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Show Me the Stocks, Not the Cash, Say Optimistic CEOs
May 4, 2015

In early March, I made the case that there’s no greater vote of confidence in a company’s growth prospects than when its top officers put some skin in the game and buy their own company stock. Among the examples I used were Warren Buffett, who owns millions of shares in Berkshire Hathaway; Elon Musk, who purchased over $100 million worth of Tesla stock in 2013; and myself, the largest shareholder of U.S. Global Investors.

Another example of how bullish an executive is on his own company is when he chooses to forego a base salary entirely and instead be compensated in company stock.

The most recent chief executive officer to receive such compensation is American Airline’s Doug Parker.

American Airlines CEO Bets his Paycheck on Company Stock

In a letter to employees, Parker wrote:

Going forward, I have asked our Board to restructure my compensation such that I will no longer receive a base salary or an annual bonus. Instead, all of my primary compensation will be paid in AAL stock. This stock will have to be earned over time, and will also have to be earned by performance. I believe this is the right way for my compensation to be set—at risk, based entirely on the results achieved, and in the same currency that our shareholders receive.

Parker has such confidence in his own company and the industry in general that he’s willing to place a huge portion of his financial security in its hands. This, along with American’s recent addition to the S&P 500 Index, should make investors’ ears perk up.

He’s not the only CEO who’s switched to stock.

Fellow airline executive Maurice J. Gallagher Jr. of Allegiant Air has also passed on cash, receiving a little over half a million dollars in stock and options in 2013 alone.

Allegiant CEO Compensated Almost Entirely in Company Stock
click to enlarge

The late, great Steve Jobs was famously paid $1 a year to serve as CEO of Apple—which we own in our
All American Equity Fund (GTBFX) and Holmes Macro Trends Fund (MEGAX)—taking his real payment in company shares. In February 2011, a few months before his death, it was reported that Jobs owned about 5.5 million shares in Apple stock, which at the time was worth a little over $2 billion.

Like Jobs,

Another notable example is Larry Ellison, co-founder and former CEO of computer technology company Oracle, also held in GBTFX. In 2013, Ellison was the most highly compensated CEO out of the 300 who were featured in the Wall Street Journal/Hay group CEO Compensation Study. During his final full year of work at Oracle, he received $67.3 million—nearly all of it in stock options.

Stock has been steadily growing in importance as a form of compensation for the most successful CEOs. Between 2009 and 2013, performance stock for those leading S&P 1500 Index companies rose 52 percent, the largest increase of any other type of payment. Compared to all other methods, in fact, performance stock is now the most-preferred, according to executive compensation consultancy firm Equilar.

Net Free Credit Hits Another Record Low
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Stock isn’t just good for executives; it’s also good for shareholders.

In a 2010 study piece that appeared in the NYU Journal of Law & Business, Villanova University Business Law Professor Richard A. Booth writes that “stock options are indeed the best form of incentive compensation yet devised” for CEOs. His reasoning: “[I]t is the supposed duty of the directors and officers to maximize stockholder value. In practice, there are few situations in which that duty is enforced as a matter of law. Options fill the gap.”

Although options are a specific type of security, giving the holder the right to buy or sell shares at a later date, they’re used here as a proxy for the broader argument that stock helps executives better align their interests with shareholders’.

Despite Greece, Investors Still Bullish on Europe

You might have noticed that Greece has been in the headlines a lot lately.

Many global investors are anxious to see how the drama unfolds, as the beleaguered Mediterranean country, strapped for cash, is staring down billions of euros in upcoming bailout loan repayments, not to mention salaries and pensions. On May 12, Greece will owe the International Monetary Fund (IMF) 0.8 billion euros, and between the end of July and beginning of August, 7 billion euros in bond payments become due to the European Central Bank (ECB), according to Wood & Company.

Below you can see which countries would be impacted the most were Greece to default on its obligations. Although Germany holds the greatest amount of Greek debt—over 84 billion euros’ worth—Slovenia would be hurt the worst, as 4 percent of its GDP is tied up in the country’s debt.

Which Countries Would Suffer the Most if Greece Defaulted on Its Debt
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Rightfully so, investors are wondering about the implications of a so-called “Grexit” from the eurozone. We don’t expect this to happen, as it would be too great of an economic, political and psychological blow to Greece. The IMF takes the same position. To be clear, the country is indeed running out of cash, and it won’t be able to pay its pensioners and creditors without a deal. Negotiation talks stalled this past weekend, but we’re optimistic that a deal can be struck.

Despite all of the negative press, global investors, including us, are increasingly bullish on both Greece and the eurozone in general. We closely monitor technical indicators such as credit default swap (CDS) spreads, moving averages and money flow, and we’ve seen some promising market moves lately. For instance, Greek banks’ five-day moving average just crossed above both the 20- and 60-day moving averages.

So far this year, investors have added $223 million to a Greek exchange-traded fund (ETF), with short interest on the product falling to its lowest level since April 2013.

Among 1,280 Bloomberg subscribers, 35 percent recently singled out the eurozone as the one market that will offer the best investment opportunities over the next year, an increase of 16 percentage points since January.

The Eurozone Unseats the U.S. as Offering the Best Investment Opportunities over the Next Year, According to Global Investors
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This is all good news for our Emerging Europe Fund (EUROX). We recently added to our Greek position and are now equal-weighted with its benchmark, the MSCI EM Europe 10/40 Index.

To get a better handle on what’s happening in Greece, check out Visual Capitalist’s infographic on the subject.

USGI Portfolio Manager Ralph Aldis Named a TopGun

Last week we learned that Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), was voted into the American Society of TopGun Investment Minds in the U.S. Metals and Mining category by capital markets performance measurement firm Brendan Wood International.

Like Jobs,

According to the firm’s press release, this honor recognizes investors considered to be “optimal leaders of thought in the industry during the past year.”

Of course, we already knew this about Ralph. As many of you know, the past three and a half years have been among some of the most challenging for metals and mining investing. But under Ralph’s expert management skills, USERX currently holds four stars overall from Morningstar, among 71 Equity Precious Metals funds as of 3/31/2015, based on risk-adjusted returns.

I would be remiss not to recognize all of the support behind Ralph and our other talented portfolio managers. We’re fortunate to have a dedicated team of world-class analysts who often work long hours into the evening researching both macro and micro economic trends and assisting in investment analysis. Ralph’s job would be near-impossible without their tireless efforts.

Congratulations, team!

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

Past performance does not guarantee future results.

Morningstar Rating

Overall/71
3-Year/71
5-Year/67
10-Year/51

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 3/31/2015

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

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. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600. The index was developed with a base value of 100 as of December 30, 1994. The MSCI Emerging Markets Europe 10/40 Index (Net Total Return) is a free float-adjusted market capitalization index that is designed to measure equity performance in the emerging market countries of Europe (Czech Republic, Greece, Hungary, Poland, Russia, and Turkey). The index is calculated on a net return basis (i.e., reflects the minimum possible dividend reinvestment after deduction of the maximum rate withholding tax). The index is periodically rebalanced relative to the constituents' weights in the parent index.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund, Holmes Macro Trends Fund, Emerging Europe Fund, Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 3/31/2015: Berkshire Hathaway Inc. 0.00%, Tesla Motors Inc. 0.00%, American Airlines 0.00%, Allegiant Travel Company 0.00%, Apple Inc. 4.03% in All American Equity Fund and 5.34% in Holmes Macros Trends Fund, Oracle Corporation 1.00% in All American Equity Fund.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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Yes, the Top 1 Percent Do Pay Their Fair Share in Income Taxes
April 29, 2015

In January 2014, I posted what has unexpectedly become one of my most widely-read articles, “What Does It Take to Be in the Top 1 Percent? Not as Much as You Think.” Seeing as it’s now over a year later and most of us have already either filed our federal income taxes or applied for an extension, I thought it would make sense to follow up on last year’s post and tackle a commonly-held misconception about how much the top 1 percent really contributes.

A good place to start is a February 2015 poll conducted by the Pew Research Center, which found that a whopping 72 percent of respondents felt that “some wealthy people don’t pay their fair share” in federal income taxes.

Everyone is entitled to his or her opinion, of course. But in this matter, the facts tell a different story. On the contrary, top-earning Americans pay such a huge percentage of income taxes that the country’s lowest earners don’t have to.

According to the Tax Policy Center, those in the top quintile of earners were responsible for paying 83.9 percent of all income taxes in 2014. Those in the bottom quintile, on the other hand, “paid” a negative rate of -2.2 percent.

How Federal Taxes Were distributed in 2014
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To get an even greater sense of just how much top earners pay in taxes, let’s unpack some of the data from the top row, which represents those who earn over $134,300 per year.

At the very pinnacle of this bracket—the 1 percent—is where you’ll find the Bill Gateses and Warren Buffetts and Larry Ellisons. About 3 million Americans—or roughly the entire population of Chicago, the third-most populous U.S. city—are members of this often-maligned group of people. According to the Congressional Budget Office, they have an average annual income of $1,031,900 after paying an average federal individual income tax rate of 29 percent. Collectively, they account for about 17 percent of total U.S. income ($13.7 trillion in 2014), and yet their share of all income taxes paid ($1.4 trillion in 2014) amounts to 46 percent.

If you do the math, you’ll find that these 3 million Americans were responsible for contributing approximately $644 billion in tax revenue in 2014.

Below is another way to visualize it. The combined percentage of those who make between $0 and $49,999 (and who reported filing their income taxes in 2013) is 63.4 percent. Yet they contribute only 6.2 percent of all income taxes.

On the other end of the spectrum, the combined percentage of those who earn $100,000 and above is only 15 percent. Yet they contribute over three quarters of all income taxes.

The Top Wealthiest Americans Pay Half of All Income Taxes
click to enlarge

To be clear, I am not insinuating that low-income earners don’t pull their own weight. It only stands to reason that because they make less, they pay less in taxes. I am merely trying to refute the misconception that the wealthy “don’t pay their fair share,” as the Pew Research poll revealed. Indeed they do, as all of the data show.

Seeking Tax-Free Income

In fiscal year 2014, the government drew in $1.4 trillion, an all-time record.

Income Taxes Paid Annually, Adjusted for Inflation
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Close to half of its revenue—46 percent, to be exact—depended on citizens dutifully paying their taxes.

This has been the case since at least 1945. Even as the share of corporate taxes has shrunk and payroll taxes increased over the course of seven decades, the share of individual income taxes has remained pretty steady in the 40- to 50-percent range.

Individual Income Taxes Have Remained the most Important Source of Revenue
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Indeed, it’s every American’s duty to pay his or her fair share, but there are ways to responsibly minimize one’s tax burden.

One such way that’s favored by high net worth individuals is by investing in municipal bonds, which go untaxed at the federal level and often at the state and local levels.

Our Near-Term Tax Free Fund (NEARX) invests in investment-grade munis with an average maturity on the short end of the curve, which is where investors want to be when the Federal Reserve comes around to raising interest rates.

The fund, which has a time-tested history of no drama, holds four stars overall from Morningstar, among 179 Municipal National Short-Term funds as of 3/31/2015, based on risk-adjusted return. It’s also delivered a rare 20 years of positive returns. Out of 25,000 equity and bond funds, only 30 have managed to achieve this same feat.

Near-Term Tax Free Fund Annual Total Return
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Explore the Near-Term Tax Free Fund!

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

Total Annualized Returns as of 03/31/2015
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fund 2.38% 2.59% 3.10% 1.21% 0.45%

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through December 31, 2015, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest).Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Morningstar Rating

     Overall/71
     3-Year/71
     5-Year/67
    10-Year/51

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 3/31/2015

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Past performance does not guarantee future results.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user's own risk. This is not an offer to buy or sell securities.

A bond’s credit quality is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C).

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

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Deutsche: Airlines Will Generate Nearly $25 Billion in Operating Income
April 27, 2015

A recent Deutsche Bank report projects a total airline industry first-quarter pretax profit of $3.5 billion, five times the $700 million pretax profit this time last year.

The bank estimates that nearly 110 percent of the earnings gain will derive from lower fuel prices. It states that “the industry over the past several years has demonstrated its ability to successfully offset most, if not all, of the rise in fuel expense via a combination of cost savings and various revenue initiatives.”

Airline Industry On Track for Significant Margin Improvement in 2015

Looking ahead to the end of the year, Deutsche Bank sees airlines generating $24.7 billion in operating income, or the money that remains after certain operating expenses are paid such as research and development, wages, maintenance and the like.

Airline Industry On Track for Significant Margin Improvement in 2015
click to enlarge

As we all know, oil has fallen nearly 50 percent since last summer, and jet fuel prices have followed closely at its heels, declining to multi-year lows. According to the International Air Transport Association (IATA,) airlines worldwide are expected to spend $71 billion on fuel in 2015, a savings of $84 billion compared to 2014.

Jet Fuel Monthly Price
click to enlarge

Efficiency Leading the Way

An important metric Deutsche Bank uses to illustrate that the industry is in expansion mode is operating margin, which measures a company’s efficiency in generating revenue. This figure tells you how much of each dollar earned the company keeps as profit after taxes. Generally speaking, the higher the number, the more efficiently the company is being run and the more capital it can use to pay down debt and return to investors in the form of stock buybacks and dividends.

Because of fuel cost savings, all 11 of the companies below are expected to increase margins by the end of 2015.

Airline Industry Operating Margins Expected to Rise in 2015
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The carrier expected to see the greatest increase is Las Vegas-based Allegiant Air, the ultra-low-cost regional carrier that focuses on underserved cities. The company provides a “complete travel experience” that allows customers to book hotel stays and car rentals on top of flights.

Claiming the highest margins last year was Spirit Airlines, the carrier known for its “Bare Fare” pricing structure. Even though it offers some of the lowest prices in the industry—they’re 40 percent lower than the competition on average—Spirit is able to maintain these margins because of its stripped-down, no-frills service and experience.

Airline Industry On Track for Significant Margin Improvement in 2015

Spirit certainly has grounds to justify this highly-frugal business model. In a June 2014 survey, close to 1,500 air travelers were asked what they considered first when looking to purchase an airline ticket. Fifty percent of respondents cited price as the most decisive factor, whereas only 3 percent said it was legroom.

Earnings Season

Most airlines that have reported for Q1 have beaten analysts expectations

A few airlines have already reported on first-quarter earnings, and so far most have beaten analysts’ expectations.

American Airlines, which was recently added to the S&P 500, reported a record net profit of $1.2 billion, or $1.73 per share. This is a tripling of the carrier’s net profits in the first quarter of last year.

American CEO Doug Parker is so bullish on his company that he has asked to be compensated solely in company stock going forward.

Delta, which we own in our Holmes Macro Trends Fund (MEGAX), reported higher-than-expected earnings—$0.45 per share—with an average beat of 5.11 percent over the last four quarters. This marks the company’s eighth consecutive quarter of record profits.

Alaska Air’s EPS came in at $1.12, with earnings up 75 percent on a year-over-year basis. The company reported record first-quarter net income of $149 million, a 67-percent increase from last year. During the quarter, the company also bought back $102 million worth of common stock and paid a $0.20 per-share dividend.

We own Alaska Air in MEGAX.

Southwest reported record profits of $453 million—or $0.66 per share, beating consensus by one penny—up from $152 million in the first quarter last year.

United Continental reported record first-quarter profits of $582 million, earning $1.52 per share, beating estimates of $1.44. The company paid back $200 million to shareholders in its proposed $1 billion share buyback program.

Finally, Allegiant also posted a record quarterly EPS of $3.74, up from $1.86 last year. This marks the ultra-low-cost carrier’s 49th consecutive profitable quarter.

JetBlue Airways is expected to report Tuesday.

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

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macros Trends Fund as a percentage of net assets as of 3/31/2015: Deutsche Bank AG 0.00%, SkyWest Inc. 0.00%, United Continental Holdings Inc. 0.00%, Delta Air Lines Inc. 1.93%, Hawaiian Airlines Inc. 0.00%, Republic Airlines Inc. 0.00%, JetBlue Airways Corporation 0.00%, American Airlines Inc. 0.00%, Southwest Airlines Co. 0.00%, Alaska Air Group Inc. 1.42%, Spirit Airlines Inc. 0.00%, Allegiant Travel Company 0.00%.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. This news release may include certain “forward-looking statements” including statements relating to revenues, expenses, and expectations regarding market conditions. These statements involve certain risks and uncertainties. There can be no assurance that such statements will prove accurate and actual results and future events could differ materially from those anticipated in such statements.

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Junior Mining Companies Have Taken a Senior Role
April 20, 2015
Smaller-cap explorers and producers are generating greater wealth for investors

For the past decade, junior mining companies have outperformed senior miners at finding new mineral deposits and generating wealth for investors. 

These are among some of the findings released in a study conducted by resource company strategist MinEx Consulting, which analyzed the performance of explorers and producers operating in Canada between 1975 and 2014. What the consultancy firm found is that, in the last decade, junior companies were responsible for more than three quarters of all new mineral discoveries and were approximately 30 percent more effective than senior companies at generating wealth.

Ralph Aldis, portfolio manager of our two precious metals funds— the World Precious Minerals Fund (UNWPX) and Gold and Precious Metals Fund (USERX), which holds four stars overall from Morningstar, among 71 Equity Precious Metals funds as of 3/31/2015, based on risk-adjusted returns—agrees with the results of the study. In a March interview with The Gold Report, he noted that junior gold producers “have the flexibility to be able to adjust” to varying commodity-price conditions.

“It’s the smaller, midsized companies that have a better handle on their operations,” Ralph said.

A good example of such a small-cap miner would be Claude Resources Inc., which we own in both USERX and UNWPX. Claude, the only producer operating in Saskatchewan, Canada, managed to turn its operation around fairly quickly after netting a huge loss of $73 million in 2013. The company just reported a profit of $4.6 million in 2014, driven by “record production performance,” according to President and CEO Brian Skanderbeg. For the one-year period, the company is up a phenomenal 216 percent.

“Claude has been around for a long time, but its new management understood that it had to change its mining method, which has made a big difference,” Ralph said in The Gold Report.

Junior companies have increasingly played an essential exploratory role in Canada. Nearly 40 years ago, they were responsible for only 5 percent of all capital spent on exploration; by 2007, that amount had ballooned to more than 65 percent. Over the past decade, juniors have accounted for 54 percent of all spending on exploration in Canada.  

Importance of Junior Mining Companies in Canada Has Been Rising Over Time
click to enlarge

As a result, major producers have steadily lost ground to the smaller players in terms of discovering new mineral deposits. In three of the previous 10 years, in fact—2009, 2010 and 2012—senior companies failed to make a single new discovery.

In the Last Decade, 3/4 of All Mineral Discoveries in Canada Were Made by Junior Explorers
click to enlarge

Quality or Quantity? How about Both?

Frank Holmes in the copper Mountain Mine in Princeton, British Columbia

Not all mineral deposits are created equal, of course. Some might be all a producer needs to be successful, whereas others aren’t even worth the time and capital to develop.

You can think of a Tier 1 deposit as a “company making” mine—one that might yield up to 250,000 ounces of gold per year over its lifespan of 20 years or more. Some of these projects can easily be valued at over $1 billion.

A Tier 2 deposit is significant but not as profitable as a Tier 1, with a typical valuation of between $200 million and $1 billion.

Finally, a Tier 3 deposit is considered marginal, valued at anywhere between $0 and $200 million.

About 80 percent of the mining industry’s wealth is generated from Tier 1 and Tier 2 projects. But such discoveries, as you might imagine, are muchrarer than Tier 3s. To give you an idea of just how rare they are, consider this: Every decade in Canada, the industry discovers on average 40 Tier 3 deposits, seven Tier 2 deposits—and only three Tier 1 deposits.

So how do the juniors stack up against the seniors when it comes to finding quality mines? In the table below, you can see that they’re running slightly behind. In the past decade, juniors made 7.3 Tier 1 or 2 discoveries in Canada, compared to the seniors’ 8.7.

Spend and Performance in Canada: 2005 – 2014
  Exploration Spend in Billions Number of Discoveries Tier 1 and 2 Discoveries Estimated Value of Discoveries, in Billions Value/Spend
Seniors $12.5 46% 21 24% 8.7 54% $7.9 39% 0.63
Juniors $14.6 54% 66 76% 7.3 46% $12.1 61% 0.83
Past performance does not guarantee future results.
Source: MinEx Consulting, U.S. Global Investors

But—and this is a big “but”—they handily beat the seniors when it came to the total number of discoveries. Of all the deposits found, over three quarters were made by junior miners.

As I said earlier, juniors spent more than the seniors on exploration during this timeframe ($14.6 billion compared to $12.5 billion), and their discoveries collectively had a much higher valuation ($12.1 billion compared to $7.9 billion). Accordingly, they were roughly 30 percent more effective than seniors at generating wealth for investors. Put another way, they had a greater “bang for your buck.”

Small Cap, Big Opportunities

This news bodes well for our two precious metals funds. Although they both invest in junior explorers and producers, the Gold and Precious Metals Fund also allocates assets to the large-cap, senior mining companies.

Market Capitalization Breakdown for USGI's Gold Funds
click to enlarge

Not only that, but Canada is the top investment destination in both funds: 57 percent in USERX, 77 percent in UNWPX. Canadian mining companies have lately seen margin expansion because the majority of their costs are in the relatively weak Canadian dollar, yet they sell their commodities in the strong U.S. dollar.

According to MinEx, 19 percent of the world’s high-quality Tier 1 and 2 mineral discoveries were made in Canada between 2005 and 2014. That’s second only to the entire continent of Africa (25 percent). The country’s mining industry also has an estimated value of $19 billion, or 21 percent of total valuation worldwide. At 0.77, Canada’s value-spend ratio, or “bang for your buck,” was better than the global average of 0.67.

Explore U.S. Global Investors’ two gold equity funds:

The Gold and Precious Metals Fund (USERX) is the first no-load gold mutual fund in the U.S. and seeks opportunity in gold mining, investing in proven gold-producing companies.

The World Precious Minerals Fund (UNWPX) gives investors increased exposure to junior and intermediate mining companies involved in precious minerals such as gold, silver, platinum, palladium and diamonds for added growth potential.

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

Morningstar Rating

     Overall/71
     3-Year/71
     5-Year/67
    10-Year/51

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 3/31/2015

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 3/31/2015: Claude Resources Inc. 0.96% Gold and Precious Metals Fund, 0.41% World Precious Minerals Fund; Copper Mountain Mining Corp. 0.00%.

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

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Finding Value in Declining Commodity Prices
April 13, 2015

I’m going to begin with a bit of good news. Below is our China Region Fund (USCOX). As you can see, not only has it broken above its 50- and 200-day moving averages, but it’s also trading at four-year highs. And since this chart was created early last week, the fund has climbed even higher, to $9.53 as of this writing.

USGIs-China-Region-Fund-USCOX-Climbs-to-a-Four-Year-High
click to enlarge

As I mentioned last week, USCOX has benefited from the continued rally in the Shanghai Composite Index through our holdings in the Morgan Stanley China A Share Fund and a closed-end fund. The Shanghai Composite is up 87 percent year-over-year and is currently at a seven-year high.

Shanghais-Composite-Breakout-Continues
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So what’s the deal with Chinese equities right now? After all, China’s economic growth for the first quarter of the year cooled to a six-year low of 7 percent.

The market surge is mostly attributable to monetary easing and government policy changes such as housing stimulus and modernization of the country’s financial structure. But there’s more at work.

Saving Big on Commodities Slump

Also contributing to the bull run is the plunge in commodity prices since last June, brought on by both the strong U.S. dollar and a slowing global economy.

Such market conditions have obviously been a challenge for those involved in the production of raw materials and natural resources. But they’ve been a windfall for net-import countries, China included. Most of the beneficiaries are Asian and Eastern European nations—excluding Russia, whose economy largely depends on revenue generated from oil exports.

Besides Russia, the biggest losers have been Latin American countries, huge exporters of some of the hardest-hit resources—crude oil, sugar, soybeans and coffee.

Massive-Money-Flow-Shift-Impact-on-Incomes-from-Commodity-Price-Drop-Since-June
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As the world’s largest importer of natural resources, China saves an estimated $600 million a day on its oil import bill. That’s a staggering $200 billion a year. Low oil prices, in fact, should help boost GDP growth in the entire Asia-Pacific region between 0.25 and 0.5 percent, according to Rajiv Biswas, economist at consulting firm IHS Inc.

Low oil prices are also helping many businesses and companies such as American Airlines keep more capital in their coffers. For every $1 change in oil, American saves about $105 million per month in jet fuel costs, according to airline research analyst Helane Becker of financial services firm Cowen Group.

Amazingly enough, precious metals are the best-performing commodities sub-sector so far this year, having collectively lost 2.5 percent.

Change-in-Commodity-Prices-Since-June
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Of the 29 resources featured in the chart above, only red meat is in the black.

Brisket-prices-have-risen-about-60-percent

Whereas many of these commodities are facing oversupply issues, the cattle industry as well as barbeque purveyors are currently struggling with a brisket shortage, which have driven the wholesale price of the popular cut of meat up 60 percent from last year. Several barbeque joints here in San Antonio, in fact, have fallen victim this year to what the media are calling “the brisket bandit,” who’s made off with thousands of dollars’ worth of meat, both raw and smoked.

Platinum and palladium are fundamentally undervalued right now, and demand for both metals is expected to pick up this year. Low prices should spur platinum jewelry demand in China, while an increase in automobile sales in the U.S., eurozone and China should help palladium. (Palladium is used in the production of catalytic converters.)

The Start of Mergers and Acquisitions

The challenging crude oil environment has prompted the first of what will likely be a new wave of oil and gas company mergers and acquisitions (M&As) similar to what we last saw in the late 1990s. If you recall, Exxon merged with Mobil in an $80-billion deal, BP tied the knot with Amoco and Chevron bought Texaco.

 

Shell-Plans-to-Acquire-BG-Group-for-70-Billion

The current cycle kicked off last November when titan Halliburton agreed to purchase Baker Hughes for $35 billion.

Now, for double that price in cash and stock, Royal Dutch Shell plans to gobble up UK-based BG Group in the biggest deal since the Exxon-Mobil merger. The combined companies will become the world’s largest producer of liquefied natural gas (LNG). Shell’s oil and gas reserves will grow 25 percent and give the company huge exposure to proven oilfields in Australia and Brazil. As is normally the case, the company being acquired sees a spike in share price, and BG is no exception; this week alone, its stock has risen more than 30 percent.

It’s doubtful we’ll see a deal this round as massive as Exxon-Mobil, but we expect more to occur among the junior to mid-tier producers and explorers.

Remembering Paul Reynolds

Last Friday I was in Toronto celebrating the life of my friend Paul Reynolds, premier broker in the resource world and former president and CEO of Canaccord Genuity, Canada’s largest independent investment bank. He passed away in Hawaii last Thursday following his competition in the Lavaman Waikoloa triathlon. He was 52.

Paul-Reynolds-former-President-CEO-Canaccord-Genuity-Group

Paul was an early pioneer in the London Alternative Investment Market (AIM), which was a very successful platform for the creation of new companies, especially those involved in natural resources. During his tenure as chief executive, he turned Canaccord into a global operation through his balance of collaboration and competition. Besides being a highly-respected and transformative brokerage executive, my friend had an infectious zest for life. He was a seasoned participant in Olympic-length triathlons and other physically-demanding competitions.

Paul is survived by his wife, four children, and a large, tightknit extended family. They, along with his abundance of friends and colleagues, will remember the profound impact of his larger than life charisma and big heart. Paul will be deeply missed. ­

 

 

 

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

Total Annualized Returns as of 03/31/2015
  One-Year Five-Year Ten-Year Gross
Expense
Ratio
Expense
Cap
China Region Fund 6.63% 0.52% 5.14% 2.77% 2.55%

Expense ratios as stated in the most recent prospectus. The expense cap is a voluntary limit on total fund operating expenses (exclusive of any acquired fund fees and expenses, performance fees, taxes, brokerage commissions and interest) that U.S. Global Investors, Inc. can modify or terminate at any time, which may lower a fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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.

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2015: American Airlines 0.00%, Baker Hughes 0.00%, BG Group 0.00%, BP PLC 0.00%, Canaccord Genuity Group Inc. 0.00%, Chevron Corp. 0.00%, Exxon Mobil Corp. 0.00%, Halliburton 0.00%, IHS Inc. 0.00%, Morgan Stanley China A Share Fund 0.00%, Royal Dutch Shell PLC 0.00%.

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

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Net Asset Value
as of 05/05/2015

Global Resources Fund PSPFX $6.17 -0.03 Gold and Precious Metals Fund USERX $5.87 -0.01 World Precious Minerals Fund UNWPX $4.89 -0.02 China Region Fund USCOX $9.78 -0.27 Emerging Europe Fund EUROX $6.90 0.03 All American Equity Fund GBTFX $28.30 -0.31 Holmes Macro Trends Fund MEGAX $20.55 -0.38 Near-Term Tax Free Fund NEARX $2.24 -0.01 China Region Fund USCOX $9.78 -0.27