Frank Talk - A globetrotter's perspectives about investing in resources and emerging markets

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August 2008

» Market pain before market gain?
» Money Supply Exaggerating Commodities Selloff
» Can you solve America’s power problems?
» July’s Commodities Purge Offers Long-Term Opportunity
» Turkey: A Very Favorable Outcome

Frank Holmes on CNBC August 8, 2008
Market pain before market gain?

After mentioning how destructive the freezing of the auction-rate securities market has been on the market in my appearance earlier this week, I returned to CNBC’s “Street Signs” to discuss the broad market effects of Citigroup’s $20 billion buyback of auction-rate securities.

During the interview, I explained why the freezing of these assets has had such a severe effect on the market.

“It’s like getting punched in the nose. You know if you walk into a door, your nose is stung and you’ll just recuperate quickly but if someone turns around and smashes your nose and breaks it and it’s bloody, it takes a long time to heal. And that’s what traumatizes both the retail agent selling these stocks and… the retail investor. So I think that hopefully this (buyback deal) will fast-track the resolution.”

Watch the Interview

Frank Holmes on CNBC August 7, 2008
Money Supply Exaggerating Commodities Selloff

I recently appeared on CNBC’s “Street Signs” to discuss the results of Tuesday’s Fed meeting.

During the interview, I was asked by Erin Burnett about the correction in commodities:

“The commodity sectors in particular are going through this massive correction. A) It’s seasonal. B) Money velocity and money supply is actually…slowing down. It’s falling, even with low interest rates. So that’s a concern that’s making it much more of a dramatic correction.”

Watch the Interview

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

August 6, 2008
Can you solve America’s power problems?

There’s nothing like $4 gasoline to get Americans focused on our nation’s energy future.

Sure, we import too much oil, we burn too much gasoline and our electrical grids are old and rickety. The challenge is what to do about it, both now and in the years ahead.

The presidential candidates are spending a lot of time offering views on energy, most of it in broad brush terms. And oilman T. Boone Pickens looks and sounds like a candidate himself in his $58 million worth of TV commercials promoting wind power and natural gas-powered cars.

What do you think we should do?

An interactive game called Energyville challenges you to keep a fictional city supplied with power over the next two decades while minimizing the economic, environmental and security impacts.

Screenshot of Energyville

The task may prove tougher than you think, as there are pluses and minuses that come with each choice you make.

Energyville is from from oil major Chevron Corp. and The Economist Group, which publishes The Economist magazine.

Give it a play—it’s fun and you’re bound to learn something new on this important topic.

Play the Game

And speaking of fun and games, we’ve put together our own interactive quiz on gold that covers history, politics and obscure trivia.

Test your knowledge of the shiny yellow metal now.

Take the gold quiz

August 4, 2008
July’s Commodities Purge Offers Long-Term Opportunity

By Frank Holmes, CEO and Chief Investment Officer

Are we at the end of the commodity bull market or does this battered sector offer an attractive buying opportunity?

That’s the question on the minds of everyone trying to navigate one of the most complex and volatile markets we’ve seen in years. The continuing economic slowdown (particularly at home and in other G-7 countries), combined with more than a year of bleak news from the financial sector, has left investors dazed and desperate.

July was a very tough month for commodities and commodity stocks. The S&P Natural Resources Index fell off 15 percent, the worst monthly sell-off in the sector since August 1998, when the Russian currency crisis triggered the implosion of the hedge fund Long-Term Capital Management. Prices for the underlying commodities also suffered in July, with the Reuters/Jefferies CRB Index down 10.1 percent. This was just short of the worst monthly performance for this index since 1970.

While energy and resources felt the impact of July’s turmoil, it’s important to keep in mind that this performance did not reflect the sector’s solid fundamentals.

Unlike other bull markets where equities traded at challenging valuations, energy and resource stocks are historically cheap. And despite very high prices for oil, OPEC production has been unable to eclipse peak production levels and spare capacity remains critically low relative to prior decades. Outside the OPEC cartel, countries such as Russia and Mexico have struggled to keep up with demand.

Meanwhile, costs continue to escalate as marginal supply is typically located in geopolitically sensitive areas or extracted from expensive unconventional resources.

A similar fundamental story holds for the metals and mining sector, where new discoveries and production are not adequate to keep up with strong global demand.

Click here to read the full commentary

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P GSSI Natural Resources Index is an equity benchmark for U.S. traded securities. The natural resource sector is classified according to the Global Industry Classification Standard. The index is a modified-capitalization weighted index, the constituents of which are selected according to objective screening criteria. The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.

Spice shop in Istanbul's Grand Bazaar August 1, 2008
Turkey: A Very Favorable Outcome

Charlemagne Capital is subadvisor to the U.S. Global Investors Eastern European Fund, which invests in Turkey and other Eastern European countries. This commentary was adapted from a research update issued this week.

The Turkish Constitutional Court has, in a surprisingly timely fashion, delivered its verdict in the case against the ruling AK Party (AKP) and its leading politicians, who had been accused of threatening the secular basis of the nation.

The AKP has not been banned. Neither have its leaders, who include Prime Minister Recep Tayyip Erdogan and President Abdullah Gul. The only censure was an effective fine for the AKP, equivalent to around $20 million.

Therefore, there will be no new elections. The AKP need not reinvent itself under another name, and the question of whether its leaders can stand as independents simply does not arise. Turkey is now free to continue its program of economic reform, and the goal of European Union membership remains very much alive.

The short term may prove volatile as traders “sell the fact” having “bought the rumor,” but over the medium to longer term, it is difficult to be anything other than wholly optimistic for Turkish shares.

Read the full report

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

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

July 2008

» America Must Not Become a Resource Hostage
» Russia: Focus on the Positive
» Could Santa Claus Be the World’s Next Oil Tycoon?
» How to Fit $100 billion in Your Pocket
» All Companies Deserve Protection from Illegal Short Selling
» How Much Do You Know About Gold?
» Is it still the Chairman’s China?
» Smith sees commodities booming for at least another decade
» Culture is key to investing success
» The Choices for a New Generation
» BRIC Countries Making Millionaires at Rapid Rate
» Cambodia Seeks to Cross the Frontier
» Dr. Faber on Global Inflation
» It May Be Time to Buy Gold-Mining Stocks

Frank on Forbes July 31, 2008
America Must Not Become a Resource Hostage

I was recently interviewed by Bob Lenzner for his program “Street Talk” on Forbes.com. During the interview, we discuss the seasonality of gold, infrastructure in emerging markets and how the price of oil has affected the market for uranium.

What to look for in a gold stock?

“There’s three value drivers…what separates one gold stock from the other and those values drivers are growth in production—can this company demonstrate, not the past but going forward one-two years, growth in production. Can it grow its reserve base faster than its production? And, what about its cash flow?”

Watch Video on Gold

How should the U.S. government approach the country’s natural resources?

“It has to be a friend for resources, not stop resources. We must explore and develop these resources—otherwise we are going to be held hostage to the rest of the globe.”

Watch Video on Infrastructure

Where is the demand for uranium coming from?

“The Chinese are building more than 40 nuclear reactors. That’s going to have a huge demand because there have been no major uranium discoveries or production coming on stream.”

Watch Video on Uranium and Potash

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

July 28, 2008
Russia: Focus on the Positive

See Julian Mayo, co-manager of the Eastern European Fund, discuss the situation in Russia on CNBC.

Watch the interview here

Charlemagne Capital is subadvisor to the U.S. Global Investors Eastern European Fund (EUROX), which invests in Russia and other Eastern European countries. This commentary was adapted from a research update issued this week.

The recent sharp share price fall suffered by Mechel may put the Russian stock market in a poor light. Similar events have happened before, however, and all have proved to be excellent buying opportunities.

Mechel is a vertically integrated metals and mining group with substantial coal interests and steel-making capacity. On July 24, its share price fell some 40 percent in the wake of criticism, aired live on TV, by Vladimir Putin, the prime minister.

On the same day, the British chief executive of TNK-BP, the joint venture oil and gas concern between BP and a Russian group, fled the country citing intolerable harassment.

Taking these two occurrences together suggests to some a business system controlled from the center where the rule of law and the principles of a market-based economy may be subservient to personal fiefdoms.

Such a view is most probably an overreaction. The fall in the Mechel share price itself occurred in a nervous market with all commodity stocks under downward pressure thanks to falling prices. The TNK-BP situation is also not new; friction between the partners had been obvious for some time, and an eventual split has become a foregone conclusion.

The distinctive Russian style of doing business may irk many people, but it should not be allowed to detract from the opportunities that exist across a vibrant economy that has seen a remarkable transformation over recent years.

Read the full commentary

Icebreaker July 24, 2008
Could Santa Claus Be the World’s Next Oil Tycoon?

The world’s largest potential oil and natural gas resources may not lie beneath the deserts of Asia or the depths of the South Atlantic, but under the ice of the North Pole. The U.S. Geological Survey reported this week that the Arctic Circle may hold 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas and 44 billion barrels of natural gas liquids.

The Arctic Circle’s potential resources total around 20 percent of the world’s undiscovered, but technically recoverable, oil and natural gas resources. Undiscovered resources are considered technically recoverable if they can be recovered using today’s existing technology. The estimated amount of oil is enough to fulfill global oil demand for nearly three years.

While this discovery certainly pokes a few holes in theory of Peak Oil, there are significant economic and geopolitical hurdles that must be considered in evaluating the impact these Arctic deposits will have on the global energy market.

The survey’s results excluded exploration and development costs. Currently, increases in these costs have caused the global exploration and development rate to slow dramatically. In addition, the survey concludes that approximately 84 percent of the resources are located offshore where exploration and drilling costs are significantly higher than conventional resources.

Also, which country has a claim to which Arctic areas is a topic of debate between bordering countries looking to secure a piece of the pie. The United States, Russia, Canada, Denmark, Norway and even China have been competing for several years to stake their claim to the Arctic’s vast undiscovered resources. According to the report, Russia and the United States may have the upper hand because the majority of the resources are found off their coasts.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Zinbabwe 250,000,000 Note July 22, 2008
How to Fit $100 billion in Your Pocket

You know you’ve got an inflation problem when 100 billion dollars buys about four oranges.

That’s the situation in Zimbabwe, where hyperinflation has decimated the currency to the point that a brand-new 100 billion dollar note is enough to provide two adults with the U.S. recommended daily allowance of fruit for a single day.

It won’t quite stretch far enough for a loaf of bread.

The 100 billion dollar notes—each of which is worth about five U.S. dollars—began circulating this week. Zimbabwe already issues denominations of 25 billion and 50 billion.

Zimbabwe estimates its own inflation at 2.2 million percent. Experts from outside the country say that estimate is far too low.

For certain goods, the inflation rate is even higher than what passes for normal in Zimbabwe. According to the Associated Press, the inflation rate has risen as high as 70 million percent for laundry detergent, 60 million percent for cooking oil and 36 million percent for sugar.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

July 18, 2008
All Companies Deserve Protection from Illegal Short Selling

By Frank Holmes, CEO and Chief Investment Officer

I'm happy to see that the SEC has acknowledged the growing problem of naked short selling in America's stock markets.

The SEC's emergency order that protects 19 big financial companies (including Fannie Mae and Freddie Mac) for a week is no doubt well-intended, but it doesn't fully address the damage done by abusive naked shorting.

I've been talking about naked short selling for the past 18 months because I know firsthand the damage that can be done by rogue hedge funds and other market abusers. U.S. Global Investors' stock, ticker GROW, has spent most of the past year and a half on the SEC's Regulation SHO list.

This is essentially a list of stocks which have a high percentage of their shares not settling within 3 days of trading--often the signature of abusive naked short sellers who make trades knowing that they will never borrow the shares that they are expected to deliver to the buyer. This is a market manipulation that creates "phantom shares" that could destroy value for legitimate shareholders. It's like somebody going to the store and bouncing a check.

Abusive short selling has been made easier by last year's SEC rules change that eliminated the "uptick rule" that required any short sale to follow an uptick in a stock's price.

Small-cap companies are particularly vulnerable to such tactics because naked shorting adds volatility to their stock prices because of the smaller floats. This unnatural volatility doesn't always reflect the underlying fundamentals of the company.
Individual investors in small-cap mutual funds have likely been harmed by these abusive short sellers. There have reportedly been cases in which the number of "phantom shares" created by abusive short sellers have approached or even exceeded the number of outstanding shares.

This is just one of the ways that rogue hedge funds, often working together, can take down a company. Not long ago a former hedge fund manager, now a popular CNBC personality, made a video in which he recounts how he and others used to improperly gang up on a stock to drive down its price.

The SEC is also implementing a "rumor sweep" to address the spread of false information to manipulate stock prices.

Do we need more rules, emergency or otherwise? Don’t the regulatory bodies already have the ability to take action against abusive naked shorting by simply enforcing the rules already on the books? And couldn't this emergency order be across the entire stock market, not just for a select group of big Wall Street firms and government-backed companies?

Wouldn't it make more sense for the regulators to spend their time and resources going down the list of Regulation SHO companies (readily available from the respective stock exchanges) and addressing their improper short sales?

While hedge funds are generally outside the SEC's reach, their prime brokers are subject to regulation. Among the most lucrative services provided by prime brokers is stock lending to hedge funds, so couldn't the regualtory bodies examine these practices to determine whether the prime brokers are aiding and abetting abusive naked shorting?

These abusive short sellers are a cancer that is threatening the health of America's financial system.

I believe that making sure the prime brokers follow the rules for borrowing and lending shares, and extending the protection beyond a few select firms to all public companies regardless of size, would go a long way toward reaching a cure.

July 18, 2008
How Much Do You Know About Gold?

You know it’s shiny, it’s rare and it’s the standard against which all good things are measured.

But how much do you really know about gold?

Take our interactive quiz to test your knowledge of gold history, geography and politics. We’ve also dug up some obscure trivia just to make it a little bit more challenging.

Have fun, and let us know what you think.

Take our Gold Quiz Here

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

July 17, 2008
Is it still the Chairman’s China?

For many in China, a dream car isn’t a Lamborghini or a Ferrari—it’s a Buick.

That’s right, a Buick. The oldest brand of American car is a sign of wealth for the roughly 9 million new Chinese drivers hitting the road each year. This is just one of many things one can learn about China from the Discovery Channel’s new series, “The People’s Republic of Capitalism.”

The four-part series, reported by veteran news anchor Ted Koppel, centers around the Western Chinese city of Chongqing—pronounced ‘Chon-Ching’—which has emerged as a focal point for China’s transformation into a capitalistic economy.

An industrial center since World War II, Chongqing has benefited from the Chinese government’s designation of the region as an “experiment zone,” which exempts it from government restrictions on certain industries. These lax government policies have been implemented by the government to help ease China’s urban migration.

Each part of the series addresses a key issue in China’s transformation:

Part 1: Joined at the Hip—This installment focuses on the intertwined relationship between the Chinese and American economies. Koppel illustrates this interconnectivity by tracing products like an iPhone from development through production.
Part 2: MAOism to MEism— A culture clash has materialized as rural peasants move into cities like Chongqing in search of better jobs and higher wages. Still, under Communist rule, the idea of “Americanism” hasn’t always been met with open arms.
Part 3: The Fast Lane—Equating China’s automobile boom with that of post-World War II America, Koppel shows the many faces comprising the world’s largest automobile market. With 25,000 new vehicles each day, car companies from around the world are battling with their Chinese counterparts to capitalize on this rapid growth.
Part 4: It’s the Economy, Stupid—Corruption, pollution, infrastructure and human rights are all problems that China is only beginning to sort out. However, big strides—like fair government payment for seized properties—have already been taken by the Chinese government to deal with the underbelly of prosperity.

Overall, the series provides a window into the largest transformation of wealth this century. To check for replay times of the series, visit the Koppel on Discovery Web site.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Evan Smith July 15, 2008
Smith sees commodities booming for at least another decade

Evan Smith, co-manager of the Global Resources Fund (PSPFX), recently appeared on CNBC’s “The Call” to discuss ways to invest in the commodities supercycle.

During the interview, Smith explained that market conditions for commodities remain favorable and that strong commodity prices should extend well into the future.

Asked how long the boom would continue, Smith responded:

“As long as emerging markets continue to develop and industrialize, and we think that’s going to last at least one or two more decades.”

Watch the Interview

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Summer 2008 Shareholder Report July 11, 2008
Culture is key to investing success

For a money manager, it takes more than just stock-picking skill to create a long-term record of success.

We attribute much of our success to our strong investment culture—the shared values and priorities that create structure and accountability within our team.

We’re happy with the results: six of our nine equity funds are on the Wall Street Journal’s latest quarterly list of top-performing mutual funds. Here’s a press release with more details on the WSJ list.

Our investment culture is so crucial to our success as investment managers, we’ve described it in detail in the latest issue of our Shareholder Report magazine.

My letter to shareholders spells out the core values that serve as the foundation of our investment culture. The letter is followed by a feature story that describes how these values are reflected in our day-to-day actions.

Other features include an updated version of “What’s Driving Gold?” and an interview with Jack Dzierwa, co-manager of our infrastructure-focused Global MegaTrends Fund (MEGAX).

You can find these stories and the Shareholder Report archives here

Romeo Dator July 10, 2008
The Choices for a New Generation

Romeo Dator, co-manager of the All American Equity Fund (GBTFX), recently appeared on CNBC’s “Power Lunch” to discuss stock plays for Generation Y investors. The interview focused on stocks with a strong five-year outlook.

During the interview, Romeo was asked how a 30-something investor should look at today’s markets:

“I think you should actually look at this as an opportunity to buy after a sell-off because I think you have a very long time horizon and we’re starting to see very attractive valuations. So I think you need to take advantage of this opportunity.”

Watch the CNBC interview

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

July 9, 2007
BRIC Countries Making Millionaires at Rapid Rate

Population Growth India’s economy grew a little over 9 percent last year, but the nation’s wealthiest citizens grew far faster.

The ranks of millionaires in India increased by 23 percent in 2007, giving it the world’s highest growth rate of rich people. There were 123,000 millionaires (financial assets in U.S. dollars) in India as of last year, according to the latest “World Wealth Report” published by Merrill Lynch and Capgemini.

The other BRIC countries—Brazil (+19 percent to 143,000), Russia (+14 percent to 136,000) and China (+20 percent to 415,000)—were also near the top of the list of countries minting new millionaires.

The growth in these countries and other emerging nations was driven by economic growth and stock market performance, so this year’s severe correction in many of the global bourses has likely knocked many people back out of the millionaire club.

China’s A-shares market was down over 47 percent in the first half of 2008, and India’s Sensex average fell 33 percent.

Altogether, there were more than 10 million millionaires around the world at the end of 2007 who held $41 trillion in financial assets—an average of $4.1 million each.

Nearly two-thirds of the total millionaires lived in North America (3.3 million) and Europe (3.1 million).

The super wealthy—those with more than $30 million in assets—grew by 8.8 percent in 2007 to about 103,000, according to the report.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Shanghai Stock Exchange Composite Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The Bombay Stock Exchange Sensitive Index (Sensex) is a selection of index members based on liquidity, depth, and floating-stock-adjustment depth and industry representation.

July 7, 2008
Cambodia Seeks to Cross the Frontier

Evan in Cambodia Evan Smith, co-manager of the Global Resources Fund (PSPFX), recently attended an investment forum in Cambodia. Here are some observations from his trip:

A recent trip to Cambodia gave me a chance to witness an emerging market in its very early stages. Having risen above decades of brutality, the country has one of the more stable governments in the region. Now Cambodia is eager to attract investment.

While neighboring Vietnam is generally classified as a “frontier market”—a designation given to the least developed of the emerging markets—Cambodia has yet to achieve that status. Even so, recent changes in Cambodia are encouraging.

The Cambodian government welcomes investors. There are no currency controls, and the economy is essentially “dollarized.” Apparently, it’s easy to negotiate tax holidays or tax reductions on property, and the government has opened up tax-free zones along the Thai and Vietnamese borders to stimulate investment.

Cambodia suffered through tremendous violence in the 1970s and ‘80s, but today the country has a more stable government than many of its neighbors.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

July 2, 2008
Dr. Faber on Global Inflation

Dr. Marc Faber, the famed contrarian economist and investor, recently fielded questions from me in an exclusive U.S. Global Investors’ webcast “Where is the Boom and the Doom?” Our wide-ranging discussion on the global economy touched on the danger of derivative investments, Chindia’s growing global footprint and the correlation of gold and oil prices, among other topics. Here are excerpts of Dr. Faber’s comments on the topic of global inflation:

“The Federal Reserve of the United States is a money-printing institution and it is very evident from its actions over the last 25 years that each time a crisis occurs, they liquefy the system…

“As the crisis in subprime lending evolved last year in 2007, they again very aggressively cut the fed funds rate from 5.25 percent on September 18 down to now 2 percent… So we have negative real interest rates and that then leads to huge bubbles and to inflation in the system…

“We are in a period during which commodity prices are rising, partially driven by the shift in demand coming from the incremental demand from China and India and also other emerging economies, and also partly driven by the ultra-expansionary monetary policies by Mr. Bernanke…

INFLATION IN KEY DEVELOPED AND EMERGING ECONOMIES

“When Mr. Bernanke began to cut interest rates last September 18, the oil price was at $75 and the dollar had kind of stabilized, and the commodities complex—the CRB—had peaked out in May 2006 and had been stable.

“But since he cut interest rates aggressively, all commodities have gone ballistic, essentially, and the dollar has of course tumbled.

“And if you look at (June 25), when Mr. Bernanke, instead of acting like other central banks, should have increased the fed funds rate from 2 percent to 3 percent to support the dollar, he just talks about being concerned about inflation but he doesn’t do a thing. Since then, the dollar has tumbled and gold has shot up and oil went up again.

“So there is a connection between the ultra-expansionary monetary policies of Mr. Bernanke—I might add, an economist that is an academic and that has studied the Depression but doesn’t understand anything about international macroeconomic conditions. And the conditions that led to the Depression in 1929-32 are very different from what we are facing today because commodity prices at that time had been in an upward trend from 1890 to 1921, but throughout the 1920s, essentially in a downtrend.

“We are now in an uptrend, so the more money he prints, the higher commodity prices will go, and the lower the dollar will go and the more inflationary pressures the U.S. will face.”

Listen to a replay of the “Where is the Boom and the Doom?” webcast

The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Frank Holmes July 1, 2008
It May Be Time to Buy Gold-Mining Stocks

I recently appeared on Bloomberg’s “Taking Stock” to discuss gold, oil and commodities with host Pimm Fox.

During the interview, I was asked if I was concerned that central banks have been selling some of their gold assets:

“That’s usually temporary. What’s really important, Pimm, is that we have negative real rates of return today and when you ever have negative real rates of return, commodities do well and gold is money and it’s a commodity. So it usually does exceptionally well.”

Later in the interview, I was asked why investors should buy mining stocks instead of investing only in bullion itself:

“Historically there has been a greater leverage of 3-to-1 equities over the bullion. However, in the past year with all the financial calamity, bullion has in fact outperformed many of the gold-mining stocks. So we try to focus on those stocks that are extremely undervalued.”

Watch the Full Interview

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

June 2008

» In Pursuit of Foreign Investment
» Where is the Boom and the Doom?
» Don’t Worry About a Return to ’70s Stagflation
» Past Neglect Causes Present Problems
» Cashing in on Social Networking
» Which Are The Top-Performing Commodities?
» Infrastructure Opportunity Getting Bigger All the Time
» U.S. Infrastructure: An Interactive Map
» Global Infrastructure: The $40 Trillion Opportunity
» The Urban Millennium
» Making Sense of Market’s Conflicting Signals
» Commodities on the Move
» What Greenspan is thinking now
» Oil Price Not a Bubble
» Consequences of the Commodities Craze

June 27, 2008
In Pursuit of Foreign Investment

Foreign Direct Investments China is still the big winner when it comes to foreign direct investment (FDI), but other countries are getting a bigger chunk of the money flows.

As this chart from The Economist illustrates, Russia has passed Mexico and Brazil to take the No. 2 spot in the past couple years. Net FDI into Russia tripled between 2005 and 2007, largely due to the energy boom there. Brazil also has seen a big upswing over the same period, and Chile has shot up on a percentage basis.

In all, FDI flows reached $470.8 billion in 2007, up from $165.5 billion in 2000, according to World Bank figures.

China remains well ahead of other emerging markets with $84 billion in net FDI in 2007, but its growth rate has flattened after years of strong gains. China’s share of emerging markets FDI was 18 percent in 2007, down from 30 percent in 2002, as opportunities have arisen in other countries.

Watch for India to take a growing share in the future. India should close in on China somewhat, especially in the long-term as Indian infrastructure improves.

For now, expect Russia to continue to boom. Capital-spending plans in oil and gas are generally based on historic prices. With prices at much higher levels in the last two years—and with a president more committed to the rule of law—capital expenditures in Russia should rise.

Mining and energy aren’t the only sectors in Russia that are attracting foreign investment. In fact, they accounted for less than 17 percent in 2006, according to the Organization for Economic Cooperation and Development. Services drew 55 percent of foreign investment that year, while manufacturing was responsible for more than 27 percent.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

June 25, 2008
Where is the Boom and the Doom?

Where is the Doom and the Boom?

With the midpoint of 2008 approaching, Dr. Marc Faber and I will offer our thoughts on the global economy in a webcast this Friday, June 27.

“Where is the Boom and the Doom?” will mostly be a conversation on opportunities and threats in the global marketplace.

The U.S. economy and markets have been struggling this year as the credit crisis plays out and people deal with soaring food and fuel prices, but things are not so bleak elsewhere in the world.

Dr. Faber is the prominent contrarian economist based in Hong Kong who writes “The Gloom, Boom & Doom Report.” He’s also a member of the Barron’s Roundtable and is a much-sought-after market commentator.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor

June 23, 2008
Don’t Worry About a Return to ’70s Stagflation

Commentary from John Derrick, Director of Research

Recent months have resurrected a potent economic villain of the past—stagflation.

The U.S. economy is seeing little to no growth, while at the same time inflation has risen to levels not seen in the better part of two decades due in large part to soaring food and energy prices.

How much should we fear stagflation now? Could we be looking at a replay of the pain and suffering of the Ford and Carter years?

While the current environment is trying for many consumers, we don’t see it evolving into outright stagflation due to the relatively low inflation rate (by historic standards) and structural changes in the U.S. economy in recent decades that provide more protection from a damaging spiral.

For one thing, there’s more flexibility in the economy as a result of improved technology, deregulation and increased competition that has resulted in more efficiencies.

A story from Bloomberg this week cites energy use as an example: Economic production in the U.S. in 2007 was 10 times greater than it was in 1973, but the nation’s energy usage has risen by a third over that time period.

A big part of that energy efficiency is the continuing transition from manufacturing to services, which has also helped control inflation by keeping labor costs down.

Goods-producing jobs are now less than 20 percent of the national labor force, down from 34 percent three decades ago (see chart above). At the same time, the service sector has grown to 58 percent of all employment, up from 41 percent in 1978.

The manufacturing sector tends to be more volatile than the service sector because of its cyclical nature.

The history of the domestic car industry is a good example of this. Lower demand creates higher inventories, which leads to layoffs and plant closures as supply is cut back. When demand bounces back, more workers are hired as production is ramped up to increase supply. This works until demand again falls off.

Unionized labor accounted for 20 percent of the U.S. workforce in the early 1980s, but now that membership is down to about 12 percent, according to Bloomberg. And the percentage of unionized workers whose contracts include automatic cost-of-living raises is only 22 percent now, down from 61 percent in the mid-1970s.

In addition to these fundamental changes in the economy, there are other factors that reduce the risk of stagflation.

A big mitigator is the memory of what happened in the late 1970s—a brutal combination of double-digit inflation, double-digit interest rates, rising unemployment and falling output. The awareness of the negative impacts of stagflation will almost certainly lead top policymakers in the White House, at the Federal Reserve and on Capitol Hill to move quickly to head off stagflation, as we’ve already seen with the economic stimulus checks and interest rate cuts.

On top of that, exchange rates are far more flexible than they were several decades ago, and the surplus of worldwide labor will serve to hold down any upward pressure on wages.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Frank Holmes June 20, 2008
Past Neglect Causes Present Problems

I was recently interviewed by Marketwatch.com investments editor, Jonathan Burton, on energy prices and their effect on economic growth.

During the interview, I spoke about the factors that have led to this bull market for commodities:

“That’s a concern that I have. And I’ve seen where they get these corrections but we have to turn around and adjust to the fact that the population of the world has doubled. We’ve underinvested in the exploration and development for energy, for copper, potash, there’s no copper or potash mine being brought onstream, significant size, for the past 30 years. Same thing with oil and gas fields.”

Watch the Marketwatch Video

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Romeo Dator June 19, 2008
Cashing in on Social Networking

Romeo Dator, co-manager of the All American Equity Fund (GBTFX), recently appeared on CNBC’s “Street Signs” to discuss the possibility of LinkedIn, a social-networking site for professionals, going public.

During the interview, Romeo said there are few public companies that offer a way to trade on social networking’s popularity.

“I think a lot of the bigger companies see the growth potential in the social-networking sites, and that’s why they’re scooping them up right now before they go public. … If you want any sort of exposure at all, I think you have to buy one of the three stocks I mentioned, be it Google, Microsoft or News Corp., because they’re the only ones that really have some sort of exposure to this area. There’s no pure play that’s a public company at this point.”

Watch the CNBC Interview

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Holdings in the All American Equity Fund as a percentage of net assets as of March 31, 2008: Google (0.00%), Microsoft (0.00%), News Corp. (0.00%)

June 18, 2008
Which Are The Top-Performing Commodities?

Earlier this month we posted the “periodic table” below that shows both the absolute and relative performance of 14 key commodities between 1999 and 2007, and we challenged readers to figure out which commodity yielded the best returns over the nine-year period.

We put this table together to show the power of mean reversion—how these commodities perform over the long term and how dramatically that performance can change from year to year.

So which of these commodities turned in the best overall performance over the nine years?

The answer, by a wide margin, is crude oil. For anyone who drives a car, this should come as little surprise.

The price of crude went up nearly 700 percent between the beginning of 1999 and end of 2007. This works out to an annualized return of 26 percent over the nine years.

At the bottom of the heap was palladium, which rose only 10 percent over the nine years, or barely 1 percent per year on average.

Of the 14 commodities on the list, all but palladium performed better than the Dow Jones Industrial Average (up 44.5 percent), the Nasdaq Composite (up 21 percent) and the S&P 500 (up 19.5 percent) over the nine-year period.

Here’s the complete list:

Commodity	Cumulative return ’99–’07	Annualized return
Crude oil	696.5%	25.9%
Nickel	542.9%	23.0%
Lead	409.5%	19.8%
Copper	358.6%	18.4%
Platinum	317.9%	17.2%
Natural Gas	284.7%	16.2%
Wheat	220.4%	13.8%
Silver	193.8%	12.7%
Gold	189.3%	12.5%
Zinc	150.0%	10.7%
Corn	113.4%	8.8%
Aluminum	90.8%	7.4%
Coal	88.1%	7.3%
DJIA	44.5%	4.2%
NASDAQ	21.0%	2.1%
S&P 500	19.5%	2.0%
Palladium	10.2%	1.1%

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

June 16, 2008
Infrastructure Opportunity Getting Bigger All the Time

Commentary from Frank Holmes, CEO and chief investment officer

Sector Breakdown The investment opportunity in infrastructure seems to be getting bigger and better all the time, especially in emerging markets.

Merrill Lynch came out with a research report this week that raises the expected spending on emerging-markets infrastructure to $2.25 trillion over the next three years, nearly double its earlier estimate.

We’re not at all surprised that Wall Street’s spending estimates for infrastructure are climbing fast.

The governments in these emerging nations have to maintain strong economic growth to keep their jobs, and to do that, they need more ports, airports, railroads, pipelines and other key industrial capabilities.

In addition, the ranks of the middle class in these countries are expanding in a thriving business environment, and these people want more and higher-quality housing, more and better roads for their new cars, and more extensive mobile phone networks.

And on top of that, huge numbers of people are pouring into the big cities from the countryside in search of steady work, and this is exerting pressure on electrical utilities and water systems.

Rapid urbanization is one of the strongest drivers of the infrastructure boom in emerging markets. In both China and India, for instance, the urban populations are expected to double in the next few decades.

We believe in the long-term sustainability of the infrastructure build-out, and we’re acting on that belief. Our Global MegaTrends Fund (MEGAX) is focused on identifying companies that stand to benefit from this powerful investment theme.

Merrill’s report has a detailed breakdown on where this spending will occur. No surprise, China is at the top of the list at $725 billion, or roughly a third of the total. The previous estimate for China was $400 billion.

The Middle East-Gulf region is next at $400 billion (up from $225 billion), followed by Russia at $325 billion (up from $195 billion), India at $240 billion (up from $110 billion) and Brazil at $225 billion (up from $180 billion).

There are hundreds of billions of dollars worth of infrastructure opportunities elsewhere in the emerging world: $120 billion in Mexico, $65 billion in Turkey, $60 billion in South Africa and $45 billion in central and eastern Europe.

In the U.S. and other developed nations, the emphasis is on repairing and rebuilding aging infrastructure.

This week in Washington, big-city mayors in the U.S. asked Congress for help with their massive infrastructure repair needs. A bill in the Senate proposes a $60 billion “National Infrastructure Bank” to finance such projects.

That number is just a small fraction of the $1.6 trillion in spending that the American Society of Civil Engineers says is required over the next five years to just fix existing roads, bridges and other vital infrastructure.

But for investors, it still represents a huge long-term investment opportunity.

Holdings in the Global MegaTrends Fund as a percentage of net assets as of 3/31/2008: Merrill Lynch (0.02%)

June 12, 2008
U.S. Infrastructure: An Interactive Map

We often cite the Report Card for America’s Infrastructure by the American Society of Civil Engineers, which estimates the United States would need to spend $1.6 trillion over five years to update its crumbling infrastructure. The nation’s infrastructure woes have gotten a lot of attention in recent years but have yet to be fixed.

We’ve created an interactive map which shows that failing infrastructure is a nationwide problem.

Click here to launch the Interactive Map

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

June 11, 2008
Global Infrastructure:
The $40 Trillion Opportunity

John Derrick, co-manager of the infrastructure-focused Global MegaTrends Fund (MEGAX), recently appeared on CNBC’s “Street Signs.”

During the interview, John was asked whether the global infrastructure build-out will slow down if the dollar significantly strengthens:

“It’s estimated that over the next say 25 years over $40 trillion is going to be spent on global infrastructure—over $21 trillion in just emerging markets over the next nine years. … Government policies are in place to build infrastructure and some of this is just due to a lack of investment in places like Russia, Middle East, etc., over the course of the 1990s and the governments have made the decision that they are going to move forward with these projects. Multibillion dollar projects, multi-year projects that are not going to get shelved just because the dollar got a little stronger or energy prices go up.”

Click here to view the recorded interview

June 10, 2008
The Urban Millennium

Karachi Market Back in 2000, then-U.N. Secretary General Kofi Annan said we were heading into “an urban millennium” that would pose many challenges.

No doubt he was right: Half of the world’s population now lives in urban areas, according to the United Nations.

We often talk about this urbanization trend, particularly its impact on infrastructure, and others are also taking notice.

The latest is National Public Radio, which has a new series called “The Urban Frontier.” The series reports on the changing face of the world’s megacities.

The first city featured is Karachi, Pakistan, a bustling port city whose population is estimated between 12 million to 18 million.

Jack Dzierwa, our global strategist, attended Citigroup’s Pakistan Investor Day 2008 in Mumbai, India back in March. He learned more about the country’s growing middle class, its expanding GDP and the shortcomings of its infrastructure, particularly when it comes to power generation. To read his observations, click here.

Future installments in NPR’s series will explore Lagos, Tokyo, New York and other cities.

Click here to find NPR’s “The Urban Frontier: Karachi”

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following security mentioned in the commentary was held by one or more of U.S. Global Investors family of funds as of March 31, 2008: Citigroup.

June 10, 2008
Making Sense of Market’s Conflicting Signals

Commentary from John Derrick, Director of Research

It’s no surprise that investors are confused about what to expect in the markets and the economy—there are a lot of data to keep track of, and they often don’t point in a consistent direction.

Is a recession still possible, and if so, how bad might it be? What impact will the federal stimulus checks have? Is the global credit crisis close to being over? What about oil prices, housing and the dollar?

We spend much of our time sorting through market information from a wide range of sources. Below are some of the important factors that we’re watching, both over the short term and the long term.

Bullish signals

The $115 billion in stimulus tax rebate checks should lift GDP growth in the second and third quarters. In addition to the checks, the government approved $50 billion in accelerated depreciation tax savings. This $165 billion liquidity injection represents more than 1 percent of GDP. ISI estimates a GDP increase of 1.8 percent in the second quarter and 3.2 percent in the third quarter due to the stimulus.
The economic decoupling story remains intact. Emerging markets are the drivers of global growth and have become less dependent on exports. In China, retail spending in April increased 22 percent over the same period in 2007, the fastest pace since 1999. Car sales in China grew 16 percent in May despite the country’s devastating earthquake.
U.S. exports remain strong due to the weak dollar. In May, the ISM’s export orders index rose to its highest level in four years. If the domestic economy slows as a result of high oil prices, the dollar is likely to fall further. This would be generally supportive of commodities prices.

Bearish signals

After some predictions that the worst of the credit crunch was past, recent reports suggest that more problems lie ahead. Just this week, rumors about trouble at Lehman Brothers returned, mortgage insurers Ambac and MBIA were downgraded, and Wachovia canned its CEO. There was also a report that European banks have endured more losses from the credit crisis than their U.S. counterparts and that Japanese regulators are closely watching for more trouble.
The U.S. housing market has yet to bottom out, and there have been indications that the bottom could be further out than previously thought. Home equity extraction is limited to nonexistent, which dampens consumer spending, and mortgage foreclosures and delinquencies in the first quarter of 2008 were highest since 1979.
Fed Chairman Ben Bernanke is talking about a strengthening dollar. It’s unusual for the Fed to take such a public stand on a subject that’s the turf of the Treasury Department. This could indicate that the federal government is getting serious about reversing the dollar’s direction, which could hurt commodities.

How we see it

The market has oscillated back and forth so far this year, and we are currently in the middle of a wide trading range.

The mixed economic data coming out include a few signs of economic recovery at home, while Europe (the U.K. in particular) appears to be “catching up” with the U.S. slowdown. China and most emerging markets remain robust and a positive impact on global growth.

Inflation is a hot topic around the world. Higher food and energy prices have put central banks on the defensive, limiting their ability to implement a more accommodative monetary policy to promote growth. The U.S. is already nine months into a Fed easing cycle, which should promote economic growth, but many other major economies have not taken similar steps.

What does this all mean for investors?

The market never likes uncertainty, and there is an abundance of uncertainty this year. Until there is more clarity on the ultimate direction of the economy and inflation, the market will likely struggle to make significant progress.

In our view, the fundamentals remain positive for continued global growth, which will ultimately drive the stock market forward. Right now, we’re just making our way over some short-term bumps along that road to long-term prosperity.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors family of funds held any of the securities mentioned in this commentary as of March 31, 2008. The Institute for Supply Management’s (ISM) New Export Orders Index compares the current month’s orders with those from the prior month.

June 6, 2008
Commodities on the Move

Here is a great illustration of mean reversion at work.

We put this table together to show how key commodities perform over the long term, both in absolute terms and relative to each other, and how drastically that performance can change from year to year.

Download Commodities and the Mean Reversion Principle

For instance, compare crude oil’s performance (maroon box) to that of coal (black box) over the nine-year period.

In 1999, oil was the top performer, gaining 112.4 percent during the year and coal was the laggard, having dropped 24.1 percent. But look at 2000 and 2001—coal outperformed oil by more than 30 percentage points in both years.

In 2004, coal was king of the hill, but the next two years it was almost at the bottom of the heap before rising again in 2007 to a respectable rank. Oil also had extreme swings up and down, as did virtually every commodity in the table.

Bonus for you number-crunchers or wild guessers out there—which commodity had the best overall performance from 1999 through 2007?

Send us your answer by email

We’ll provide the correct answer next week, along with the performance of all of the commodities in the table.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

June 5, 2008
What Greenspan is thinking now

Former Fed chief Alan Greenspan was among the speakers at this week’s Pershing Insite 2008 investment conference in Hollywood, Fla. Jack Dzierwa, global strategist at U.S. Global Investors, is attending the conference and he sent back his notes on Greenspan’s current thinking on a range of topics.

Current level of commodity prices (including oil) is a result of demand and supply forces due to globalization and population growth rather than speculation.
Controlling inflation by the Fed is the most important prerequisite to sustainable growth. Although the European Central Bank has two goals (inflation and growth), concentrating on one only (inflation) guarantees that the other will follow.
No evidence that a prolonged period of low interest rates since 2000 is responsible for the current housing crisis.
House prices will have to stabilize before we can say that the current writedowns/crisis are over. Not certain about timing.
The dollar’s current weakness is a result of the interest-rate differential with the euro and will revert as U.S. rates rise.
Central banks globally lost a lot of effectiveness as sovereign wealth funds and hedge funds proliferated. That is why we see less and less of intervention in foreign exchange markets.
Those working in 2015-2020 will have to support a much larger dependent population due to aging U.S. population. Expect much higher taxes or cut benefits by 50 percent as productivity gains (historically 3 percent per annum) will not be sufficient to meet much higher health care costs. Countries with younger populations are at an advantage.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Evan Smith June 4, 2008
Oil Price Not a Bubble

Evan Smtih, co-manager of the Global Resources Fund (PSPFX), recently appeared on Bloomberg’s “Market Pulse” to discuss the fundamental drivers behind the rise in oil prices.

During the interview, Smith was asked whether he feels oil’s rise to record prices constitutes a bubble:

“We wouldn’t characterize [it] as a bubble. We’re probably due for a technical correction for crude oil here in the near term but we see that as just a correction. If you look back over the last year we have had five corrections in crude oil between 6 to 12 percent. We’re probably due for one of those but we would see that as a buying opportunity.”

Watch the Bloomberg Interview

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

June 3, 2008
Consequences of the Commodities Craze

The commodities market is so sizzling that restaurants now have to keep a watchful eye on their French fry grease.

Enterprising thieves are making off with used fryer oil, which can be converted into biodiesel. This so-called “yellow grease” is easily accessible, since it’s usually stored outdoors because of its rancid odor.

Yellow grease trades on the commodities market, and its value has soared fourfold in recent years.

Read the New York Times Article

While American eateries try to keep sticky fingers off their fryer grease, the government of Peru has armed guards protecting its guano.

The seabird dung that carpets a couple of dozen islands off the Peruvian coast is in great demand as an organic fertilizer. Guano sells for about $250 a ton locally and double that in the United States.

Peru’s government restricts guano collection to about two islands a year so it can accumulate on the others. Guards on the islands fend off fishermen and other threats to the cormorants, boobies and other seabirds that drop up to 15,000 tons of guano each year.

Read the New York Times Article

Back in the U.S., more gas tanks are being punctured or drilled by thieves eager to drain off gallons of $4-a-gallon gasoline. Pickup trucks and sport utility vehicles with plastic tanks are most vulnerable due to their height.

Old-fashioned strategies like siphoning and “gas-and-dash” drive-offs without paying for fuel are also on the rise.

Read the USA Today Article

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

May 2008

» Where the Growth Is
» Oil expert weighs in on price drivers
» Don’t Blame Speculation—Commodity Prices Are Driven by Fundamentals
» View from the top of the (man-made) world
» Wall Street: More Dollars than Sense?
» BRICs building a new world order
» Short-Term Correction Likely for Oil
» Energy and Commodities Trends—Sustainable or Speculative?
» Challenges Await Russia’s New President
» Energy Exuberance
» Financial regulators need to catch up to the industry
» Has Copper Topped?
» In Defense of Gold

May 30, 2008
Where the Growth Is

Julian Mayo, co-manager of the Eastern European Fund (EUROX), appeared this week on CNBC’s “Street Signs” to discuss opportunities that he sees in emerging markets around the world.

One such opportunity that Julian discussed was the cell phone business in emerging markets, which he noted are still far behind the developed world.

“You’re still seeing a huge increase in average usage. People are using their cell phones more. There are a lot of people in emerging markets—in places like Russia or China or India—where you don’t have cell phones. And so you want to be in places like MTS—Mobile TeleSystems in Russia —which is undergoing rather incredible growth at the moment because of people just using more cell phones. It’s a simple story, but it’s a growth story, and that’s what emerging markets are all about.”

Watch the CNBC Interview

Price of Oil Graphic

May 28, 2008
Oil expert weighs in on price drivers

Daniel Yergin, one of the world’s top thinkers when it comes to oil, has a commentary in today’s Financial Times about the rapid rise of oil’s price to a recent peak of $135 per barrel.

Yergin’s main theme is that there’s a major change under way—oil is in the process of losing its global monopoly as transportation fuel. He says other technologies are being developed that will take market share away from oil.

But he stresses that this is a process, and that it will take many years to play out. In the meantime, oil will remain dominant.

One of the key points in Yergin’s commentary addresses the reasons why we can’t just snap our fingers and pump more oil to satisfy rising demand coming from Asia, the Middle East and other emerging markets.

There are three obstacles. The first is time. These high prices have not been around all that long and development of new supplies takes many years. The second is access to new resources. And the third factor is what is happening to costs. The public focuses on the price at the pump, but the oil industry is preoccupied, and indeed somewhat stymied, by how rapidly their own costs are rising.

These long-term constraints on oil production and their impacts on price tend to be skipped over in the election-year posturing. Candidates should be talking less about imposing “windfall” taxes on oil producers and more about how to raise domestic output.

Lack of investment in the late 1990s is in part to blame for today’s supply issues, and any opportunistic actions by politicians that would discourage investment will exact even more price pain in the future.

Click here to read Yergin’s full commentary

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

May 27, 2008
Don’t Blame Speculation—Commodity Prices Are Driven by Fundamentals

Commentary by John Derrick, Director of Research

U.S. Global Investors hosted a webcast this week titled “Energy and Commodities Trends: Speculative or Sustainable?” to provide a closer look at the current strength in natural resources prices. Our timing for this topic is good: oil prices hit a record $135 a barrel this week and drivers get more and more depressed every time they pull up to the gas pump.

Americans want to know how long we are going to have to put up with this. The answer to that question depends on whether one places most of the blame for today’s prices on market speculators or on a fundamental shift in global supply and demand trends.

When we answer that question, we think it’s important to offer both short-term and long-term viewpoints.

The flood of new money into energy and commodities from pension funds, hedge funds and other large investors has created some frothiness in those markets. We said recently that a short-term correction in the price of oil was likely, based on our statistical models.

But we think the long-term price trend will continue upward due to global growth.

The world is growing more populous and more prosperous. Rising living standards in the developing world are increasing demand for resources, which is driving up commodity prices across the board because supply can’t keep pace.

People around the world are consuming more calories (greater demand for food), they are buying more cars (greater demand for steel and oil), they are building bigger homes (greater demand for cement and copper), and so on.

And there are also interrelationships between these trends—for example, vast amounts of farmland in the developing world are being transformed into housing tracts, which reduces the acreage for food production. This pinches supply at the same time that demand is soaring.

Surging Purchasing Power in the Developing World

The chart to the right clearly illustrates this prosperity trend. In China, per-capita GDP has risen from $339 in 1990 to $2,574 this year—that’s nearly an eightfold increase in less than two decades. In India and the Middle East, the numbers have more than doubled, and Brazil is close to doubling. Rising incomes lead to greater consumption of energy and commodities, which exerts pressure on prices.

Along with growing populations and growing prosperity, there is also growing urbanization. In China we're expecting roughly 500 million people to move to cities or towns over the next three decades. India’s urban population is expected to reach 540 million by 2025, roughly double today’s level.

This trend has been at work for years. About three billion people—nearly half of the world—lives in urban areas right now. To give you an idea of the scale, that’s more people than the total global population in the mid-1960s. To keep up with the increase, cities are expanding their water systems, electricity grids, roadways and other infrastructure. Estimates are that $40 trillion will be needed over roughly the next 20 to 25 years to build out this infrastructure, which will exert price pressure on commodities.

Another way of weighing speculation against fundamentals is to look at metals prices.

Many metals are hard to speculate on because they are not listed on commodities exchanges—these include iron ore, steel, magnesium and cobalt. Research from Lehman Brothers found that a group of key non-exchange-traded metals shot up 600 percent between early 2002 and early 2008. During the same time, prices of listed base metals—copper, aluminum, nickel, zinc and lead— rose only 250 percent. This tells us that fundamental demand is a stronger factor in driving metals prices higher.

People want to blame speculation because that would give them hope that today’s food and energy prices will return to “normal” after the bubble bursts.

This is the way it has worked in the past, but most people don’t understand or perhaps don’t want to accept the fact that we have reached a tipping point across the board in commodities that will support even higher prices in the future.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

May 23, 2008
View from the top of the (man-made) world

This photo is worth a “Wow!” based just on what it shows—rows of skyscrapers peeking up through a thick bank of clouds.

A Photo of the Burj Dubai with surrounding skyline.
12% of the worlds construction cranes are in the UAE area.

But here’s the truly amazing thing about this image—it was not taken from an airplane, helicopter, hot-air balloon or other flying contraption.

This is a view from the Burj Dubai, the world’s tallest building that’s under construction in the United Arab Emirates. The structure is more than 2,600 feet tall (800+ meters), dwarfing the soaring towers strung out along Sheikh Zayed Road.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

May 22, 2008
Wall Street: More Dollars than Sense?

Hamburger Skyrocketing gas prices are creating enormous pain in most of America, but those well-heeled financial types laboring in the canyons of Lower Manhattan have their own burden to bear: budget-busting burgers.

The Wall Street Burger Shoppe recently boosted the price of its black truffle burger from $150 to $175 to make sure it remains New York’s most expensive slab of ground meat stuffed inside a bun.

This high-dollar fast food is made with a grilled patty of Kobe beef, produced from a special breed of Japanese cattle that’s typically fed sake and given muscle-relaxing massages.

But as posh as that sounds, the hefty price tag comes mostly from the fixings—rare black truffles, wild mushrooms, seared foie gras and aged Gruyere cheese.

Oh, the plate—the meal deal includes fries and a salad—is finished with a generous sprinkling of gold-leaf flecks. To wash it down, they toss in a free beer.

Co-owner Heather Tierney told Reuters that the $175 burger is meant as a treat for those occasions when someone has a particularly good day on Wall Street.

Tierney estimates that they sell 20 to 25 of them a month—that averages out as one per trading day. Seems that even with the market’s daily mood swings, there’s always someone who’s having a day worth celebrating.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

May 19, 2008
BRICs building a new world order

Commentary by Frank Holmes, CEO and chief investment officer

There was a small and little-publicized gathering in the heart of Russia today that years from now may be viewed as a watershed event in the ever-quickening shift of economic and political power from West to East.

The gathering in Yekaterinburg was the first for the foreign ministers of the four BRIC countries: Brazil, Russia, India and China. Among the key topics on their agenda are trade, development and other economic issues.

The BRICs, of course, are the world’s four largest emerging-market economies. On a purchasing-power parity basis, the combined GDP of these four countries in 2007 ($14 trillion, according to the IMF) made them the same size as the United States and just a little smaller than the European Union ($14.7 trillion).

It’s important to note that GDPs in the BRIC countries are growing at rates far exceeding those of North America and Europe. With policies for peace and prosperity that promote political stability and economic expansion, their clout only stands to grow in the future.

We at U.S. Global have long paid close attention to the policies in the BRIC countries. They are the four largest of what we call the “Emerging 7,” or E-7—the world’s seven most important emerging nations for which reliable economic data is available. Along with the BRICs, the E-7 includes Mexico, Pakistan and Indonesia. Together this bloc of countries represents nearly half of the world’s population.

We were early in recognizing the vast opportunities presented by the BRICs and other fast-growing economies.

Our emerging markets and natural resources funds have long invested in these countries, while our infrastructure fund—the Global MegaTrends Fund (MEGAX)— is focused on the multi-trillion-dollar build-out of roads, power plants, aviation networks, telecom systems, etc., needed to support future growth.

Most E-7 countries are in Asia (Russia’s richest resource deposits are on this continent), and their sustained rates of growth illustrate the profound shift of political and economic influence away from the North Atlantic.

This shift is attracting an increasing level of attention. Recently in Time magazine, Columbia University economist Jeffrey Sachs predicts that Asia’s emergence as the world’s economic center is one of the “earth-changing trends unprecedented in human history” that will mark the current century.

And a new book, “The Post-American World,” by Newsweek International editor Fareed Zakaria, maintains that the U.S. will lose its place as the world’s dominant power—not because the U.S. is weakening (as occurred in post-WWII Britain and France, for example), but because the BRICs and others are finally realizing their potential.

In the case of China and India, it wasn’t that long ago that both were extremely poor and economically isolated. Today they represent a critical mass of 2.4 billion people whose economies are growing at about 10 percent a year. Both countries are rapidly urbanizing and creating a huge middle class, and their dedication to building out their infrastructure will continue to drive growth in their domestic and export sectors.

Frank Holmes on CNBC May 16, 2008
Short-Term Correction Likely for Oil

Frank Holmes appeared earlier this week on CNBC’s “Street Signs” to discuss the price of oil with host Erin Burnett.

During the interview, Frank explained why the odds favor a short-term correction for oil:

“Right now, oil is at an overbought condition that’s happened less than 5 percent of the time over the past 20 years of data points. The dollar is down the same, percentage wise, and has started to rally but oil hasn’t started to decline. So based on the math of these markets, oil could easily fall back to $85, $100 a barrel and everyone would call it a bubble but it’s not a bubble. It’s just a correction in a secular bull market in resources.”

Watch the CNBC Interview Here

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

May 14, 2008
Energy and Commodities Trends—Sustainable or Speculative?

Energy and Commodities Trends--Sustainable of Speculative

It’s no secret that the world is hungry for resources—you see that every time you drive past a gas station. But it’s not just energy that’s soaring. Crop prices have also shot up despite more acreage being planted than ever before.

Should we blame short-term profiteers or long-term global trends? Are we on a course that may lead to $200 oil and $7 gas, or is today’s price merely a bubble soon to pop?

For insights into these important questions and more, join us on May 21 for our exclusive webcast Energy and Commodities Trends— Sustainable or Speculative?

Frank Holmes, CEO and chief investment officer, will be joined on the webcast by Brian Hicks, co-manager of the Global Resources Fund (PSPFX), and John Derrick, co-manager of the Global MegaTrends Fund (MEGAX).

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

May 13, 2008
Challenges Await Russia’s New President

Dmitri Medvedev The handpicked successor of former Russian President Vladimir Putin has taken his place at the Kremlin. The question now is whether Dmitry Medvedev can sustain the progress made under Putin’s leadership.

During those eight years, Russia used windfall oil profits to erase foreign debt and build up some of the world’s largest currency reserves. But while Russia’s standing has improved dramatically, Medvedev will have to address looming threats to the economy.

Foremost among them is inflation. Russia’s inflation rate exceeds 14 percent year over year, making it the highest by far among the BRIC countries: Brazil, Russia, India and China. In contrast, Brazil’s inflation rate is below 5 percent.

Another challenge facing Medvedev is stepping up private investment, particularly in the energy sector. The Russian oil industry is feeling the effects of years of underinvestment, but Medvedev has indicated that he would support greater private investment.

Despite the challenges, there are many reasons to be optimistic about Russia. The country boasts strong fundamentals, including budget and current account surpluses and substantial foreign reserves. And the installation of Medvedev as Putin’s successor—as well as Putin’s decision to stay on in the role of prime minister—has helped to eliminate political uncertainty. Russia’s economy is expected to grow by about 7 percent this year.

In perhaps one sign of Russia’s growing influence, Medvedev’s inauguration last week coincided with state-run natural gas producer OAO Gazprom becoming the world’s third-largest company by market value. In doing so, it surpassed China Mobile Ltd. and General Electric Co. Only Exxon Mobil Corp. and PetroChina Co. are bigger.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the commentary were held by one or more of U.S. Global Investors family of funds as of March 31, 2008: OAO Gazprom, China Mobile Ltd., General Electric, PetroChina Co.

May 12, 2008
Energy Exuberance

Commentary from Frank Holmes, CEO and chief investment officer

Oscillators allow our investment team the ability to track the movement of a stock or commodity through price and time and are based on the concept that prices move in waves.

The high and the low movements of the oscillator signify the overbought and oversold levels of stocks and/or commodities over different time periods. This helps investment professionals manage risks and opportunities and as we like to say simply “better manage expectations with a probability model.”

Read the full article...

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

May 8, 2008
Financial regulators need to catch up to the industry

I saw an interesting commentary this week in the Financial Times that addresses a subject that’s on everyone’s mind these days but few are actually talking about publicly: how best to regulate the financial sector in the aftermath of the subprime debt crisis and the resulting credit squeeze that has damaged so many banks, brokerages, hedge funds and other instititutions.

FT columnist Martin Wolf says rightly that the current regulatory schemes have been left in the dust by the advances in complex financial derivatives, exposing both institutional and individual investors to high levels of systemic risk. Failure to fix this growing problem will only amplify that risk in the future.

He proposes a list that he dubbed “the seven C’s”. That list is below, along with a brief quote from his column for each one:

Coverage—“Regulatory coverage must be complete. All leveraged institutions above a certain size must be inside the net.”
Cushions—“Capital requirements must be the same across the entire financial system, against any given class of risks. But there must also be greater attention to the adequacy of that other cushion: liquidity.”
Commitment—“Originators do not care sufficiently about the quality of loans they plan to offload on to others. … Originators should be required, therefore, to hold equity portions of securitised loans.”
Cyclicality—“Existing rules are pro-cyclical. Capital evaporates in bad times, as a result of write-offs, thereby forcing contraction of lending, worsening the economic slowdown and further impairing assets.”
Clarity—“A big challenge is to generate as much clarity as is possible. One issue is the calamitous recent role of the rating agencies and the conflicts of interest under which they operate.”
Complexity—“Excessive complexity is a significant source of lack of clarity…One possibility then is to insist that all derivatives be traded on exchanges.”
Compensation—“There are enormous rewards for successful trades and for loan originators. The mantra of aligning incentives seems to be lost in the failure to impose symmetrical losses.”

Whether or not regulators should sail forward on Mr. Wolf’s “Seven C’s” is open to debate, but his proposal is thoughtful and if nothing else a good place to start a broader conversation about what should be done to protect investors in the future.

Click here for the full article

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Brian Hicks May 7, 2008
Has Copper Topped?

Brian Hicks, co-manager of the Global Resources Fund (PSPFX), appeared this week on CNBC’s “Street Signs” to discuss copper with host Erin Burnett and Emcor CEO Frank MacInnis.

During the interview, Hicks was asked whether Chinese demand for the red metal might wane as inflation depresses the country’s construction market:

“The first quarter was quite strong for Chinese restocking of Shanghai inventories, but we think they may be on the sidelines here for the second quarter. We see that seasonally. We think in the second half of the year, we’ll see them start to restock once again as it looks like demand is still quite strong.”

Watch CNBC Interview

Holdings in the Global Resources Fund as a percentage of net assets as of 3/31/07: Emcor (0.00%).

May 2, 2008
In Defense of Gold

Commentary from Frank Holmes, CEO and chief investment officer, and John Derrick, director of research.

The price of gold has corrected by close to 20 percent since peaking on March 17. If you have been listening to the popular press and business TV, you may be convinced that the gold and commodity “bubbles” have popped.

Gold Prices Once you back away from the day-to-day noise and put things into perspective, this correction in gold, while painful in the short term, we believe is just another pause in a long-term secular bull market. As it has been said, bull markets climb a wall of worry.

Over the past year, gold bottomed around $640 per ounce in late June. As the financial crisis unfolded, it staged a spectacular rally, surging more than 60 percent to $1,032. Gold has since pulled back, but given that the long-term fundamentals remain intact, we believe it is setting the stage for the next leg up.

Here are some of the reasons why:

Negative real interest rates

The macro environment for gold is still supportive based on negative real interest rates. The one-year Treasury bill is offering just 2 percent, while the official inflation rate is around 4 percent.

Negative interest rates make gold look more attractive compared with other safe investment alternatives, such as T-bills and certificates of deposit.

We believe the Federal Reserve will keep interest rates below the rate of nominal economic growth in order to support a fragile economy in an election year.

Negative real rates between mid-2001 and spring 2005 powered gold’s biggest bull run in decades, with prices rising from $255 to $455 per ounce.

Real inflation is underreported

The official inflation rate is around 4 percent, but when you include the rapidly rising prices for food and energy and understated housing costs, the real inflation rate is even higher.

MZM Index One of the best ways to protect yourself against inflation is to participate in it by investing in commodities such as oil and agricultural products. Historically, gold also has proven to be a viable hedge against rising inflation because it maintains its purchasing power.

We agree with those who estimate that the actual inflation rate is close to double digits due to the Fed’s massive injection of new money into the economy to avert a recession. MZM (money zero maturity), the amount of money in the economy that’s easily accessible for spending, is up 15 percent compared with the same time last year.

ETF redemptions

The current correction in gold has been led by sizable ETF redemptions.

The StreetTracks Gold Shares ETF (ticker GLD) lost 1.3 million ounces of gold over the past two weeks, with nearly a third of that amount being redeemed this Tuesday alone. This may mark the first-ever ETF-led gold correction.

This correction is not surprising, given the strong acceleration in the first quarter of 2008 and typical seasonal trends. Some short-term profit-taking is likely, along with speculation that prospects have improved in financials and technology.

But in our opinion, this move out of gold is not indicative of the smart money, as momentum investors chased performance on the way up. The price action appears to be signaling a rotation from weak gold holders, perhaps back into the broader equity market.

Other factors

On top of the factors above, there are other fundamental factors that we believe will drive

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