager turnover, lack of familiarity with international processes and compliance standards, and short institutional histories. Perhaps there is room for a multi-manager approach here.

Third, How and When Should One Rebalance into China Equities?

After four years of a vicious bear market, China A-shares have rocketed approximately 40% in the last six months. It is not a difficult feat to transpose a chart of other bubbles, e.g., the 1999 NASDAQ crash, against a chart of recent Chinese index movements. This would argue for delaying investment. Another approach could be to let FTSE and MSCI do your thinking for you and simply follow their index weighting decisions. I would suggest that investors shouldn't default to the indexer's mechanistic timetable without realizing the return implications.

Finally, Investors Should Identify Credible Information Sources to Help Make Decisions

I would argue that these information sources are critical even if one currently owns no Chinese securities, simply because of China's significant presence in the global economy. Stated differently, whether one decides that China equities represent an opportunity or a risk to global portfolios, one should have an informed, up-to-date view on China's economy and markets.

 
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Munis: Infrastructure, All Talk? http://www.vaneck.com/muni-nation-blog/infrastructure-all-talk-06-19-15/ Yesterday Bond Buyer interviewed Jim Colby, Senior Municipal Strategist, and discussed transportation infrastructure.

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Van Eck Blogs 6/19/2015 12:30:40 PM June 19, 2015

Yesterday Bond Buyer interviewed Jim Colby, Senior Municipal Strategist, and discussed transportation infrastructure. Colby says there has been much lip service, but little action, suggesting: “The first thing Congress should do is fund the Federal Highway Trust Fund. It's the easiest thing to do.”

Watch video »  

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After Strong Start, Gold Changes Course on U.S. Data and Rate Expectations http://www.vaneck.com/blogs/gold-commentary-may-2015/ For the Month Ending 05/31/15: Gold performance was split in May, with bullion prices rallying in the first half and then weakening during the second half of the month.

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Van Eck Blogs 6/5/2015 12:00:00 AM

Download Commentary PDF

For the Month Ending May 31, 2015

Strong Rally Followed by Weakness in May

The performance of the gold price was split in the month of May, rallying in the first half and then weakening during the second half of the month. The drivers were primarily a mix of U.S. economic data releases and the markets’ interpretation of how the data affected the timing of the anticipated Federal Reserve (the "Fed") rate hike. Earlier in the month, gold advanced over $20 per ounce in one day, on May 13, following the release of weaker than expected U.S. retail sales figures for April. Gold closed at $1,216 per ounce on that day, crossing the important $1,200 per ounce level. This triggered more technical buying, and on the next day, gold broke over its 200-day moving average, pushing it to trade as high as $1,232 per ounce on May 18.

The U.S. Dollar Index (DXY)1 , which historically has a strong negative correlation2 to the gold price, fell 1.6% during the first half of May. But in the second half of the month, the courses reversed. U.S. economic releases, including a strong housing report and strong capital goods orders, added support to expectations for an increase in the federal funds rate.3 The DXY rallied (up 4.1% in the second half of May) and gold dropped, to close at $1,190.55 per ounce on May 29, up $6.18 per ounce or 0.52% for the month.

The World Gold Council published its gold supply and demand statistics for the first quarter of 2015. Total gold demand is estimated at 1,079.3 tonnes in Q1 2015, a 1% drop year-on-year. Jewelry demand of 600.8 tonnes was down 3%, but above its five year average of 570.3 tonnes. Jewelry demand from India was up 22%, reflecting the unusually weak demand of the same period a year ago. In contrast, slowing economic growth and a rallying domestic stock market impacted gold demand in China, resulting in a 10% drop in jewelry demand. However, it is worth noting that Q1 2014 was a record first quarter for Chinese jewelry demand. For the first time since 2012, quarterly net inflows into gold bullion exchange traded products drove investment demand, up 4% year-on-year. Central banks purchased an estimated 119.4 tonnes during Q1 2015, relatively unchanged from the previous year. Total supply was relatively flat, with growth in mine supply (+1%) offset by a decline in scrap supply (-3%).

Mixed Results for Gold Companies, But Costs Lower

The performance of gold stocks was mixed during the month of May. The NYSE Arca Gold Miners (GDMNTR)4 fell 2.9%, while the Market Vectors Junior Gold Miners Index (MVGDXJTR)5 gained 2.7%. The junior stocks had been underperforming relative to the larger companies this year. After their recent outperformance, the MVGDXJTR is up 7.6% year to date as of the end of May, compared to a 6.4% gain for the GDMNTR during the same period. Perhaps some of the merger and acquisition (M&A) activity we have seen this year (discussed below) has reminded the market of the “takeover option” embedded in many of the smaller companies but rarely priced in, leading to increased interest in the junior sector as of late.

Gold companies reported mixed results for the first quarter of 2015. Some companies beat earnings and operating expectations, while others disappointed. Many of the companies that failed to meet expectations maintained their 2015 full year guidance, targeting improved results in the second half of the year. Overall, the trend appears to be for lower operating costs this year, with many companies reporting lower than expected costs in the first quarter. Over the last couple of years, companies have been successful in redesigning mine plans and optimizing their businesses and operations to reduce costs. Currently, lower fuel prices and weaker currencies are also having a positive impact on costs. For a group of thirteen large- and mid-tier producers, Scotiabank research estimates the Q1 2015 cost benefits from currency devaluation and lower fuel prices at around $24 per ounce. Continued sector focus on improving operating efficiencies to further reduce costs suggests that companies are well positioned to contain costs at present levels, and thus, we expect that potential increases in the gold price should translate into margin growth.

Gold Impacted by Anticipation of Fed Rate Hike

As was apparent during the month of May, the gold price is mostly reflecting the markets' expectations for the timing of the next federal funds rate increase as dictated by the conditions of the U.S. economy. In the short term, we expect gold to continue to trade sideways around the $1,200 level as these expectations change based on updated U.S. economic indicators.

Later in the year, if the Fed raises rates, the performance of gold will likely depend on how the U.S. economy responds to the rate increase and whether it can withstand it. If the Fed does not raise rates, we believe this would signal a turning point for gold and potentially the beginning of the next gold rally. In the longer term, in our opinion, imbalances continue to build in the global financial system with the potential to threaten its stability, which we expect would ultimately drive investors seeking protection to gold and gold shares.

Equities Continue to Outperform Bullion

Gold stocks have outperformed gold so far this year, despite gold being relatively unchanged. This follows several years of significant underperformance of the equities relative to the metal, which took stock valuations to historical lows. We believe the improved performance of the equities this year reflects a successful turnaround of the gold companies that has brought back profitability and financial health to the sector. With companies, generally speaking, in good shape now, but valuations still relatively low, the timing seems perfect for M&A. Producers struggling to replace reserves have the opportunity to buy those ounces at discounted prices.

Is M&A Activity on the Rise?

However, M&A activity remains relatively subdued. We believe this is due to three main factors. First, companies are being disciplined in their investment decisions in an effort to avoid the mistakes of the past, which led to acquisitions that ended up destroying value. Second, valuations of potential buyers are as depressed as those of the targets, so the customary issuance of the buyer’s shares to finance transactions is less attractive in this environment. Third, the larger companies either do not have the balance sheet flexibility to support acquisitions, or, it appears, they may not want to get too much bigger.

On this third point, consider for example the three super-majors (producers of over 4 million ounces annually): Barrick, Newmont, and AngloGold Ashanti (all 0% of Fund net assets as of May 31, 2015). Because of their large production base, it is nearly impossible for these companies to grow through organic discoveries alone so they rely on acquisitions to replace reserves. However, the super-majors are currently engaged in asset sales rather than asset purchases, primarily with the objective of raising cash to deleverage their balance sheets. We have written about the topic in previous commentaries, expressing our opinion that bigger is not necessarily better when it comes to gold mining. In that context, we find the current environment most favorable for small- and mid-tier companies with strong balance sheets that can take advantage of depressed valuations to acquire projects in anticipation of the next gold bull market.

Alamos and Aurico: A Merger of Equals

Such a transaction was proposed by Alamos Gold (3.2% of Fund net assets as of May 31, 2015) and Aurico Gold (3.5% of Fund net assets as of May 31, 2015) on April 13 of this year, combining the companies via a true merger of equals. The market cap of the companies on April 10—the last trading day prior to the announcement—was almost identical at approximately $750 million. The deal was structured so that neither Alamos nor Aurico shareholders received a premium as a result of the deal, with shareholders of each company owning approximately 50% of the merged company. This is unusual for the gold sector where, historically, companies have paid hefty acquisition premiums to grow their businesses. This deal combines two companies with characteristics that make them uniquely complementary of one another.

Likely, the attractive feature of the merger is the marriage of Alamos’ strong balance sheet ($351 million in cash and no debt as of the end of March 2015) with Aurico’s Young-Davidson mine in Canada, a growth asset with a long life, still in development and ramping up. Although Young-Davidson became cash flow positive in September 2014, and Aurico had over $240 million in additional liquidity available as of the end of March 2015, Alamos’ cash position provides the cushion necessary for development to continue even at lower gold prices. This significantly de-risks the asset. Gold mining is a risky business, at many levels, reducing any risk should have a material impact on valuations, and thus, represents an important requirement, in our view, for any transaction. Other key features of the proposed merger, which is expected to be completed in late June, include: Alamos no longer being a company with a single producing asset, which typically warrants a discount; a Canadian mine is added to Alamos’ asset base, which improves its geopolitical risk profile; synergies and experience swap between each company’s Mexican asset; the shorter-term growth provided by Aurico’s Young-Davidson mine complemented by the longer-term growth provided by Alamos’ Turkey projects; and last, but not least, the potential for re-rating as the junior companies join the ranks of mid-tier producers.

In our view, although it may take higher gold prices to get the M&A wheels of the sector really turning, those companies with the capacity to execute value creating deals today are in a privileged position, presenting a potential opportunity for investors. Van Eck International Investors Gold Fund, which held both Alamos and Aurico prior to the transaction, will continue to seek such opportunities.

 

INIVX Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned 0.12% for the one-month period ending May 31, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR)returned -2.88% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.  

 

Month End: Average Annual Total Returns (%) as of May 31, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV 0.12 -12.82 -13.57 6.03 8.74
INIVX at Max 5.75% sales charge -5.68 -17.82 -14.59 5.40 8.63
GDMNTR Index -2.88 -11.89 -15.96 -0.10 --

Quarter End: Average Annual Total Returns (%) as of March 31, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV -12.89 -22.28 -13.24 4.04 8.60
INIVX at Max 5.75% sales charge -17.90 -26.72 -14.26 3.43 8.49
GDMNTR Index -13.79 -21.73 -15.16 -1.60 --

^Monthly returns are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.45%. Expenses are capped contractually until 05/01/16 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: 2Q'15 - No June Swoon But Finish Strong? http://www.vaneck.com/muni-nation-blog/2q15-no-june-swoon-but-finish-strong-05-28-15/ Municipal bond market performance has been undeniably uninspiring during April and May. The total return for the Barclays Municipal Bond Index has actually turned negative (-0.02%) year-to-date, according to Barclays, as of this writing.

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Van Eck Blogs 5/28/2015 5:01:02 PM May 28, 2015

Municipal bond market performance has been undeniably uninspiring during April and May. The total return for the Barclays Municipal Bond Index has actually turned negative (-0.02%) year-to-date, according to Barclays, as of this writing. Some of the central culprits are:

  • Elevated forward monthly supply of some $13 billion to $16 billion, which is meaningfully above the 2015 average, so far this year, of $11 billion according to the Bond Buyer
  • Sputtering cash flows into ETFs and mutual funds post-tax date
  • Uncertainty over how soon the Federal Reserve (Fed) will raise rates
  • Certain obligations of the city of Chicago being marked to below investment grade on the heels of the Illinois Supreme Court’s decision to overturn the 2013 Pension Reform Law

Despite a strong first quarter, investors seem to have tempered their desire to further engage municipals, perhaps waiting to see what more evidence there is to support the Fed’s looming rate movements. While investors were pausing, however, the yield curve has shifted to higher levels and I believe the opportunity to reengage the market at better entry points is currently at hand.

The following data points support my general thesis that the fundamentals are still favoring investors. Near term, or until it is certain that the Fed will move rates, it would appear that the greater risk might be that of no action as opposed to a continued commitment to the asset class. As the tables below demonstrate, a significant amount of cash will be available for reinvestment in June, suggesting the potential for improved performance of the asset class.

Finally, the benefit of the tax-free coupon, in my view, greatly enhances the income component of municipals versus corporates or Treasuries. Investors should keep in mind that when the ratio of municipal yields is equal to or exceeding that of Treasuries, there is a potential opportunity for investors.

CASH FLOW IN 2015 (CALLS/MATURING/COUPONS)
Month Amount
January $ 31,423,722,000
February $ 34,220,094,000
March $ 28,088,763,000
April $ 25,040,692,000
May** $ 32,898,608,000
June** $ 49,240,314,000
July** $ 44,323,866,000
August** $ 36,930,062,000
Maturity MMD Muni Yield (%)* 10-Yr U.S. Treasury Yield (%)* Yield Ratio (%)*
1 0.22 0.22 99.10
2 0.62 0.61 102.31
5 1.45 1.55 93.55
7 1.88 1.97 95.67
10 2.32 2.24 103.71
15 2.84 2.44 116.49
20 3.08 2.64 116.80
25 3.23 2.84 113.85
30 3.30 3.04 108.66


 

Source: Bloomberg as of 5/21/2015.

*Municipal yield curve calculated and disseminated by Municipal Market Data (MMD). Yield Ratio=MMD Yield/Treasury Yield. Yields represented by yield to maturity. Yield to maturity is the annual rate of return on a bond held to final maturity.

**Projected

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Post Disclosure  

The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in any Fund. An index's performance is not illustrative of any Fund's performance. Indices are not securities in which investments can be made.

The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year.

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Munis: Talking Points on Chicago Downgrade http://www.vaneck.com/muni-nation-blog/talking-points-on-chicago-downgrade-05-21-15/ Last week Jim expressed his views to several media outlets on the Moody's downgrade of certain Chicago credits to below investment grade. Here is a summary in a Q&A format.

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Van Eck Blogs 5/21/2015 9:39:34 AM May 21, 2015

Last week Jim expressed his views to several media outlets on the Moody's downgrade of certain Chicago credits to below investment grade. Here is a summary in a Q&A format.

QAWere you surprised by the recent Chicago downgrade?

I wasn’t necessarily surprised that Chicago was downgraded, but I was somewhat surprised at the magnitude of this downgrade. With S&P having followed suit, though not to the same degree, it will be interesting to see what Fitch does from here.

Is the downgrade likely to have a significant impact on the wider market?

The Chicago decision hasn’t shown to have ripple effects on the muni market, partly due to the fact that Chicago’s issues are well known and because it is a tiny portion of a huge market. I believe part of this downgrade is an attempt by Moody’s to be aggressive with “stressed” credits, as opposed to falling behind the curve as they did in past years. What are the implications for the municipal bond market? Although $8.1 billion is a significant capitalization, it represents less than one half of 1% of all outstanding municipals (approximately $3.7 trillion according to Securities Industry and Financial Markets Association (SIFMA)). The market takes notice of this news but hasn’t appeared to shudder in response.

What happens next for Chicago?

Market participants are still banking on the city raising taxes to help meet its needs and that's within its powers. Chicago has the resources, i.e., the capacity to meet its obligations through user fees, higher taxes, etc. There are possible solutions. While the recent Illinois pension ruling set them back, I believe they have what they need. On the other hand, this is a shot across Chicago's “bow." After 2008 the financial world was falling apart with auction-rate securities cratering and money funds breaking the buck; all looked to the rating agencies. Rightly or wrongly, the harsh spotlight was placed on the raters.

Why do you think Moody’s took such drastic measures?

After Puerto Rico, Detroit, San Bernardino, etc., the rating agencies, in my opinion, moved swiftly to preserve their credibility. Now they are getting out in front of problems rather than reacting to them. No longer do they give issuers time to proactively take corrective action, which while under political pressures the issuers may or may not take.

Where should investors go from here?

Generally we continue to favor municipals in the context of a highly diversified portfolio. Credit quality is generally strong and the yields are the equivalent of — if not higher than — U.S. Treasuries. For those who can tolerate credit risk, I see the municipal high yield market as attractive, with taxable equivalent yields higher than those of the U.S. corporate high yield market and according to Moody’s, historically lower default rates.

  jim_colby_signature  

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Munis: Update on the Commonwealth http://www.vaneck.com/muni-nation-blog/update-on-the-commonwealth-05-05-15/ On July 25, 1898, during the Spanish-American War, the U.S. invaded Puerto Rico with a landing at Guánica. As an outcome of the war, Spain ceded Puerto Rico, the Philippines and Guam to the U.S. under the Treaty of Paris.

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Van Eck Blogs 5/7/2015 9:26:37 AM

PR FlagOn July 25, 1898, during the Spanish-American War, the U.S. invaded Puerto Rico with a landing at Guánica. As an outcome of the war, Spain ceded Puerto Rico, the Philippines and Guam (which were then under Spanish sovereignty) to the U.S. under the Treaty of Paris.

Why do I lead with this bit of history? As has been very well documented and publicly discussed, the financial fortunes of the Commonwealth of Puerto Rico have for nearly 117 years been both indirectly and directly tied to the United States. Despite legislative initiatives from the U.S. Congress to stimulate economic activity and significant tax benefits for accessing the capital markets, the Commonwealth today finds itself hard pressed to find ways to stimulate its economy and extricate itself from over $70 billion in debt it needs to honor.

As of this writing, most of the debt resides at the lower end of non-investment grade. While private equity and hedge fund investors have taken the lead in terms of outstanding bonds held, discussions and negotiations with the Commonwealth have yet to generate a solution that leads away from a transformational restructuring of the debt. Bonds continue to trade in the marketplace, evidencing some measure of liquidity and perhaps expectations that a solution will soon be reached.

Moody’s Investors Service, however, just released a report on May 4 (titled Commonwealth of Puerto Rico - U.S. State Governments: Legislature’s Rejection of Tax Overhaul Plan Casts Doubt on Financing Plans), which suggests that the recent legislative rejection of the governor’s value added tax (VAT) proposal is “negative for the U.S. territory because it delays efforts to issue more than $2 billion of bonds to restore cash for operations and debt service. Without the bond sale or another infusion of cash, Puerto Rico will face increasingly difficult choices, including potential government shutdowns.”

Moody’s went on to say that U.S. Secretary of the Treasury Jack Lew has been in contact with Puerto Rico's governor, urging him to find a solution, noting that federal intervention, “would be unprecedented, and our ratings for U.S. state and local governments do not assume the national government will provide financial support in such situations.”

We continue to monitor developments, both with interest and concern, as the potential impact to the municipal marketplace of a negative outcome would be meaningful.

  jim_colby_signature  

Post Disclosure  

Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are broadly the same. The symbols that are used by Moody’s to designate least credit risk to that denoting greatest credit risk: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Ratings from Ba to Caa are below investment grade (non-investment grade) or speculative grade.

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Strong Month for Gold Stocks as Debt Bubble Grows http://www.vaneck.com/blogs/gold-commentary-april-2015/ For the Month Ending 04/30/15: Gold ended April unchanged at $1,184.37. The lackluster performance was surprising given U.S. dollar weakness and firm demand from India and China.]]> Van Eck Blogs 5/5/2015 12:00:00 AM

Download Commentary PDF  

For the Month Ending April 30, 2015

Strong Advance for Gold Stocks in April

The gold price ended the month of April essentially unchanged at $1,184.37 per ounce. We were surprised by the lackluster performance in a month that saw U.S. dollar weakness and reports of firm demand from India and China.

The U.S. dollar broke its seemingly relentless uptrend. The U.S. Dollar Index (DXY)1  fell 3.6% in its first monthly decline since June 2014. U.S. economic statistics released in April were weak—with payrolls, industrial production, and gross domestic product (GDP) coming in below expectations. There appears to be a growing feeling in the market that the European Central Bank (ECB) stimulus is taking effect, potentially ending the threat of deflation. In our opinion, while this does not seem to be enough to account for the precipitous fall in the DXY, it may have triggered a reversal in overextended positioning in the currency markets. Gold would normally advance against such a decline in the U.S. dollar. Perhaps there are more price adjustments to play out in the markets.

Demand from India and China Continues

Reuters reported March gold imports to India doubled over last year and preliminary reports from the All India Gems and Jewellery Trade Federation indicate that April imports may double as well. It seems Indian demand has returned to normal following a weak 2014 that was hampered by import restrictions and new taxes.

The China Gold Association reported first quarter demand grew 1.1% over last year. Bullion flows through Swiss refineries were strong in March. Bloomberg Business reports imports to Switzerland from the U.K. were the most since November, while exports to India and China both reached multi-month highs. This, to us, suggests the trend in bullion flows from western vaults to eastern vaults continues unabated.

Gold stocks had a strong advance in April, shown by the 10.3% gain in the NYSE Arca Gold Miners (GDMNTR)2 and the 9.1% gain in the Market Vectors Junior Gold Miners (MVJGDXJTR)3 indices. This is likely a rebound from their poor March performance. Also, companies have started announcing their first quarter results. Some companies have exceeded expectations, while others have fallen short. Grade inconsistencies within a gold deposit can cause production to fluctuate. Both planned and unplanned changes in grade make mining revenues inherently difficult to forecast. Most of the companies reporting poor first quarter results plan to make up for it later in the year with increasing production. We will have a better assessment once all have reported, but so far overall it's looking like an average quarter.

China May Provide Reserves Update

Official (central bank) gold purchases and sales in China are not made public and are not included in supply/demand statistics. In 2009, the Chinese announced they had 1,054 tonnes of official gold reserves, which was an increase of 454 tonnes from the previous announcement in 2002. They have not given an update since 2009. Five countries and the International Monetary Fund (IMF) have more than 1,054 tonnes of official gold, with the U.S. on top at 8,133.5 tonnes. There has been recent speculation that the Chinese might give a gold reserve update in conjunction with the IMF decision on whether to include the Yuan in its currency reserve basket, expected in either May or October. The timing of such an announcement by China would make sense and if it happens, it would be big news in the gold market. It is widely believed that China has been building its official gold position to help enable the Yuan to become a global reserve currency. At 1,054 tonnes, the value of China's gold represents 1.1% of its foreign currency reserves and is equal to 0.5% of its GDP. For comparison, the World Gold Council shows the official gold holdings of the United Kingdom, European Central Bank, and the U.S. at 10.5%, 27.1%, and 73.6% of foreign currency reserves, respectively. Casey Research estimates that the value of U.S. gold reserves is equivalent to 2.0% of GDP, while the combined reserve gold of Eurozone nations equals 3.5% of GDP. From these numbers, it is relatively easy to calculate the Chinese would need approximately 4,000 tonnes to equal the U.S.'s 2% of GDP and approximately 10,000 tonnes to equal the U.K.'s 10.5% of foreign currency reserves. The market's reaction to the Chinese announcement, if it occurs, will depend on what the market believes the Chinese will do in the future. We believe that if Chinese official gold reserves have not yet reached something in the 4,000+ tonne range, the gold market might rally on the possibility of continued purchases. Of course, any comments the Chinese may have encompassing a gold announcement could also influence market reaction.

Another Credit Bubble Ready to Burst?

Many investors think of gold as insurance against financial tail risk4 – those rare circumstances that raise financial risk to levels that can shake investor confidence, cause selloffs in the markets, and may threaten the stability of the financial system. One way to create elevated levels of tail risk is through excessive credit creation.5 Government policies on home ownership led government sponsored enterprises (Fannie Mae and Freddie Mac)6  to enable or encourage the loose lending standards and credit creation that generated a housing boom. The solid black chart line (below) shows the household credit bubble that peaked in 2008, driven largely by home mortgages. The chart also captures the subsequent collapse in household debt/GDP, which ushered in the Great Recession. Gold fell as the bubble burst, but quickly recovered and soared to over $1,900 per ounce in 2011.

U.S. Debt as a % of GDP: 1969 - 2014The markets, the Federal Reserve (the "Fed"), economists, and investors generally are unable to identify bubbles before they burst and the events that lead to their collapse are only known in hindsight. Nonetheless, we would argue that the dashed black chart line shows another bubble that has formed through excessive credit creation. Once again the government, through the Fed, has provided loose credit conditions (ultra-low rates, bond purchases) that enabled the U.S. Treasury to accumulate massive amounts of debt. No one knows whether this bubble will dissipate without adverse consequences or collapse in a crisis. In the last five years, bankruptcies, reducing expenses, and higher savings rates allowed households to bring their debt closer to historically normal levels. Would the government be able to respond to a burst debt bubble as proactively as households responded to theirs? Unlike over-leveraged homeowners, the government is not likely to declare bankruptcy and default on some of its debt. It has shown itself unable to cut expenses as debt levels continue to grow. Raising taxes further might snuff out the expansion. The current entitlement structure guarantees that expenditures (retirement, medical) will grow substantially as the population ages. The persistently subpar economic growth since 2008 has been unable to reduce Federal debt/GDP on its own.

Gold May Protect Against Financial Tail Risk

In our opinion, this is a sovereign debt bubble with no viable solutions in the country that issues the world's reserve currency with no viable alternatives – an unprecedented situation in modern finance. New regulations and capital requirements have made the banking industry safer and more able to deal with another crisis like the 2008 event. However, the next crisis, if it occurs, will probably have little similarity to the last one, just as the credit crisis was far different from the tech bust. We could be wrong about all of this and it is possible the radical monetary and fiscal policies practiced today become the risk-free norms of the future. Until we know the answer, we believe some potential insurance against financial tail risk might be a good idea.

INIVX Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned 9.51% for the one-month period ending April 30, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR) returned 10.27% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.  

 

Month End: Average Annual Total Returns (%) as of April 30, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV 9.51 -17.10 -14.11 6.04 8.87
INIVX at Max 5.75% sales charge 3.24 -21.87 -15.13 5.42 8.76
GDMNTR Index 10.25 -15.66 -15.76 0.51 --

Quarter End: Average Annual Total Returns (%) as of March 31, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV -12.89 -22.28 -13.24 4.04 8.60
INIVX at Max 5.75% sales charge -17.90 -26.72 -14.26 3.43 8.49
GDMNTR Index -13.79 -21.73 -15.16 -1.60 --

^Monthly returns are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.45%. Expenses are capped contractually until 05/01/16 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: The Impact On States From Oil’s Downturn http://www.vaneck.com/muni-nation-blog/the-impact-on-states-from-oils-downturn-04-23-15/ Muni Nation invited Loop Capital's Chris Mier, Managing Director, and Rachel Barkley, Vice President, to provide their commentary on the potential impact of current low oil prices on the muni market.

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Van Eck Blogs 4/22/2015 3:18:58 PM

Muni Nation invited Loop Capital's Chris Mier, Managing Director and Rachel Barkley, Vice President to provide their commentary on the potential impact of current low oil prices on the muni market.MUNI NATION invited Loop Capital's Chris Mier, Managing Director, and Rachel Barkley, Vice President, to provide their commentary on the potential impact of current low oil prices on the muni market.

MIER & BARKLEY: Although falling oil prices have an impact on the national economy, certain states are particularly reliant on the industry. The top five oil producing states (Texas, California, Alaska, Oklahoma, and North Dakota) currently account for approximately 60% of total national production. Oil companies contribute various direct and indirect revenues to these states, including severance taxes and sales and corporate income taxes, depending on the state. Their employees pay applicable income, property, and sales taxes as well.

As illustrated in the accompanying chart, reliance on severance tax revenues, also known as production taxes, varies greatly among states. Today, Texas serves as the nation's largest crude oil producer but has a relatively moderate reliance on severance taxes. California, meanwhile, does not currently levy an oil production tax. This contrasts significantly to the state of Alaska, which appears to rely on the oil industry for the majority of its revenues.

Muni Nation: State Severance Taxes as Percent of Total Tax Revenues


On a positive note, many states with a high concentration in the oil industry have applied lessons learned during the 1980s which may serve them well during the current oil downturn. State governments, including Texas and Oklahoma, have funneled oil revenues into reserves and funding for one-time capital projects, which can be delayed or cancelled in lean years. Alaska is particularly vulnerable to a prolonged downturn in the oil industry, although its lower overall outstanding debt seems to make it less of a concern for the majority of bondholders.

In our view, analysts should pay significant attention to declining oil prices as it is expected to have a notable negative impact on the economy and governmental revenues for several of the industry's largest issuers. We also point out that while the decreasing prices are cause for concern, oil prices historically have reversed direction rapidly, which can make predicting future trends a challenging process.

Chris Mier, Managing Director, Analytical Services Division
Chris Mier is the Chief Strategist and Director of the firm's Analytical Services Division (ASD). The ASD has five full-time professionals and is one of the largest analytics groups dedicated to investment banking. Under Mr. Mier's direction, the ASD has built two proprietary option valuation models, as well as econometric models to forecast SIFMA, municipal bond volume, and other variables of interest. The group also provides analytics and commentary on the economy, monetary policy, and a variety of public finance issues.

Rachel Barkley, Vice President
Rachel Barkley joined Loop Capital as a Vice President in 2014 after serving as a Senior Municipal Analyst at Morningstar, following stints at Fitch Ratings as a Public Finance Director, and at PFM. She has covered the oil and gas sector extensively during the current downturn. Rachel covers credit conditions, pension performance, and financial developments in the state and local government sector for Loop. She also follows water, sewer, and other revenue bond areas.

Please note that the information in this post represents the opinions of Chris Mier and Rachel Barkley and not necessarily those of Van Eck Global. These opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results, or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.

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Munis: A Thought About Tax Day http://www.vaneck.com/muni-nation-blog/a-thought-about-tax-day-04-16-15/ I recall that over the years April 15 has generally loomed large on the calendars of municipal bond investors. Anticipation and preparation for this date have included a cessation of investment activity and even some selling...

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Van Eck Blogs 4/15/2015 5:08:16 PM

Muni Nation: Tax DayI recall that over the years April 15 has generally loomed large on the calendars of municipal bond investors. Anticipation and preparation for this date have included a cessation of investment activity and even some selling of underperforming or short-dated munis to generate cash for check writing. Heaven forbid that one might touch other parts of his investment portfolio such as stocks or taxable bonds for this purpose. Until our recent financial crisis broke the veil of comfort with money market funds, any excess cash generated from the sale of muni bonds was often swept into bank accounts, and then sent to state treasuries and the IRS.

What has always struck me about this behavior is the lack of logic of selling a tax-advantaged security to pay taxes. Yes, in years past, the markets were different: yields on bonds were higher and returns in equities stronger. At times it seemed not to matter that a client would have to reenter the muni market with fresh cash and find a suitable replacement for whatever was sold. If this does not seem odd to you, consider one of the points we often discuss in this space: the taxable equivalent return as a comparative versus other asset classes.

If your goal as an investor in municipal bonds is to earn income that is free from federal taxes (and in some instances, state and local taxes as well), it seems appropriate to judge the value of potential municipal income against all other options in your portfolio and thus possibly avoid giving up a valued income stream. In this current low interest rate environment, I believe it's worth considering this point.

  jim_colby_signature

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Gold Market Declines in Anticipation of Fed Action http://www.vaneck.com/blogs/gold-commentary-march-2015/ For the Month Ending 03/31/15: The gold market came under pressure early in the month due to the March 6 U.S. payroll report, which added more jobs than forecasted.

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Van Eck Blogs 4/6/2015 12:00:00 AM

Download Commentary PDF  

For the Month Ending March 31, 2015

Market Review: Gold Under Pressure

The gold market came under pressure early in the month due to the March 6 U.S. payroll report, which added more jobs than forecasted. Markets reacted as if employment strength might increase the chances for a Federal Reserve (the "Fed") rate increase. As a result, the U.S. Dollar Index (DXY)1 moved sharply higher and gold bullion trended to its low for the month of $1,143 per ounce on March 17. The Fed itself threw cold water on the market's rate outlook following the March 17 Federal Open Market Committee (FOMC) meeting. In statements issued on March 18, the Fed downgraded its forecasts for both economic growth and inflation. Gold rallied from its March 17 lows, ending the month at $1,183.68 per ounce for a loss of $29.54 (2.4%) in March.

Following a strong start to the year, the gold price has given up its gains and was essentially unchanged in the first quarter. The market has long forgotten the financial risks it was concerned about in January, which were driven by the threat of European deflation, a possible Greek exit from the Euro, and volatile currency markets. The focus has now reverted to Fed activity, as markets gyrate on possible changing rates and not on fundamentals. Stock markets tend to rally on poor economic news (the S&P 500® Index was up 1.2% on March 18) which might cause the Fed to continue to ease.2 Stocks tend to tank on good economic news (the S&P 500® Index declined 1.4% on March 6) that might cause the Fed to remove the punch bowl.3 We believe it is dangerous to have a central bank that is comfortable exerting so much control over capital allocation and market activity. It can be seen as distorting markets. In a March 22 Wall Street Journal editorial, Alex J. Pollock observes, "The Fed has no superior economic knowledge. It has only forecasts as unreliable as everybody else's, and theories as debatable.

Gold Stocks Tumble More than Bullion

Gold stocks tumbled with the March weakness in the gold price. The NYSE Arca Gold Miners Index (GDMNTR)4 fell 13.8%. Like gold, the GDMNTR is now essentially flat for the year. The Market Vectors® Junior Gold Miners Index (GDXJTR) declined 13.4% in March and was down 3.9% in the first quarter.5 Negative sentiment was caused by the March 10 bankruptcy of Allied Nevada, a junior gold company. The company has a successful heap-leach mine in Nevada that produced 214,000 ounces of gold in 2014 with cash operating costs estimated in the $825-$850 per ounce range.6 Below the heap leach ore is a larger, multi-million ounce deposit. Allied Nevada (0% of Fund net assets as of March 31) raised debt earlier in the cycle with hopes of constructing a world-class milling operation to process the deeper ores. However, in our opinion, the project does not make sense given that gold is currently around $1,200 per ounce and the company is now unable to service its debt.

There have been few bankruptcies in this gold bear market and Allied Nevada is an isolated case. The industry is generally conservative financially and there are many junior companies with more cash than debt on their balance sheets. BMO Capital Markets estimates the total net debt (debt minus cash) of the small producers under coverage is -$13 million, while the total for project developers is -$170 million. Several of the senior companies have relatively high debt ratios due mainly to capital cost escalations that occurred earlier in the 2000s. However their debt is very manageable at current gold prices. The Allied Nevada expansion plans looked appealing as gold moved toward $1,900 per ounce in 2011. Although we previously owned shares of Allied, we could see the writing on the wall as the gold price fell in 2013 and sold the last of our position nearly two years ago.

Market Outlook: Fed Rate Hike May Hurt Vulnerable Economy…but Help Gold

In the bizarre financial world in which we live, the latest "new normal" policy to evolve is negative interest rates – yes, some lenders or savers have to pay for the privilege of lending or saving! Last year the European Central Bank (ECB) set negative policy rates and the central banks of Switzerland, Denmark, and Sweden have since followed. German government bonds now have negative yields on maturities up to eight years. J.P. Morgan Chase recently announced it may charge institutional clients as much as 5.5% on certain deposits. With rates at zero (or less) and the start of 60 billion Euro per month of quantitative easing (QE), we expect monetary policies in Europe to have the same effect that past QE has had in the U.S. where it pumped up asset prices (stocks, corporate bonds, art, luxury condos, etc.), wealth disparity, and cheap credit to over-spending governments.7  

In our view, the one thing QE did not pump up in the U.S. was the economy. In a March 27 speech, Fed Chairman Janet Yellen said, "the economy in an underlying sense remains quite weak by historical standards." The Bank of Japan has also failed to ignite its country's economy through massive stimulus. To the best of our knowledge, we have no reason to believe the European economy will react differently to QE. In today's financial system, central banks alone are virtually incapable of stimulating lasting growth.

The Fed has led the market to believe it will begin to raise rates in the second half of this year. Normally central banks raise rates to cool an overheated economy or to bring inflation down. Now for the first time, the Fed wants to simply move rates closer to historic norms, but in doing so, we believe it risks sending an economy with underlying weakness into recession. Raising rates also risks drawing more capital into the U.S. from global markets, where it is needed most. Bloomberg reports that Europeans have already purchased a record amount of junk bonds from U.S. companies, and HSBC Holdings Plc believes Japanese investors will double their purchases of U.S. Treasuries in coming years.

Regardless of what the Fed does, we feel that the economy is vulnerable to recession within the next several years. The current expansion will have lasted six years in June. The average expansion since 1970 is six years and the economy has not gone more than nine and a half years without a recession. Rate increases sometimes mark the beginning of the end of an expansion. Credit excesses and asset bubbles are often revealed only when rates begin to rise. If the next recession comes before the Fed can normalize rates, it will have little room to stimulate the economy, which might be the Fed's biggest concern.

Another Recession?

Scotiabank has analyzed the last six tightening cycles since 1982 when a suitable gold index became available. They found that gold prices advanced in the year following the first rate increase in half of the cycles, whereas gold declined in the other half. Scotia points out that the only other point at which the Fed raised rates in a low-inflation environment was in 1986, when rates were increased in order to help defend a sharply depreciating U.S. dollar. It was also one of the rate-rising periods when gold performed well. The Scotia analysis leads to an uncertain outlook; sometimes gold advances when rates rise and other times it does not. However, the economic and financial backdrop of the next rate cycle is unlike any other in history. The imbalances in asset markets, sovereign debt levels, and central bank finances create risks that may become overwhelming under the stress of rising rates. Perhaps the first rate increase will mark the beginning of the end of the gold bear market.

View more updates from Joe Foster  

 

INIVX Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned -12.89% for the one-month period ending March 31, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR) returned -13.79% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.  

 

Average Annual Total Returns (%) as of March 31, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV -12.89 -22.28 -13.24 4.04 8.60
INIVX at Max 5.75% sales charge -17.90 -26.72 -14.26 3.43 8.49
GDMNTR Index -13.79 -21.73 -15.16 -1.60 --

Average Annual Total Returns (%) as of December 31, 2014

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV 0.76 -6.10 -12.47 4.13 8.74
INIVX at Max 5.75% sales charge -4.99 -11.50 -13.49 3.51 8.63
GDMNTR Index 0.33 -11.99 -15.72 -2.04 --

^Monthly returns are not annualized.

Expenses: Class A: Gross 1.46%; Net 1.45%. Expenses are capped contractually until 05/01/15 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: A Market in Transition http://www.vaneck.com/muni-nation-blog/munis-a-market-in-transition-04-01-15/ Watch my latest video on:

  • Recent comments from the Federal Reserve
  • Events that could derail the market
  • Potential opportunities going forward

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Van Eck Blogs 3/30/2015 3:34:32 PM April 1, 2015

Watch my latest video on:

  • Recent comments from the Federal Reserve
  • Events that could derail the market
  • Potential opportunities going forward


 
 

Video Transcript 

Tom Butcher: Hello and welcome to Van Eck Outlook. I'm your host, Tom Butcher. I have with me today Jim Colby, Portfolio Manager and Senior Municipal Strategist at Van Eck Global. Jim is a seasoned veteran of the industry, having been involved with the muni market for over 30 years. Today our focus is municipal bonds as we enter the second quarter of 2015. It is a market in transition. Jim, welcome.

Jim Colby: Tom, thank you.

Butcher: Thanks for joining us. A few weeks back we heard the most recent Federal Reserve comments, which suggested that raising rates are still a little ways off. What does this mean for the muni market?

Colby: Tom, what it really means for tax-exempt investors is that there's a reprieve from the discourse and the worry over rising rates and what changes that might mean to portfolio strategy. Embedded in the Fed's comments was a continuing concern about the economic landscape and what impact imposing higher rates would have. Investors can take some solace in the fact that we perhaps have ahead of us a quarter or two during which rates will likely remain where they are; the markets should remain relatively stable until the next signal from the Federal Reserve. That is the backdrop against which we might evaluate the relative value of opportunities inherent in the municipal marketplace.

Butcher: Thank you. While investors might take some solace, do you see any potential event in 2015 that might derail a continuation of attractive yields and/or potential performance?

Colby: As is typical in Washington, there are many events that might occur. We've seen nothing but a stalemated legislative body over the last two or three years that has largely failed to move forward on important fiscal policies. Were a development such as Congress changing tax laws, funding the highway trust fund, or infusing of more dollars into the system to take place, there would likely be an impact on the economy and the marketplace. Those are a few of the things that might occur. All eyes are going to be on the Federal Reserve.

Butcher: Yes.

Colby: I don't only mean domestically, incidentally. Global markets will be paying attention to what the Fed says at the next meeting. It is coming up in June and will send another set of signals to which the markets will react accordingly.

Butcher: Bearing all that in mind, where do you currently see potential opportunities in terms of credit and/or curve positioning?

Colby: From my vantage point, investors who feel they can bear some of the near-term risk of changes in the marketplace and who want to be conservative with regards to credit might consider looking to the investment-grade part of the municipal marketplace as well as the intermediate part of the curve. Here at Van Eck Global we define the intermediate part of the curve as 6 to 16 years because that's where the curve is the steepest, potentially offering the greatest opportunity for performance in a changing or dropping yield and rate environment. Nevertheless, the figures tell you that in that part of the curve it may be possible to earn 75% of all the yield that resides in the municipal marketplace, with maybe 30%–40% less duration or interest rate risk. That's one thing to keep in mind for the more conservative investor. Those who fear more impact to their portfolios as a result of rising rates might consider looking to the shorter end of the municipal yield curve. Perhaps they should consider municipal high yield too. The arguments for staying in the municipal asset class are the same arguments that we've made over the last twelve months: relative value, potential higher after-tax returns, and in the case of high-yield, lower default rates than one finds in other asset classes. I think the culmination of recent events in the Federal Reserve's decision to leave rates unchanged is offering municipal investors a reprieve, and they can go back and take a look at the potential opportunities that we've discussed in past sessions about investing in munis.

Butcher: Jim, thank you very much indeed. With Jim's very succinct description of a market in transition, we come to the end of this edition of Van Eck Outlook.

  jim_Colby_signature 

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Munis: Derailment? http://www.vaneck.com/muni-nation-blog/derailment-03-19-15/ Lately the media has made much of the lack of new funding for the nation's aging infrastructure. Given that infrastructure-related sectors account for a significant portion of the municipal bond market investors may question how their portfolios may be affected.

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Van Eck Blogs 3/19/2015 3:58:09 PM

Muni Nation: Derailment?Media and various professional organizations have recently made much of the lack of new funding for the nation's infrastructure and in particular, for the Highway Trust Fund. Last month, as reported in The Bond Buyer, the specter of cutbacks in federal reimbursements for highway and transit projects has once again become a congressional concern: "States may see a cutback . . . as early as June unless Congress passes a multiyear transportation bill by the end of May."

In 2013 the American Society of Civil Engineers (ASCE) reported that the cumulative report card grade for America's infrastructure was D+, and nothing has occurred in the intervening months to suggest to me that this grade is any different. Yes, stopgap measures have kept the funding solvent, but in a December report the Department of Transportation released a brief detailing the following:

"Based on current spending and revenue trends, the U.S. Department of Transportation estimates that the Mass Transit Account of the Highway Trust Fund will have a balance of approximately $1.1 billion at the end of FY 2014."

With the cost of replacing the Tappan Zee Bridge in New York coming in at approximately $4 billion, the federal share alone is about $1.6 billion, which exceeds the estimated balance of the Highway Trust Fund. The ASCE has estimated that by 2020, investment of $3.6 trillion will be required to maintain our infrastructure, raising the question of how to finance such massive rebuilding.

Dollars aside, transportation financing is a critical sector imbedded in the structure of muni portfolios. For instance, the Barclays municipal transportation sector classification currently accounts for 23% of the Barclays Municipal Revenue Bond Index. Current transportation sector weights in the Van Eck Global investment grade ETFs: Market Vectors Short ( SMB), Intermediate ( ITM) and Long ( MLN) Municipal Index ETFs are approximately 13%, 15%, and 19% respectively, suggesting to me the sector's significance as a potential contributor or detractor to the total returns of these portfolios.

Whatever the outcome, the performance of muni portfolios will likely, in a significant way, rest upon the considerable contribution of transportation infrastructure in the months and years to come.

  jim_colby_signature  

Post Disclosure  

Past performance is not representative of future results. Data regarding holdings and sector information is not intended to represent any past or future investment recommendation.

The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in any Fund. An index's performance is not illustrative of any Fund's performance. Indices are not securities in which investments can be made.

The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. Barclays Municipal Revenue Bond Index is a sub-set of this broader index.

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Munis: Embrace Supply and Stay the Course http://www.vaneck.com/muni-nation-blog/embrace-supply-and-consider-staying-the-course-03-05-15/ For 13 consecutive months (January 2014 to January 2015) the returns on municipal bonds as measured by the Barclays benchmark indices were positive: A wonderful run but practically unsustainable.

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Van Eck Blogs 3/4/2015 3:57:28 PM  

For 13 consecutive months (January 2014 to January 2015) the returns on municipal bonds as measured by the Barclays benchmark indices were positive: A wonderful run but practically unsustainable. Returns were negative at the end of February, reflecting uncertainty about the near-term plans of the Federal Reserve ( the "Fed") as well as a more robust presentation of new issues from municipalities. February can be summed up this way: The Fed continued to wait for a trigger to finally signal a move to higher rates. That circumstance provided the ideal backdrop to a higher seasonal issuance of bonds, that throughout the month caused yields to rise. Fresh cash entered the market, but given the uncertainty of the timing of the Fed's move, the market demanded higher yields (lower prices) to place bonds. 

  03-05-15-Barclays-Index-Returns  

Source: Barclays.  

Corrections occur in virtually all markets and not all for the same reasons. In this case, it was logical for municipals to follow the trend of Treasuries throughout the month. I’ll suggest that because little has changed fundamentally, this correction was needed, in my view, to continually focus investors on the inherent value that municipals currently present. 

I have spoken many times in the past about the taxable-equivalent calculation offering a true means of authenticating relative value. This condition remains in place. I continue to believe municipals remain a valuable asset class in an asset allocation model. One month does not a trend make and I suggest further that you embrace the possibility that an uptick in supply has generated more attractive entry points for new cash. Consider staying the course with municipals in order to continue to realize the potential benefit of tax-free income.

jim_colby_signature   

Important Disclosure

The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in any Fund. An index's performance is not illustrative of any Fund's performance. Indices are not securities in which investments can be made.  

The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index. The Barclays High Yield Municipal Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year.  

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Gold Companies Optimistic About the Future http://www.vaneck.com/blogs/gold-commentary-february-2015/ For the Month Ending 02/28/15: In February, the gold market’s attention shifted from global financial risk to U.S. monetary policy expectations and the timing of the expected interest rate hike by the Fed.

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Van Eck Blogs 3/4/2015 12:00:00 AM

Download Commentary PDF  

For the Month Ending February 28, 2015

Market Review: Timing of Fed Rate Hike Grabs Attention

During the month of February, the gold market’s attention shifted from global financial risk to U.S. monetary policy expectations. In our opinion, the market now seems more focused on the timing of the expected interest rate hike by the U.S. Federal Reserve (the “Fed”) and less on the financial issues, primarily in Europe, that drove up the gold price in January. In particular, the market appeared to be less concerned with the debt situation and the ramifications of Greece’s potential separation from the Eurozone, as negotiations toward a Greek bailout plan progressed throughout the month. As a result, gold dropped $70.55 (-5.5%) in February and closed at $1,213.22 per ounce on February 27.

Following a stronger-than-expected January U.S. employment report, the price of gold lost more than $30 on February 6. Then, on February 17, gold lost another $20 ahead of the Chinese New Year holiday as markets priced in an expected drop in Chinese demand post-festivities. Gold traded at an intra-day low of $1,190.49 per ounce on February 24 following remarks by Federal Reserve Chair Janet Yellen as the market speculated on the timing of the forthcoming rate hike.

Central Banks Increase Gold Buying in 2014

Another month of net inflows for gold bullion exchange-traded funds (ETFs), we believe, has also provided support for gold at present levels. After a decline of more than 40% in holdings during 2013 and 2014, an increase of 5% in the first two months of this year is a positive signal, in our opinion.

The World Gold Council published its gold supply and demand statistics for 2014. Total gold demand is estimated at 3,924 tonnes in 2014, a 4% drop year-on-year, which is not surprising given that 2013 was a record year for consumer demand. Jewelry demand was down 10% in 2014, but remains 5% above its five-year average. Positively, central banks were net buyers of 477 tonnes of gold in 2014, an increase of 17% from 2013, making 2014 the second highest year of central bank net purchases in 50 years (behind only the 544 tonnes purchased in 2012). Russia was the largest buyer, accumulating an additional 173 tonnes in 2014. Total supply was relatively flat, with growth in mine supply offset by a decline in scrap supply.

Undervalued, Gold Shares Outperform Bullion

Despite a decline in the gold price, gold stocks outperformed gold in February. The NYSE Arca Gold Miners Index (GDMNTR)1 fell 4.2% and the Market Vectors Junior Gold Miners Index (MVGDXJTR)2 dropped 3.2%. We think this outperformance of stocks relative to the metal reflects how undervalued these equities are at present and indicates an improvement in investor sentiment towards gold companies, which appear to be in much better shape now.

Most of the larger companies we track have now reported their fourth quarter and annual 2014 results. Although some companies failed to meet 2014 production and cost targets, the majority met or exceeded expectations. Operating guidance for 2015 was generally in line with expectations, with both production and costs fairly flat relative to 2014. However, some companies did guide for increases in production and lower costs. In our view, we expect costs in 2015 to be lower than guided as a result of both lower energy prices and weaker currencies, but we estimate that the effect of weaker currencies will be more significant than the impact of lower oil prices. Gold companies also released updated reserve and resource statements as of the end of 2014. With very few exceptions, primarily as a result of asset acquisitions, companies were unable to replace the gold ounces mined in 2014 and accordingly, reserves dropped approximately 10% to 15%. Gold prices used to estimate reserves at the end of 2014 were broadly in line with those used by gold companies in 2013, ranging from around $1,100 to $1,300 per ounce. This is in contrast to 2013, when most companies estimated reserves using gold prices that were materially lower than those assumed in 2012, leading to a massive reserve write-down in the sector.

Management Discipline Supports Optimism

We recently attended the BMO Global Metals & Mining Conference in the last week of February and met with more than 20 individual gold companies. Because of its timing and the breadth of participating companies, this conference provided a good opportunity for us to not only meet with management teams for company-specific updates, but, more importantly, to get a feel for the current state of the sector. Only a short time ago, the sector realized it needed to change and began formulating ways to do so. By last year, initiatives had been deployed and their effects had started to become apparent. This year companies showcased the results of the sector’s turnaround. We have been speaking about the positive changes happening in the industry, and have now seen a few quarters of results showing that these initiatives seem to be paying off. Presentations were filled with charts illustrating declining operating and capital costs, reduction of corporate overhead, increased profitability and returns on capital, reduced debt, increased cash balances, and simplified projects and management structures. Companies presented evidence of improved health, but also reiterated their focus on increasing operating efficiency, reducing costs, and maintaining their commitment to capital discipline.

Companies have been reconfigured; while some simply chug along, many others are now able to generate significant free cash flow in this lower gold price environment. We believe this shows that, regardless of how bullish their outlook on gold prices may be, managements know that they have to prove to the market that they can operate sustainably at current prices. Thus, despite the fact that the gold market is clearly lacking shine at present, the mood at this conference was the best it has been in quite some time. It was encouraging to see companies optimistic about the future. They finally appear comfortable, but not complacent, with the way they are running their businesses and are committed to continuing to look for improvements. We certainly hope this means that they are never going back to the "bad" old ways of the recent past, which were characterized by the pursuit of growth at any cost, which led to overspending, high costs, and poor returns on investments.

Ready to Benefit from Rising Gold Price

While we believe the gold price in the shorter term may continue to bounce around the $1,200 per ounce level, financial stress has the potential to drive gold higher in the longer term. The good news is that companies are now ready to reap the benefits of a rising gold price. At current gold prices, lower cost producers (in which we maintain an overweight position) are profitable, and some select companies may still offer future growth. One of those companies, Goldcorp (5.1% of Fund net assets as of February 27, 2015), is presently ramping up production at two new mines: Eleonore in Canada and Cerro Negro in Argentina, while developing the Cochenour project, also located in Canada.

On February 27, we visited Goldcorp’s Cerro Negro mine, located in the Santa Cruz province of Argentina. Cerro Negro achieved commercial production on January 1, 2015, and is expected to produce about 450,000 ounces of gold this year. Operating in Argentina has certainly presented challenges due to exchange controls, import restrictions, a limited labor pool, an uncertain tax structure, and high inflation. Although this has caused delays and higher capital costs, Goldcorp has successfully completed construction and has begun operations at the mine. We were pleased to see that both the underground mine and the processing plant are performing in line with expectations. In fact, the grade of the deposit has thus far been slightly higher than assumed in the model and gold recoveries at the plant are also exceeding budget. The ramp up has been impacted by import restrictions in Argentina, which make it difficult to get replacement parts for the trucks that transport the ore from the mines to the plant, reducing equipment availability and limiting the amount of ore that can be delivered to the plant for processing. However, Goldcorp expects the arrival of additional trucks and a buildup in spare parts to overcome the issue shortly.

Goldcorp’s experience in Argentina is a good example of the challenges the gold sector faces in growing production. The company could have chosen to pass on the opportunity to develop the high-quality Cerro Negro mine, which contains more than five million ounces in reserves, simply to avoid the risks of operating in Argentina. Instead, despite some difficulties, Goldcorp has developed a mine that is expected to grow the company’s production by about 15% this year. Gold companies have to assume and manage a large number and variety of risks, including country risk, if they expect to grow their businesses. The payoff for overcoming these risks is a mine that can potentially generate attractive returns for shareholders. With the coming presidential elections in Argentina, we expect a much more business friendly environment in the future.

Read prior gold commentaries by Joe Foster  

 

Fund Review and Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned -3.66% for the one-month period ending February 28, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR)returned -4.21% for the same period. The Fund is actively managed and invests mainly in gold-mining equities, and is managed by a specialized investment team that conducts continuous research to assess mining efficiencies and opportunities. View additional performance data here.  

 

Average Annual Total Returns (%) as of February 28, 2015

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV -3.66 -19.16 -10.41 4.91 8.87
INIVX at Max 5.75% sales charge -9.20 -23.84 -11.47 4.29 8.76
GDMNTR Index -4.21 -17.08 -12.44 -0.68 --

Average Annual Total Returns (%) as of December 31, 2014

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(1/1/56)
INIVX at NAV 0.76 -6.10 -12.47 4.13 8.74
INIVX at Max 5.75% sales charge -4.99 -11.50 -13.49 3.51 8.63
GDMNTR Index 0.33 -11.99 -15.72 -2.04 --

^Monthly returns are not annualized.

Expenses: Class A: Gross 1.46%; Net 1.45%. Expenses are capped contractually until 05/01/15 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: The Power And Appeal Of The Exemption http://www.vaneck.com/muni-nation-blog/the-power-and-appeal-of-the-exemption-2015-02-12-15/ With the real yield (adjusted for inflation) of 30-year U.S. Treasuries not even reaching 2%, Jim believes the tax exemption may make municipal bonds an even more attractive source of income for yield starved investors.

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Van Eck Blogs 2/12/2015 4:03:08 PM February 12, 2015

There are some things, none of which are new to our conversation, that buttress any discussion about municipal fixed-income investing these days.

First, low interest rates generally lower the cost of financing a debt load and reduce the real debt burden for municipalities nationwide. This is a welcome story.

Second, given the United States' present low growth rate and very low interest rate environment, the current real yield curve (Treasury yield at various maturities minus Consumer Price Index (CPI1)) in the United States is only marginally positive through the 5-year maturity and not even 2% out at 30 years. As reported by the Bureau of Labor Statistics, the CPI rose 0.8% in 2014 after a 1.5% increase in 2013. This is the second smallest increase in the last 50 years, trailing only the 0.1% increase in 2008. It is considerably lower than the 2.1% average annual increase over the last ten years.

As of this writing, the "real" yield (Treasury yield minus CPI) on quoted U.S. Treasuries was approximately:

Maturity

Treasury Yield1

CPI2

Real Yield

2-Year

0.63%

0.8%

-0.17%

3-Year

1.01%

0.8%

0.21%

5-Year

1.48%

0.8%

0.68%

10-Year

1.94%

0.8%

1.14%

30-Year

2.51%

0.8%

1.71%


Fortunately for investors, current inflation is low, such that yields are positive beyond two years, however, it's important to remember that inflation can diminish yields in fixed-income portfolios.

Why do I show you this? It is to demonstrate the power of the federal tax exemption applicable to certain municipal bonds in this low interest rate, low inflation environment. The nominal yield for a 10-year AAA municipal bond, as of 2/6/15, was 1.95%. Adjust that to the maximum taxable equivalent yield (AAA yield divided by 1 minus 39.6% tax rate) and you have 3.23% for those in the highest tax bracket. This is more than a full percentage point higher than U.S. Treasuries. For a 30-year AAA municipal bond with a nominal yield of 2.75%, the same math generated a taxable equivalent yield of 4.55% as of 2/6/15, a full 2.04% more than a 30-year Treasury. Regardless of whether you reduce yields by the rate of inflation, I believe municipals remain both attractive and popular with investors.3

Finally, in the municipal high-yield space, taxable equivalent returns have outpaced most other popular investment categories for the prior ten years, proving that municipals, with the power of the federal tax exemption, deserve consideration in strategic as well as tactical asset allocation strategies.

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Post Disclosure   

1CPI Source: Bureau of Labor Statistics as of December 2014. A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.
2Treasury Yield Source: Bloomberg as of 2/9/2015. Note: U.S. Treasury income is exempt from state income taxes.
3Municipal Bond Yields Source: Municipal Market Data (MMD). The S&P rating scale is as follows, from excellent (high grade) to poor (including default): AAA to C, with intermediate ratings offered at each level between AA and CC. Anything lower than a BBB rating is considered a non-investment-grade or high-yield bond.

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Munis: What To Look For in 2015 http://www.vaneck.com/muni-nation-blog/what-to-look-for-in-municipal-bonds-in-2015-02-05-15/ Watch my latest video that focuses on:

  • Muni asset allocation
  • Potential issues to look out for
  • Infrastructure finance

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Van Eck Blogs 2/5/2015 12:31:47 PM

Watch my latest video on:

  • Muni asset allocation
  • Potential issues to look out for
  • Infrastructure finance


 
 

Video Transcript

Tom Butcher: Hello and welcome to Van Eck Outlook. I'm your host, Tom Butcher. With me today is Jim Colby, Portfolio Manager and Senior Municipal Strategist at Van Eck Global. Jim is a seasoned veteran of the industry, having been involved in the municipal bond markets for more than 30 years. Our focus today is munis (municipal bonds) at the start of 2015.

Jim, we're now four weeks into 2015, and things look very similar to how they did this time last year, particularly vis-a-vis uncertainty around the Fed. How should we be looking at the municipal bond asset class going into 2015?

Jim Colby: Tom, that's a great leading question, and I think we're due for a reality check. I would start off my comments by saying I think we need to stay the course with our municipal bond strategy, in terms of how we approached directives at the end of 2014. That is because uncertainties abound from many angles: decisions the Federal Reserve has to make; an uneven economic recovery in the United States, despite good numbers on the employment side; and global uncertainties that perhaps include a weakening or softening of economies overseas. The health of economies outside the U.S. does have an impact on U.S. municipal and fixed-income markets because the natural gravitation toward Treasuries as a safe haven impacts the price and valuation of municipal fixed income. The French coined a saying that the more things change, the more things stay the same, and I think that very much applies to municipals. Municipals as an asset class remain competitive, given that they continue to be a source of credit quality and tax-advantaged income, and are something that investors appear to be seeking in these uncertain times. All of these elements combined continue to make munis an important asset class.

Butcher: What particular issues should we be looking out for?

Colby: I think going forward some of the uncertainties that surround the questions of how to allocate your assets and how to take advantage of opportunities in the municipal space revolve around policy decisions. Are we going to see legislation come out of Washington as proposed by President Obama in his recent State of the Union message with respect to tax law changes? Are we going to see issues that impact other elements of social policy that could impact the question of issuance in the municipal market space? Will there be infrastructure-related or other issues that are allowed to come to market with the help of the federal government for important areas of housing and, as I said, infrastructure and development that will add to the volume and issuance in the municipal space, which could upset the supply-demand dynamic? These are all elements of concern that I think we ought to pay attention to going forward, at least for the next four to six months.

Butcher: Going back to one area that you have just mentioned: infrastructure finance. It's been garnering a lot of news recently. What do you think could happen?

Colby: Last November there was a terrific piece done by CBS's 60 Minutes focusing on infrastructure and infrastructure needs. In that particular piece, it was asserted that there are some 70,000 bridges in the United States that are in need of immediate corrective repair. 60 Minutes highlighted Pittsburgh as one city where perhaps 20% of the bridges that connect Pittsburgh to its suburbs and other important transportation corridors are in need of corrective action. President Obama and his legislative aides have floated a number of ideas with respect to creating more vehicles to make it possible for infrastructure financing to take hold for some of these needs and corrective actions. They may be as simple as raising the gas tax to provide additional cash for the transportation fund. It might also include public and private partnerships, which have been discussed recently as another vehicle for assisting in the nation's repair of its infrastructure. But, suffice it to say, infrastructure finance is an area of serious need in this country and an area where the need may well be served by municipal finance and municipal bonds.

Butcher: Jim, thank you very much. With Jim's views on munis in 2015 and infrastructure finance, we come to the end of this edition of Van Eck Outlook.



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Global Financial Concerns Propel Gold in January http://www.vaneck.com/blogs/gold-commentary-january-2015/ For the Month Ending 01/31/15: The prospect of systemic financial risk drove the gold market in January. Currencies, deflation, and sovereign debt topped the list of concerns that caused gold to advance 8.4%.

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Van Eck Blogs 2/3/2015 12:00:00 AM

Download Commentary PDF  

For the Month Ending January 31, 2015

Market Review: Gold Advances on Tail Risk

The prospect of systemic financial risk drove the gold market in January. Currencies, deflation, and sovereign debt topped the list of concerns that caused gold to advance $98.91 to close the month at $1,283.77 (an increase of 8.4%). The U.S. Dollar Index (DXY) soared 5.1%, rising in tandem with gold as safe havens.1Gold also broke free from the broader commodity complex, as WTI crude and copper tumbled 10.9% and 12.6%, respectively, in January. Gold bullion exchange-traded products had their strongest monthly net inflows since 2012.

Gold stocks began the year with a strong move, as the NYSE Arca Gold Miners Index (GDMNTR) gained 20.3% and the Market Vectors Junior Gold Miners Index (MVGDXJTR) gained 14.7%.2Large-cap stocks outperformed, which may be due to generalist money coming into the sector. South African stocks were stellar performers, with gains ranging from 42% to 64%, which may explain why the GDMNTR managed to outperform U.S.-listed gold mutual funds in January.

Most nations appear to be pursuing weak currency policies in order to gain trade advantages and generate growth. Singapore was the latest to do so, and on January 28, it had its first emergency policy change since 2001, sending the Singapore dollar to five-year lows against the U.S. dollar. Every country that devalues does so at the expense of another country. If devaluations become more aggressive and disorderly, systemic risk may become prevalent throughout the world.

On January 15 the markets caught a glimpse of what a currency crisis might look like when the Swiss National Bank (SNB) abandoned the Euro peg established for the Swiss franc three years ago. Markets were baffled by SNB officials, who had voiced strong support for the peg just days before dropping it. Apparently, the European Central Bank’s (ECB) moves toward negative rates and plans of quantitative easing (QE) created unbearable Euro weakness for the Swiss.3Within minutes of the announcement, the Swiss franc saw double-digit percentage gains against foreign currencies. Liquidity dried up and Swiss franc trades became virtually impossible to execute. Currency dealers suffered losses in the hundreds of millions of dollars and some needed cash infusions to remain solvent. Swiss franc transactions account for less than one percent of the $5.3 trillion a day foreign exchange market. An unanticipated Swiss-like shift in currency policies in one of the major currencies cannot be ruled out, as central bankers experiment with extremes in interest rates, exchange rates, money printing, and asset purchases.

European consumer prices fell for the second consecutive month to -0.6 percent in January. European policy makers continue to fret over deflationary pressures, seeking to avert a depression-era mentality in which consumers become less willing to spend and debts become more onerous in real terms. On January 22 the ECB announced a massive QE program to print €60 billion per month to purchase bonds and debt securities in an attempt to stimulate the moribund European economy and somehow generate inflation. Past experience in Japan and the United States suggests to us that the stimulus program may not work as expected.

On January 25 the Syriza party gained control of Greece’s leadership after campaigning to end fiscal austerity, roll back market reforms, and restructure sovereign debt — essentially to unwind or renegotiate the terms of Greece’s bailout agreement with the Troika (The European Commission [EC], the International Monetary Fund [IMF], and the ECB). Meanwhile, Greece lacks the cash to repay bonds held by the ECB that fall due this summer and repayment of IMF loans due in March may also be in doubt.

Eldorado's Greek Dilemma

Eldorado Gold Corporation (4.9% of Fund net assets as of 1/31/15) is a Canadian mid-tier gold company with mines and development projects in Greece that represent approximately 40% of its value. Its stock suffered a painful blow after the new Minister of Energy claimed the government is against Eldorado’s projects. Eldorado has been one of the largest foreign investors in Greece since the sovereign debt crisis in 2010. It operates two mines and is developing Skouries, a large copper/gold project. Skouries is fully designed and permitted to European Union (EU) environmental standards. The company employs approximately 1,900 Greeks; it aims to spend around $1 billion over five years and will generate additional jobs during construction. Eldorado does not pay bribes, subvert regulations, or evade taxes. It runs a successful business with a robust payroll. Most observers believe a sovereign bond default and exit from the EU would be a worst-case outcome for Greece as well as Europe. Judging by the irrational way Syriza has treated Eldorado so far, we feel this scenario may be likely.

Market Outlook: Free Money Knows No Discipline

There was a significant change in gold market psychology in January. Through most of the gold bear market there has been little sense of financial stress or tail risk. The Federal Reserve Bank (the "Fed") was tapering its bond buying program and the U.S. economy improved. The economies of Europe and Japan remained sluggish but were able to muddle through without further banking or sovereign debt problems. For most of last year, gold was driven mainly by geopolitical risks that culminated in war in Ukraine and Syria/Iraq. Financial stress has not been a dominant gold driver since the financial crisis and its aftermath – until now.

Central Bank policies have reached their “zero bound” and are running out of options to stimulate economies. Interest rates are near zero or negative across much of the developed world. HSBC economist Karen Ward states in a recent report: “Central banks face the unenviable task of trying to convince households, corporates, and markets that this latest batch of easing will work when it’s increasingly evident others haven’t.”4Currency devaluations have begun to supplement radical monetary policies as tools of the trade, further distorting markets. We believe politicians have no incentive to make needed structural changes to education, regulations, business formation, taxes, entitlements, or bureaucracy as long as Central Banks keep rates low and continue buying massive quantities of sovereign debt. As an added bonus, the Fed’s portfolio generated approximately $100 billion of interest income for the U.S. Treasury in 2014 alone. Free money knows no discipline. Impediments to growth remain.

Gold at an Inflection Point?

In our opinion, the gold price has been forming a base around the $1,200 per ounce level since 2013 in a market that has lacked momentum. With the financial risks that are now coming into view in 2015, perhaps gold has reached an inflection. Renewed problems in Greece are cropping up at a time when Europe is least able to deal with them. Meanwhile, Russia continues to agitate in Ukraine. Many global stock markets reached new highs with the recent ECB stimulus, while the U.S. dollar and bonds continue to soar. Interest rates have been falling in much of the world as the Fed contemplates a rate increase. The deflation that European policy makers are reacting to may instead be a temporary side effect of the oil price crash. It seems the excesses, contradictions, and distortions in financial markets and Central Bank policies could set the stage for a financially tumultuous year. --End--

Read prior gold commentaries by Joe  

 

More from Joe Foster

 

Fund Review and Performance

The Van Eck International Investors Gold Fund Class A shares (INIVX) returned 12.75% for the one-month period ending January 31, 2015 (excluding sales charge), while the NYSE Arca Gold Miners Net Total Return Index (GDMNTR)5returned 20.35% for the same period. The Fund is actively managed and invests mainly in gold-mining equities. The Fund is managed by a specialized investment team that conducts continuous on- and under-the-ground research to assess mining efficiencies and opportunities. View additional performance data here.  

 

Average Annual Total Returns (%) as of January 31, 2015 (Class A)

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(2/10/56)
INIVX at NAV 12.75 -5.25 -8.26 6.07 8.95
INIVX at Max 5.75% sales charge 6.24 -10.69 -9.34 5.44 8.84
GDMNTR Index 20.35 -4.39 -10.32 0.51 --

Average Annual Total Returns (%) as of December 31, 2014 (Class A)

  1 Mo^ 1 YR 5 YR 10 YR LIFE
(2/10/56)
INIVX at NAV 0.76 -6.10 -12.47 4.13 8.74
INIVX at Max 5.75% sales charge -4.99 -11.50 -13.49 3.51 8.63
GDMNTR Index 0.33 -11.99 -15.72 -2.04 --

^Monthly returns are not annualized.

Expenses: Class A: Gross 1.46%; Net 1.45%. Expenses are capped contractually until 05/01/15 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Index returns assume that dividends of the Index constituents in the Index have been reinvested. Please call 800.826.2333 or click here for performance current to the most recent month end.  

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Munis: Continuing the Theme http://www.vaneck.com/muni-nation-blog/continuing-the-theme-01-21-15/ Van Eck Blogs 1/21/2015 4:00:12 PM January 21, 2015

Confusion as to how healthy the U.S. economy truly is and where interest rates are headed continues to drive volatility these days, especially in the equity markets. There is also concern, in my view, about the fixed-income markets, as rates have once again been driven lower. Municipals, as is typically the case, have mirrored the U.S. Treasury market and have generally posted positive returns year-to-date as of this publication.

As a follow-up to my prior post, municipal bonds continue to exhibit attractive characteristics. Here are some reference points we have used in the past that fairly represent the potential value of munis.

First, the taxable equivalent returns found in both investment-grade as well as high-yield municipals have continued to demonstrate the effect of the tax-exempt coupon and its impact upon returns. As demonstrated in the chart below you can see municipal returns over the last three-year period are lower versus the broad U.S. equity market, even on a taxable-equivalent basis. However the risk, as measured by standard deviation, was measurably less for municipals as compared to the S&P 500® Index.

Muni Nation: Taxable-Equivalent Index Returns vs. Risk

As of December 31, 2014. Source: FactSet.

The second chart makes the argument that, although high-yield bonds nominally yield less than corporate high-yield bonds, these yields are still some 13 basis points above the long-term comparative average of the two which was 97% at yearend. This relationship continues to favor high-yield municipals over corporate high yield.

Muni Nation: Yield Ratio of Barclays Municipal High-Yield Index to Barclays Corporate High-Yield Index

As of December 31, 2014. Source: FactSet.

What you need to know is that while uncertainty looms about the effects of a stubbornly slow U.S. recovery, the global implications of the plummeting current price of oil, and the sputtering Eurozone and Chinese economies, municipals, in my view, still embody a compelling and resilient asset class and have exhibited relatively low volatility during these uncertain times.

  jim_colby_signature  

Post Disclosure   
 


Taxable-equivalent return represents the return a taxable bond would have to earn in order to match — after federal taxes — the return available on a tax-exempt municipal bond (excluding AMT if applicable). Municipal bonds may be subject to state and local taxes as well as to federal taxes on gains and may be subject to alternative minimum tax. The chart displays the returns of the Barclays Municipal Bond Index on a tax-equivalent return basis and compares such returns to other asset classes as represented by the indexes described at the end of this presentation. Fixed-income investments have interest rate risk, which refers to the risk that bond prices generally fall as interest rates rise and vice versa. Municipal bonds are not guaranteed by the full faith and credit of the United States and carry the credit risk of the issuer. Municipal bonds are exempt from federal taxes and often state and local taxes. Other securities listed are subject to federal, state, and local taxes. Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions, and market liquidity. Prices of bonds change in response to factors such as interest rates and issuer's credit worthiness, among others. Investing in smaller companies involves risks not associated with investing in more established companies such as business risk, stock price fluctuations, and illiquidity. Standard deviation is the statistical measure of the historical volatility of a portfolio.

Historical information is not indicative of future results; current data may differ from data quoted. The listed indices are unmanaged and are not securities in which an investment can be made.

Yield ratio is calculated by dividing the yield to worst of Barclays Municipal High Yield Index by the yield to worst of Barclays U.S. Corporate High-Yield Index. Yield to worst is generally defined as being the lowest yield that a buyer can expect to receive.

The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in any Fund. An index's performance is not illustrative of any Fund's performance. Indices are not securities in which investments can be made.

The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index. The Barclays High Yield Municipal Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year. The S&P 500® Index is calculated with dividends reinvested and consists of 500 widely held common stocks covering the leading industries of the U.S. economy. The Barclays U.S. Corporate High Yield Index covers 50 of the most liquid and tradable U.S. dollar-denominated, non-investment-grade corporate bonds for sale in the U.S.
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Munis: What to Know Heading into 2015 http://www.vaneck.com/muni-nation-blog/what-to-know-heading-into-2015-01-07-15/ I believe 2014 will be described as a rousing success in a variety of ways. The results were unexpectedly rewarding for municipal bond investors. Some may be wondering, "What now?"

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Van Eck Blogs 1/7/2015 3:59:19 PM January 7, 2015

I believe 2014 will be described as a rousing success in a variety of ways. The results were unexpectedly rewarding for municipal bond investors. Some may be wondering, "What now?"

Muni Nation: Muni Bond Index 2014 Performance

Source: Bloomberg.

Keep in mind that we begin this year in a very different place than where we were last January. Most significantly, at yearend the 30-year bond on the Municipal Market Data (MMD) yield curve had adjusted downward from 4.19% to 2.86%, a fall of 133 basis points since the end of last December. Similar to last year, however, we begin the calendar with uncertain expectations. What will the Federal Reserve do and when? Will the U.S. economy show more than uneven and uncertain improvements? Will economic slowdowns in Europe and China continue to prompt "flights to safety" into U.S. Treasuries, pulling potential positive performance from municipals?

What We Need To Know

So far the supply and demand imbalance that helped drive last year's strong muni performance is still in place. There continues to be reinvestment demand in the form of cash arriving in client accounts from coupon payments, maturities, and bond calls that generally help buoy the market, while issuers appear to remain reluctant or possibly unable to fill that demand with additional new supply. With the municipal bond curve positively sloped, there may be income earning opportunity to be had while overall credit quality continues to improve. The after-tax comparison, which we will detail in the next MUNI NATION, currently favors municipals over taxable bonds. With a proper diversification strategy, investors should consider the asset class in 2015.

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Post Disclosure  

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years.

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The Rate Hike Zone http://www.vaneck.com/muni-nation-blog/the-rate-hike-zone-12-11-14/ Will municipal bonds do well in 2015? Even though they're drifting toward what Jim has termed "The Rate Hike Zone," he still believes conditions are positive for munis.

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Van Eck Blogs 12/11/2014 9:28:31 AM Muni Nation Image: The Rate Hike Zone Starting in the late 1950s, Rod Serling produced a successful television series called The Twilight Zone, which began every episode with the following introduction: "You're traveling through another dimension, a dimension not only of sight and sound but of mind. A journey into a wondrous land whose boundaries are that of imagination. That's the signpost up ahead: Your next stop, the Twilight Zone!"

I think it's appropriate for MUNI NATION to replace "The Twilight Zone" with "The Rate Hike Zone," as a way to convey the fixation that market participants have with the long awaited but seemingly distant and uncertain Federal Reserve decision to allow rates to rise. Although there are many historical references to the reaction of markets to higher rates, the conditions underlying this event are now different. They are different because underlying the current environment is an understanding that we are in a manufactured rate structure, with a slowly growing economy and, so far, not a whiff of inflation.

The Rate Hike Zone reference further highlights the journey of uncertainty that market participants are currently experiencing; in my view, they want to be told what to do once they arrive at "the signpost up ahead" as well as how to prepare for it now.

Reflections upon conditions that exist in the municipal market, in my view, are positive for municipal bonds in 2015, substantially for the reasons I have enumerated in the past. They are:

  • Measurable demand is stronger than supply
  • Improvement of overall credit quality is supported by an improving economy now bolstered by lower fuel costs
  • The continuation of a three-year trend toward lower credit impairments1 

These might give investors reason to believe in the value of the muni asset class. This seems to me a journey "whose boundaries are less than that of imagination" and more of practicality.

1Source: Municipal Market Advisors (MMA). As of 12/2/14.

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Is Green The Color Of Munis? http://www.vaneck.com/muni-nation-blog/is-green-the-color-of-munis-12-03-14/ With the term "green bonds" hitting headlines and pushing toward the mainstream, it raises the question of whether the fundamental nature of the municipal bond asset class is green. Jim explains the green bond phenomenon and provides his view.

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Van Eck Blogs 12/4/2014 11:58:48 AM Muni Nation Image: Is Green The Color Of Munis? For me, a bit of wonderment has accompanied recent discussions about the potential enhancement of the profile of municipal bonds due to the designation of certain bond issues as "green." Green bonds are bonds whose proceeds are specifically earmarked for projects and activities that promote climate and other environmental or sustainability purposes. The use of bond proceeds is the main factor differentiating a green bond from a non-green bond.

Municipal bonds provide state and local governmental entities with the intent of offering a public benefit through access to U.S. capital markets. These benefits accrue to delivering potable and clean water, sanitation, power (electricity), transportation, pollution control, education, housing, and health care, to name a few. So what could be more socially responsible and "green" than the municipal asset class?

According to Bank of America Merrill Lynch (BAML) in a November issue of its Municipals Weekly: "Since green bonds officially debuted in the U.S. municipal bond market in June 2013, roughly $1.6 billion of green bonds are scheduled to, or have been issued." While still a nascent market, the applicability and suitability of green bond issuance for municipal issuers is endless.

The authors readily agree that, for the most part, munis are generally believed to be green, and the primary difference between green bonds and muni bonds exists in the use of proceeds. Whether it's the full faith, credit, and taxing power attributed to general obligation bonds, or the pledge of gross or net revenues from revenue bonds, both provide a level of security for these and the other approximately $3.7 trillion of bonds in the muni universe1.

Further reading of the BAML discussion details how municipal issuers can use green bond proceeds. According to the Green Bond Principles, issuers can use them for: renewal energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, and clean water and/or drinking water.

I believe that investors, already familiar with the benefits of muni investing, applaud such a noble assertion. As far as I can tell, however, there are virtually no incremental benefits for the investor or issuer, save for the psychological effect that those baby boomers or even the millennials may derive as they collect their coupons.

All of this leads me to wonder whether the industry hasn't wasted some time and money to "touch up" an asset class with a new coat of paint though fundamentals remain otherwise unchanged. It seems to me the chosen paint color is green.

1Source: SIFMA data. Amount outstanding as of 6/30/2014.

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Weather, Oil, And Market Dynamics http://www.vaneck.com/muni-nation-blog/weather-oil-and-market-dynamics-11-21-14/ Van Eck Blogs 11/21/2014 2:57:38 PM As we approach the holidays, I want our readers to note a couple of items that may affect the near-term performance of the municipal bond market.

First, as noted by The Weather Channel, approximately 200 million Americans have recently been caught up in a pre-winter polar vortex of snow and bitterly cold temperatures. Coincident with Mother Nature's late autumn gift is the continued downward price pressure on oil. The spot price of Cushing, Oklahoma West Texas Intermediate (WTI) on the New York Mercantile Exchange dropped from $107.95 per barrel in June to its November 17 level of $75.64 per barrel, a 30% decline as spot prices hit a four-year low of $74.13 on November 13.

Muni Nation: Cushing, OK WTI Spot Price

Source: U.S. Energy Information Administration, Thomson Reuters Data as of 11/17/14.

For families who heat their homes with oil, the current savings are significant. Moreover, it appears lower oil prices can accrue to economic savings for state and local municipalities as well, except for the oil producing dependent states, such as Louisiana, where revenue from royalties and leasing, in my view, are poised to fall. Taken in total, the benefit one stakeholder enjoys seems to be neutralized by the lost revenues of the other, but fortunately I don't believe this is likely to impede the U.S. economic recovery.

The second item is simplistic as an illustration of why municipals have continued to perform well. The imbalance of cash chasing too few bonds historically has been — and I expect will continue to be — the story. With current interest rates remaining range bound, municipals can present a compelling value proposition for investors.

Muni Nation: Demand from Bonds

Source: Siebert, Brandford, Shank & Co. LLC. as of 10/31/14.

Finally, it is with sadness and respect that I acknowledge the passing of James (Jim) A. Lebenthal, whose family, according to The Bond Buyer, is often referred to as "the first family of New York City municipal bonds." He was a friend to our business and the municipal marketplace, as well as one of the best advocates of the public benefits hidden within the capital markets. His advocacy will long resonate as a legacy that will continue to shine light upon the good that municipals generally deliver to millions of U.S. residents.

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Stockton Decision Stirs Debate http://www.vaneck.com/muni-nation-blog/stockton-decision-stirs-debate-11-12-14/ MUNI NATION invited Kathleen McNamara, CFA, CFP, Senior Municipal Bond Strategist at UBS CIO Wealth Management Research, to provide her commentary on the Stockton, California bankruptcy plan.

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Van Eck Blogs 11/12/2014 9:01:20 AM Muni Nation: Kathleen McNamara guest contributorMUNI NATION invited Kathleen McNamara, CFA, CFP, Senior Municipal Bond Strategist at UBS CIO Wealth Management Research, to provide her commentary on the Stockton, California bankruptcy plan.

MCNAMARA: Stockton's bout with bankruptcy will be the subject of much debate — and a lot of second guessing — in the months ahead.

After warning the City of Stockton (CA) that pension obligations did not enjoy a privileged position in federal bankruptcy court, U.S. Bankruptcy Judge Christopher Klein confirmed the City's plan of adjustment last week. Judge Klein's decision to overlook the disparate treatment accorded pensioners and capital market creditors disappointed municipal bond investors, who had hoped for better treatment in the wake of his decision on October 1 that pensions should be given no more protection than other contractual obligations.

The court's approval of the city's bankruptcy plan reinforces the importance of choosing municipal credits carefully at the outset. In the rare instance when a municipality seeks court protection from its creditors, Chapter 9 grants the municipal petitioner extraordinary latitude in choosing whom to pay in full and whom to haircut. The court's decision is also likely to highlight the stark difference between enterprise revenue bonds and structurally weaker securities such as local government lease revenue bonds and pension obligation bonds (POBs). The City of Stockton left its enterprise revenue debt unimpaired while targeting its leases and POBs for payment reductions.

In a general sense, municipal credit conditions are likely to improve in the next two years on the heels of continued growth in the U.S. economy. Bankruptcies should remain infrequent events. However, when they do occur, the examples of Stockton and Detroit remind us of the political risk associated with Chapter 9 proceedings. Unlike corporate reorganizations, creditors in a municipal bankruptcy are not permitted to offer an alternative plan to the court. Judge Klein's ruling a month ago may yet have an enduring impact on public employee unions by asserting that pensions are a contract, like any other, and entail some risk of reduction in bankruptcy. But on a more practical level, municipal bond investors holding general fund obligations are still more likely to take a bigger hit in those rare occurrences when the two competing creditor classes find themselves facing off in court. Therefore, we expect bond-specific credit analysis to be increasingly important for performance.

Please note that the information in this post represents the opinions of Kathleen McNamara and not necessarily those of Van Eck Global. These opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results, or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.

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A Precedent Set In Stockton http://www.vaneck.com/muni-nation-blog/a-precedent-set-in-Stockton-11-06-14/ News out of the Golden State regarding Stockton's bankruptcy plan may set a precedent for future restructurings. Will preserving pensions at the detriment of bond holders be more common going forward? Jim lays it out for us.

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Van Eck Blogs 11/6/2014 10:55:19 AM Muni Nation: A Precedent Set in Stockton Image On the last day of October, the headline from Ignites blared: "$32M Haircut for Franklin in Stockton Bankruptcy." Under the newly approved bankruptcy plan, bond holders will receive only approximately 1% in repayment for a $32 million loan to the city of Stockton in California. Two Franklin Templeton municipal bond mutual funds were the lone holdouts fighting the city's proposed payouts. They had argued that Stockton could afford a larger debt repayment by reducing payments to the California Public Employees' Retirement System. Their arguments, however, were not enough to sway the U.S. Bankruptcy Court in Sacramento as it ruled that "Stockton retirees had sacrificed enough in the form of concessions to their medical coverage as a result of the bankruptcy."

Although the net impact to a fund complex like Franklin is relatively minor, I believe this judgment has significance to the municipal marketplace perhaps far beyond the loss those funds stand to incur. Such a ruling, which preserves pensions and lowers the boom on bond holders, could set a precedent for future municipal bankruptcy expectations and negotiations going forward.

The recovery rate for municipal impairments has, in the past, been significantly higher than that experienced in the taxable bond markets. Although there still needs to be further examination of the bankruptcy plan, I believe pensions and their unfunded liabilities are a weak link for many municipalities/issuers, and, down the road, may play a significantly larger role in the attempt to preserve credit quality and payment obligations.

Van Eck Outlook: Muni Performance Heading into 2015Video: Muni Performance Heading into 2015
I hope you will take a moment to check out my latest video discussing this year's strong performance in municipals, possible game changers, and my expectations through yearend and into 2015.
Watch video »  

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The Best Defense Is A Good Offense http://www.vaneck.com/muni-nation-blog/the-best-defense-is-a-good-offense-11-03-14/ With October having come to a close and strong performance still in play, muni investors may be tempted to close the books and wait out the rest of the year. Jim explains why he believes this game plan may not be the most prudent strategy.

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Van Eck Blogs 11/3/2014 3:06:44 PM Muni Nation: Best Defense Is a Good Offense This somewhat hackneyed reference to an athletic strategy might actually be one way to express an opinion that answers how investors might choose to approach their municipal portfolios over the remainder of the year.

With October having come to a close and municipal bond performance up 8.32% year-to-date as of October 31, as measured by the Barclays Municipal Bond Index, investors may be tempted to close the books and wait out the end of the year. With volatile equity markets, uncertainty surrounding the timing of the Federal Reserve's decision to allow rates to rise again, and headlines trumpeting conflict and disease, it might indeed be tempting to do nothing.

Muni Nation: Total Returns

Source: Bloomberg.

However, I hasten to say that playing defense does not strike me as a prudent strategy; the underlying elements that have driven performance so far this year are likely to remain in place through the next two months, at the very least. Thus, investors may benefit from sticking to a good offensive game plan by building tactically upon core holdings in high-yield and investment-grade intermediate munis. This potentially offers income from high-yield and the benefits of roll down1 from intermediates which may allow one to build upon possible gains, even in the face of unknowns.

Back to the title line: Even though we are in the fourth quarter of the year, we want to finish strong with a sound game plan and good performance. I believe that an allocation to the municipal bond asset class so far this year has proven to be a good move that I personally would not abandon at this point in the game.

1As a bond approaches maturity it will gradually "roll down the curve" toward lower yields each year as it moves closer to maturity. As this occurs the bond will be valued at successively lower yields and thus potentially higher prices as it gradually moves down the yield curve. This strategy may help protect principal in a rising interest rate environment and allow an investor to capture higher yields. This strategy works best when the yield curve remains upward sloping and when rates rise less than the markets are predicting. Conversely, if yields rise by the full amount that the markets predict, the benefits of this strategy could be zero.

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years.

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The Ides of October http://www.vaneck.com/muni-nation-blog/the-ides-of-october-10-24-14/ The market gyrations of last week may become a data point for chartists and strategists who are looking to build a new thesis for their economic outlook, the Federal Reserve's decisions, or the directionality of the fixed-income markets. Why?

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Van Eck Blogs 10/24/2014 9:11:54 AM Muni Nation: October Image The market gyrations of last week may become a data point for chartists and strategists who are looking to build a new thesis for their economic outlook, the Federal Reserve's decisions, or the directionality of the fixed-income markets. Why? On the heels of a volatile equity market, U.S. Treasuries and municipal bonds recently exhibited abnormal behavior, especially last Wednesday (15th), the Ides of October. The price of the 10-year Treasury note whipsawed in early markets with a 3-point move in little more than an hour, trading from approximately $101 up to $104. Similarly, certain high-grade municipals with 10-year maturities traded in a 16-basis point range in terms of yield. Both of these moves were beyond the range of what is generally considered normal behavioral and trading patterns, giving rise to discussion as to cause and effect.

Although October has ushered in some devastating moments in our financial history (recall the entire month of October 2008 and days such as October 19, 1987 and October 28, 1929), this feels to me more like the tide turning than a lurch toward a distasteful ending. As unsettling as volatility can be, it is not unusual for corrections to reset valuations. With strong performance in the muni market year-to-date and, so far, no fundamental changes to the underlying conditions that brought us to this point, last week's temblors have not shaken my assumptions that muni valuations are still attractive compared to certain other asset classes. The imbalance between supply and demand will potentially continue to be the dominant theme as the impact of the Ides of October recedes in the rear view mirror.

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Reading the Spreads http://www.vaneck.com/blogs/muni-nation/reading-the-spreads-10-16-14/ Van Eck Blogs 10/16/2014 3:35:09 PM As I have noted in earlier posts, the performance of the municipal asset class has been better than anticipated thus far this year. Investment grade municipal bonds, as measured by the Barclays Municipal Bond Index, as of yesterday have now generated positive returns of 9.3% while the Barclays Municipal Bond High Yield Index is up 12.2% for the same time period. In prior posts I have outlined some of the fundamentals leading to these results and I have also pointed to the relationship between muni high yield and corporate high yield as a factor that may have attracted significant assets to the asset class.

The yield ratio of muni high yield to corporate high yield has been over 100% for the past 14 months. In the nearly 20-year history of the Barclays indices, this ratio, or relative value, of muni high yield has never before reached these heights. The huge rally in corporate high yield, i.e., the move to lower yielding bonds, and the surge in size of the muni high yield sector, with the addition of Puerto Rico credits, are responsible, in part. Now, as investors have taken note, the ratio of muni high yield to corporate high yield has come in from a high on June 30th of 136% to approximately 106% on September 30th as increased demand and spread narrowing have begun to move the indices in the direction of reversion to the mean, or to a more normalized relationship. The good news for municipal bond investors is if the long-term average is representative of "normalized," we still have a way to go before the ratios reach 76%.

Yield Ratio of Barclays High Yield Municipal Bond Index to
Barclays Corporate High Yield Index

September 2003 - September 2014

Source: FactSet as of September 30, 2014.

Spread tightening is generally one natural consequence of demand and has typically generated the type of performance we’ve seen in the muni market this year. The example above illustrates that high yield corporates are still not yielding as much as high yield municipals, although the difference between their yields is narrower than it was mid-summer. However, with ratios remaining above 100%, I believe high-yield municipal bonds may continue to attract a wide variety of investors looking for income and value potential through the final quarter of 2014.

Yield ratio is the ratio of the yields between two indices or bonds. The equation is: Yield Ratio = Yield of Index A / Yield of Index B.

Yield to worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

Spread tightening is when the difference in yield between two indices or bonds becomes less pronounced.

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays Corporate High Yield Index covers 50 of the most liquid and tradable U.S. dollar-denominated, non-investment grade corporate bonds for sale in the U.S.

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Crosscurrents May Benefit Municipals http://www.vaneck.com/blogs/muni-nation/crosscurrents-may-benefit-municipals-10-01-14/ At the risk of sounding like a bulge bracket drum beater, recent events, including the resignation of Bill Gross from PIMCO, beg for some clarity in so much as municipals have generally continued to generate respectable returns so far this year...

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Van Eck Blogs 10/1/2014 12:46:11 PM At the risk of sounding like a bulge bracket drum beater, recent events, including the resignation of Bill Gross from PIMCO, beg for some clarity in so much as municipals have generally continued to generate respectable returns so far this year.

Last week the muni market assimilated some large and needed supply, notably two $2 billion new issues: one from California and the other from New York. Each one was met with strong demand, and as the syndicates closed the bonds traded higher (in price) in after-hours trading. Possibly in anticipation of the new supply, municipal bond yields finished the week lower than where they began.

As of last Friday, Bank of America Merrill Lynch had calculated that issuance was still down 9.09% compared to this same time period last year. While according to Lipper data, investor inflows into muni mutual funds and ETFs were again positive for the week amounting to $588 million (although inflows year-to-date are approximately $16 billion, which is well short of the $68 billion that left municipal funds in 2013). This theme continues to, in part, explain both the performance and potential opportunity perhaps present in the municipal asset class.

Much has been said about the recent comments from the Federal Reserve and the winding down of its bond purchase program that may signal a sooner-than-expected rise in interest rates. Mixed U.S. economic indicators, however, have recently suggested that growth is not turning higher, thus lending support to U.S. Treasuries and municipals.

The resignation of Bill Gross generally appeared to affect fixed income assets, as evidenced by the market's reaction. Municipals are a small portion of PIMCO's total assets under management, and although it's not expected, we’ll keep our eyes on possible outflows from PIMCO’s open- and closed-end muni funds. I anticipate a generally muted impact to the overall municipal bond market.

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Hot Fun in the Summer http://www.vaneck.com/muni-nation-blog/hot-fun-in-the-summer-09-15-14/ Van Eck Blogs 9/15/2014 5:13:59 PM The evidence that the muni market was open for business in August is shown in the numbers below. According to Municipal Market Advisors (MMA) data, in the long end of the curve, investment grade muni yields fell by 27 basis points (bps) from the end of July to the end of August. For the same time period, the Barclays Municipal Bond Index was up 1.21%, the Barclays Municipal Long Bond Index was higher by 1.86%, and the Barclays Municipal Bond High Yield Index was significant, advancing 3.13%. This provides us with some potentially crowd pleasing year-to-date results (total returns) for the three benchmarks of 7.47%, 12.37%, and 11.59% respectively.

09-16-2014 Muni Index Returns YTD to 8/31/14 

Source: Bloomberg. Data as of 8/31/14

It is unclear which geo-political or economic elements are going to emerge that may shape the markets as we head into the final months of the year, but it appears that the themes below have been some of the primary drivers of these results this year:

  • Low supply of newly issued bonds
  • Strong cash flow from maturities, calls and coupons
  • De-risking out of international debt pushing Treasuries higher
  • Taxable equivalent yield advantage of munis versus other fixed income
  • The isolation of “credit troubled issuers” such as Detroit and Puerto Rico from the broader market

With definitive action on the part of the Federal Reserve potentially months away, the municipal bond asset class continues to enjoy investor attention and asset in-flows.

09-16-2014 Muni Flows 

Source: Morningstar Direct. Data as of 8/31/14.

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays Municipal Long Bond Index is a subset of this broader index and covers investment-grade municipal bonds with a nominal maturity of 22 years or more. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years.

 
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Back To School http://www.vaneck.com/muni-nation-blog/back-to-school-09-10-14/ Michael Zezas, Municipal Strategist at Morgan Stanley and guest contributor to MUNI NATION, "schools" us with his views on the condition as well as challenges facing the higher education sector.

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Van Eck Blogs 9/10/2014 1:23:33 PM MUNI NATION invited Michael Zezas, Morgan Stanley's Municipal Strategist, leading the firm's strategic municipal research effort, to provide his commentary on the education sector.

Muni Nation: Michael ZezasSummer's nearly through, and about 17.5 million students have returned to their colleges. To pay for that privilege, many will rely on student loans, which total about $1 trillion in the U.S. alone. The economic effects of that debt burden are increasingly a source of debate, with everyone from Wall Street critics to Congress and Fed economists worrying aloud about the value and financing of higher education. For the municipal bond market, this evokes questions about the business model of colleges and universities and, importantly, the credit quality of their bonds. While there are some valid concerns, we still see a stable fundamental outlook for the bulk of the sector. Consider the following:

  1. The market for higher education bonds is generally high in credit quality. 78% of muni bonds issued by colleges and universities come from institutions with an AA rating or higher. Furthermore, I believe it's interesting to note that in 2012, the average public institution carried on its balance sheet 140 days' cash on hand, while private institutions carried 263.

     
  2. Demand for a college degree remains supported. In general, college graduates tend to have higher income levels with fewer incidents of unemployment than individuals with only a high school diploma. This may sound like a platitude, but the evidence seems to bear it out, as illustrated in the chart below based on U.S. census data.

     

College Graduates Have Tended to Earn More with Lower Levels of Unemployment in the U.S. 

Muni Nation: College Graduates Have Tended to Earn More with Lower Levels of Unemployment in the U.S.

Source: Morgan Stanley Research, Bureau of Labor Statistics, U.S. Census Bureau. Data from most recent census.

Not surprisingly, a greater percentage of high school graduates are attending college.

College Participation in the U.S. Trends Upward with Income Gap for College Graduates (3-yr rolling average) 

Muni Nation: College Participation in the U.S. Trends Upward with Income Gap for College Graduates


Source: Morgan Stanley Research, National Center for Education Statistics, U.S. Census Bureau. Data from most recent census.

  1. Key challenges exist but affect a smaller part of the market. Demand for a college degree may be strong, but universities' ability to raise tuition may be limited over time, posing risks to their business model and credit quality. Personal income growth in the U.S., which has been subpar, is strongly correlated with enrollment. Not surprisingly, in 2012, the last year for which we have data, the number of families eliminating college choices for financial reasons spiked.

    Furthermore, while the percentage of U.S. high school graduates going to college is projected to rise, the number of high school graduates is not expected to grow over the next seven years. Also, consider the rise of disruptive technology, like free online courses taught by credible professors, which over time could prove a viable, cheaper alternative to traditional universities. Taking it together, there are gathering pressures on incoming tuition payments, which account for 38% of revenues for private institutions and 33% for public institutions.

    Yet some universities may be better positioned than others to cope with this risk. How? Revenue diversification and tuition discounting. The more revenue streams a university has, the less reliant it may be on tuition for financial health. Diversification allows a university the flexibility to use price discrimination (charging different tuition rates to different students) to sustain enrollment. This is called tuition discounting, and it reduces the "sticker price" at many institutions. Higher-rated, more financial-resource-rich institutions, which make up the bulk of the rated market, have the greatest capacity to discount, given, on average, less reliance on tuition (25% of revenues for AAAs vs. 86% of revenues for BBBs) and substantial higher total financial resources per student (over $1 million for AAAs, less than $23,000 for BBBs).


I believe the business model of higher education is likely to come under pressure over time. The good news for bondholders, however, is that this pressure is more acute for smaller, lower-rated institutions, which generally are a smaller portion of the higher education municipal bond sector.

Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are broadly the same. The symbols that are used by S&P to designate least credit risk to that denoting greatest credit risk: AAA, AA, A, BBB, BB, B, CCC, CC, and C. S&P appends positive or negative modifiers to each generic rating classification from AA through CCC. Ratings from BB+ to CCC- are below investment grade or speculative grade.

This summary is based on a report that was published on September 3, 2013 and titled, Municipal Macro Report: College Orientation. Morgan Stanley does not undertake any duty to update this material or otherwise advise you of changes. This material is provided for informational purposes only.

Please note that the information in this post represents the opinions of Michael Zezas and not necessarily those of Van Eck Global. These opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results, or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.

Michael Zezas, CFA
Executive Director, New York, Municipal Strategist, Morgan Stanley

Michael Zezas is Morgan Stanley's Chief Municipal Strategist, leading the firm's strategic municipal research effort. He has been recognized by Institutional Investor Magazine as a member of its All-America Fixed-Income Research team in the "Municipals Strategy" category and is a member of SIFMA's muni policy committee.

Michael joined Morgan Stanley in 2007 in the role of Head of Credit Analysis for the U.S. Investment Group, a buy-side asset manager housed within Global Wealth Management. In this role, Michael was responsible for municipal and corporate credit portfolio strategy and management. Prior to joining the firm, he served as a credit analyst in the public finance group at Fitch Ratings, covering various municipal sectors and serving as the lead analyst for tax-supported credits for several US states. Mr. Zezas started his career as a Coro Fellow in Public Affairs focusing on public sector capital budgeting and economic development.

Michael received a Bachelor of Arts degree in Political Economy from Georgetown University and earned a Master of Public Affairs degree from the LBJ School of Public Affairs at the University of Texas at Austin. He is a CFA charterholder as well as a member of the CFA Institute, the New York Society of Securities Analysts, the National Federation of Municipal Analysts, and the Municipal Analyst Group of New York.


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My View From The Eighth Month http://www.vaneck.com/muni-nation-blog/my-view-from-the-eighth-month-08-19-14/ Van Eck Blogs 8/19/2014 11:58:44 AM I begin this commentary with the fundamentals. Performance for municipal bonds since the start of 2014 has been strong thus far. Year-to-date (YTD), municipals have returned 6.18% as measured by the Barclays Municipal Bond Index and 8.20% for the Barclays High Yield Municipal Bond Index. In my opinion, the broad muni market has demonstrated resiliency, with the exception of June, when supply was strong and selling of tobacco and Puerto Rico bonds depressed the market. So far this year, municipal high-yield bonds appear to have continued to deliver potential value, posting comparable yields to corporate high-yield bonds, with yield ratios in excess of 119% on July 31, as illustrated below. This data point could be driving the "crossover trade" from taxable high yield to municipal high yield. As we move through the eighth month of the year, the thirty-day visible supply of $8.1 billion in new bonds1 may potentially fail to cover the demand that could be generated by $41.8 billion of coupons, calls, and maturities flowing into client accounts through August2.

Ratio of Barclays High Yield Municipal Bond Index
to the Barclays Corporate High Yield Index Yield to Worst3
 

Ratio of Barclays High Yield Municipal Bond Index to the Barclays Corporate High Yield Index Yield to Worst

Source: Barclays Research as of 7/31/14.

There is some positive news on the municipal credit side. Moody's reported on July 29 that they upgraded more debt than they downgraded for the first time in six years. Significantly, New York and California earned upgrades to Aa1 and Aa34, respectively. These states are the two largest issuers of municipal bonds.

Finally, the faltering economic fortune of Puerto Rico continues to make headlines, sometimes in dramatic form. With the enactment of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which allows certain government owned entities to restructure their debt, the clock is ticking down to a moment when various market participants may be anticipating some action. As much as the selling of certain credits has created an air of desperation, liquidity is seemingly present, and according to SIFMA data, billions of dollars in bonds have changed hands in the secondary market through the end of July. What is even more significant to me, however, is that the broad municipal bond market has been far less affected than one might have expected. The positive returns that the Barclays muni benchmark indices posted in July might suggest the market has moved beyond the headlines.

The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays Corporate High Yield Index covers 50 of the most liquid and tradable U.S. dollar-denominated, non-investment grade corporate bonds for sale in the U.S.

1Source: Bond Buyer as of 8/7/14. The 30-day visible supply is compiled daily from The Bond Buyer's Competitive and Negotiated Bond Offerings calendars. It reflects the dollar volume of bonds expected to reach the market in the next 30 days. Issues maturing in 13 months or more are included.

2The coupons, calls, and maturities data was provided by Siebert Brandford Shank and Co., LLC.

3Yield to worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

4Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are broadly the same. There are nine symbols that are used by Moody's to designate least credit risk to that denoting greatest credit risk: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. Ratings from Ba1 to Caa3 are below investment grade or speculative grade.

All of the Market Vectors municipal bond ETFs can potentially hold debt issued by the Commonwealth of Puerto Rico. At the time of this posting, only the Market Vectors High-Yield Municipal Index ETF and the Market Vectors Short High-Yield Municipal Index ETF held Puerto Rico debt. (Click the preceding hyperlinks to view geographic weightings.) This means the Funds would be susceptible to additional risks associated with investment in Puerto Rico.


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Resilience And Opportunity Potential http://www.vaneck.com/muni-nation-blog/resilience-and-opportunity-potential-08-12-14/ Van Eck Blogs 8/12/2014 1:57:53 PM The municipal bond market, as measured by the Barclays Municipal Bond Index, eked out a small gain for the month of July, and in my view, this is significant. The forces of what has been a strong U.S. stock market so far this year, and continued evidence of some economic improvements, have interrupted what had been a strong first six months of the year for municipal bonds, generally turning investors toward taxable bonds. Still, the volatility of some equity markets, which appeared to be brought about by elements of the conflicts in Gaza, Ukraine, and Iraq, combined with the default (again) by Argentina, could potentially leave investors favoring municipal bonds.

The saga of Puerto Rico has dominated both the headlines and secondary market trading in recent months, but in general has not dampened interest in the broad market overall. What has remained in place is the equation of demand consuming limited supply. Also the ratio of municipal yields to treasury yields — an important indication of potential value — seems to be pointing to possible opportunity in investment-grade muni bonds, from intermediate maturities to the long end of the curve. It's here that the ratios have again reached 100% as of July 30.

After redemptions in early June fostered a round of selling, tobacco bonds have posted stronger returns than investment-grade bonds in July, with limited new issue supply supporting price action throughout all sectors. The spreads of high-yield municipals to investment grade continue to signal a potential value opportunity. As of July 29, the Barclays High Yield Municipal Bond Index spread was 454 basis points to the Barclays Municipal Bond (investment-grade) Index, still 170 basis points above the long-term average beginning in 2004.

In addition, the Barclays High Yield Municipal Bond Index is yielding 127% of the Barclays U.S. Corporate High Yield Index as of July 30. From these two comparisons alone, it is hard to ignore the potential for opportunity in municipal bonds. The argument for a crossover trade from high-yield corporates to high-yield municipals can be made, when considered on a taxable-equivalent basis.

Index Yield and Duration Profile as of 7/31/14

Index Yield and Duration Profile

Source: FactSet as of 7/31/14. Index performance is not illustrative of Market Vectors ETF performance. Fund performance is available at www.marketvectorsetfs.com.

High-Yield Corps Index: The Barclays U.S. Corporate High Yield Index covers 50 of the most liquid and tradable U.S. dollar-denominated, non-investment grade corporate bonds for sale in the U.S. High Yield Muni Index: The Barclays Municipal Custom High Yield Composite Index covers high yield rated (75%) and BBB rated (25%) municipal bonds with a nominal maturity of 1+ years. The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years. The Barclays High Yield Municipal Bond Index covers below investment-grade municipal bonds with a nominal maturity of one or more years.

Taxable-equivalent yield represents the yield a taxable bond would have to earn in order to match, after federal taxes, the yield available on a tax-exempt municipal bond (excluding AMT). Municipal bonds may be subject to state and local taxes, as well as to federal taxes on gains, and may be subject to alternative minimum tax. The chart displays the yields of municipal bond indices on a tax-equivalent and duration basis and compares such yields to other asset classes as represented by the indices defined above. Municipal bonds are exempt from federal taxes and often state and local taxes. Corporate bonds are subject to federal, state, and local taxes. Prices of bonds change in response to factors such as interest rates and issuer's credit worthiness, among others. Duration is represented by duration to worst. Historical information is not indicative of future results; current data may differ from data quoted.  


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Straddling the Bermuda Triangle http://www.vaneck.com/muni-nation-blog/Bermuda-Triangle/ At the risk of overstaying my welcome on this topic, I submit that Puerto Rico continues to dominate the landscape of municipal investing in curious ways. I will try to be succinct.

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Van Eck Blogs 7/29/2014 9:13:24 AM Puerto Rico Electric Authority (PREPA)
At the risk of overstaying my welcome on this topic, I submit that Puerto Rico continues to dominate the landscape of municipal investing in curious ways. I will try to be succinct.



On the heels of the Moody's downgrade and negative July 1 outlook announcement for Puerto Rico Electric Power Authority (PREPA), the company's bonds traded as low as $37, only to rebound to a $45 bid by Friday, July 18. Its high was $47 on Tuesday, July 22 after it was announced that loan repayment obligations had been extended to the end of July. The benchmark Puerto Rico general obligation (GO) 8's (8% coupon bonds issued in March 2014 and maturing on July 1, 2035) were pushing closer to their original issue price of $93 on July 23 after trading as low as $84.25 on July 2.  

The financing arm of the Commonwealth, the Government Development Bank (GDB), held an inv