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July 28, 2014
Second Quarter Earnings: Marching Toward a Strong Recovery

It’s earnings season once again, and though only a quarter of the Russell 1000 has reported so far, the news is just north of positive. All signs indicate that the market has dusted itself off and is back to its cheerful self after a ho-hum first quarter, which was negatively affected by harsh winter weather.

In the chart below, you can see that 73 percent of the companies that have reported as of this writing exceed their earnings per share (EPS) beat rate. The beat rate, as you might know, is the rate at which companies surpass market analysts’ published estimates. The revenue beat rate, meanwhile, sits at 67 percent, a positive surprise above the long-term median of 63 percent.

Russell-1000-Earnings-Per-Share-and-Revenue-Beat-Rates
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Included in these figures are a few of the top-performing companies that we own in our All American Equity (GBTFX) and Holmes Macro Trends Funds (MEGAX), such as Facebook, Apple and Biogen Idec. We’ll discuss these companies later.

So to what do we attribute these welcome tidings?   

Two notable indicators are the significant drop in initial unemployment claims and the jump in U.S. and global consumer confidence.

Americans are heading back to work.
According to last week’s data reports, initial unemployment claims fell to their lowest level since 2006, before the Great Recession brought the country to its knees.

US-Initial-Unemployment-Claims-at-Lowest-Level-Since-2006
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Couple this news with the constructive U.S. jobs report, and we’re looking at a return to pre-recession labor-market strength. The U.S. Bureau of Labor Statistics reported that 288,000 nonfarm payroll positions were added in June alone, bringing the country’s unemployment rate to a five-year low of 6.1 percent. Data for July is expected next Friday.

Feeling good about letting go of their dough.
Another sign that the economy promises a strong continued recovery is the modest boost in domestic and global consumer confidence levels.

Information and insights company Nielsen announced that its global confidence index has inched up an overall 1 point to close at 97, the highest it’s been since 2007. A 100 mark indicates exceptionally strong consumer optimism.

According to Nielsen, the U.S jumped 4 points from the previous year to close at 104 points, making it come in at 8th place worldwide. India leads all other nations at 128 points, possibly attributable to the recent election of its new prime minister Narendra Modi. At 48 points, Portugal trails the pack.

As you can see in the chart below, there’s a 17 percent increase from the same time a year ago in American respondents who feel that now is a good time to spend their money on necessary and discretionary goods and services.

Percent-of-Americans-Who-Say-That-Now-Is-a-Good-Time-to-Buy-the-Things-Wanted-and-Needed
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The results of the Michigan Consumer Sentiment Index echoes the buoyancy of the domestic economy. At 81.3, the index is finally stabilizing at pre-recession levels.

Consumer-Confidence-is-Rising-to-Pre-Recession-Levels
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Following are some of the top-performing holdings in our funds.

Facebook
FacebookFacebook continues to defy investors’ expectations. The social media titan enjoyed a robust second quarter, reporting revenue of $2.91 billion, an increase of 61 percent from the same time last year. More than $2.6 billion was derived from advertising alone. Mobile ads specifically represented about 62 percent of advertising revenue, indicating that an increasingly greater number of users are moving away from traditional portals such as desktops and laptops.

The second quarter, in fact, has seen a 7.3 percent increase from the first quarter of mobile daily Facebook users, from 609 million to 654 million.

“We had a good second quarter,” founder and CEO Mark Zuckerberg said. “Our community has continued to grow, and we see a lot of opportunity ahead as we connect the rest of the world.”

Apple
The tech giant reported that its quarterly profits rose 12 percent to $7.75 billion, bolstered by its iPhone and Mac sales. Anticipation of a next-generation iPhone, expected to arrive in late September, as well as the tentatively-named iTime smart watch, have also excited consumers both domestically and internationally.

In China, the world’s largest mobile market, Apple products unexpectedly outperformed Samsung Electronics, the popular South Korean smartphone maker.

“China, honestly, was surprising to us,” Apple CEO Tim Cook said. “We thought it would be strong, but it went well past what we thought. The unit growth was really off the charts across the board.”

Apple’s exceptional performance contrasts dramatically with Amazon.com’s report that it lost $126 million in the second quarter. The retail leader has sunk a staggering pile of cash into developing its Fire Phone, made available for purchase last Friday, which has so far received mixed reviews from tech experts, analysts and bloggers.

Phone-Wars-Apple-Tim-Cook-Amazon-Jeff-Bezos-jockey-consumers-pockebooks

Partially as a result of the Fire Phone’s dubious receipt, Amazon has posted its most disappointing quarterly loss since 2012. The company, in fact, forecast that its operating losses this quarter will fall within the $410 to $810 million range.

Biogen
The Cambridge, Massachusetts-based biotechnology company Biogen, a leader in developing treatments for neurological and autoimmune disorders such as multiple sclerosis (MS), reported revenue of $2.4 billion, a 40 percent increase from this time a year ago.

Biogens-2014-Q2-Sales-Jumped-40-percent-Year-Over-Year
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Its blockbuster medication Tecifidera, used to defend against relapsing MS, has generated a jaw-dropping $700 million in 2014 alone—$585 million domestically, $115 overseas.

Other runaway Biogen products include Avonex and Tysabri.

Looking forward to a stronger third quarter.
Good news such as this has been a long time coming.

Although many economic experts and pundits hesitate to admit that the U.S. economy has recovered to pre-recession levels, the second quarter has presented the most convincing signals thus far that we’re closer than ever. A greater number of Americans are finding quality employment. Initial unemployment claims are tapering off. Consumer confidence is growing year after year. And with powerful American companies such as Facebook, Apple and Biogen leading the charge, the U.S. has a bright future in store.

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 can fluctuate in response to sector-related or foreign-market developments. For details about these and other risks the Holmes Macro Trends Fund may face, please refer to the fund’s prospectus.

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.

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.

The Russell 1000 Index is a U.S. equity index measuring the performance of the 1,000 largest companies in the Russell 3000 Index.  The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan.  The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spend money.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings as a percentage of net assets as of 6/30/2014: Facebook Inc. (2.27% in All American Equity Fund, 2.59% in Holmes Macro Trends Fund); Apple Inc. (2.75& in All American Equity Fund, 2.68% in Holmes Macro Trends Fund); Amazon.com (0.00%); Biogen Idec Inc. (3.33% in All American Equity Fund, 3.34% in Holmes Macro Trends Fund); Samsung Electronics Co Ltd. (0.00%); China Mobile Ltd. (0.00%); China Unicom (0.00%); China Telecom (0.00%).

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July 24, 2014
Desperately Seeking a Cheaper Kilowatt Hour

Let’s imagine that an aluminum manufacturer is eyeing two locations to build a new factory. In location A, an industrial kilowatt hour (kWh) is priced at 4.21 cents, whereas in location B, it goes for 12.67 cents.

The difference is upwards of 200 percent.

It’s fair to assume then that, all other considerations being equal—reasonable taxes, a skilled workforce, modern infrastructure—location A will win out. 

So how can electric companies lower their prices to attract businesses and industries? Countless factors make an impact. Research and development. Construction costs. Permits. Securing land. Mining, drilling and refining. Operating and maintenance costs. Taxes and fees. Power lines. The risk of changing laws and regulations.

But let’s keep things simple. Generating electricity is a lot like investing: to get the most efficacious results, diversification is key. That means a combination of energy sources, from natural gas to nuclear to renewables.

A tale of two states.
In the examples given above, location A is actually Washington State, which offers the lowest price per industrial kWh in the continental U.S. Location B is Connecticut, the most expensive.

To keep prices competitive, Washington diversifies its energy portfolio. The greatest contributor is hydroelectric power, which generates close to 7,700 gigawatts per hour (GWh) annually. Other significant sources of electricity are nuclear (812 GWh), natural gas (290 GWh) and coal (192 GWh). Renewables, which account for 912 GWh, include wind, solar and geothermal. As a result, the state offers electricity at a 35 percent discount from the national average.

The simple largest electric power producer in the U.S., Washington State's Grand Coulee Dam has a total generating capacity of 6,809 mega

Aided by the fact that the Evergreen State doesn’t collect a corporate income tax, cheap power has attracted industries that tend to consume biblical amounts of electricity, from aircraft production to software development to aluminum refining. Major companies in these spaces that are either headquartered or maintain a significant presence in the state include Microsoft, Amazon.com, Expedia.com and Boeing.

Connecticut, on the other hand, is not nearly as diversified as its West Coast peer. About half of its net electricity production last year came from the 2,103-megawatt Millstone Nuclear Power Station (48 percent), the other half from natural gas (44 percent). A negligible amount was derived from coal and renewables.

Net Electricity Generation Comparison Between Washington and Conneticu (April 2014)
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Any industrial company considering Connecticut as its home base of operations must factor in the hefty electric bill, which is nearly 90 percent higher than the national average. Against all odds, the state has managed to hang on to old stalwarts in the manufacturing and technology sectors such as General Electric and United Technologies.

In the hypothetical scenario above, I used an aluminum manufacturer because aluminum requires a notoriously huge amount of energy to produce. The electricity needed to manufacture just one tonne of the stuff eats up over a third of your entire production costs. Fifteen kWh makes only a kilo, or 2.2 pounds, of product.

Meaning: the hypothetical aluminum maker headquartered in Washington will spend about 63 cents per kilo, whereas the one in Connecticut will spend close to 2 bucks to manufacture the same amount.

Granted, at only 5,006 square miles, Connecticut lacks the scale and plentiful natural resources found in states as large and spacious as Washington. The same problem can be found in other small, densely-populated states and territories such as Massachusetts, Rhode Island, New Jersey, New Hampshire and the U.S. Virgin Islands.

The Virgin Islands, in fact, has some of the world’s most expensive electricity precisely because it doesn’t have the means to diversify its energy portfolio. The territory depends entirely on imported crude oil to run its petroleum power plants, and as a result, its energy goes for between 50.8 and 54.8 cents per kWh as of last year. This business-repelling price far exceeds that of countries whose energy is considered steep compared to the U.S. average, namely, Denmark (41 cents per kWh), Germany (35), Spain (30), Australia (29) and Italy (28). This year the Virgin Islands has tried to reel in businesses with substantial tax breaks, but the savings might not be enough to offset the eye-popping electric bill.

It’s pronounced “nuclear.”
Although people have increasingly distanced themselves from nuclear energy because of catastrophic environmental disasters over the years, there’s still a place for it in a country’s energy portfolio. Nuclear power plants might be expensive to build, but they’re cheap to run.

The question is whether nuclear power helps drive electricity prices down. For some answers, take a look at the following chart.

Top 10 Nuclear Generating Countries
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As the leading producer of nuclear energy, the U.S. has some of the world’s cheapest electricity—which for the industrial sector averages between 6.75 cents and 9.33 cents per kWh. These prices are either trumped or competitive with other nuclear power-producing countries such as Russia (11 cents per kWh), Canada (10) and China (8). India, which doesn’t quite make it into the top 10, generates 30 billion kWh annually at an average of 8 cents per kWh.

However, a few of the countries on the chart have pricy electricity. Nuclear power accounts for close to three-quarters of France’s energy, and yet its electricity is on average 7 cents per kWh more expensive than the U.S. Again, diversification is key. Germany, which already has costly electricity, will soon see its prices soar even higher once it decommissions its nine currently operating nuclear plants, a gargantuan, politically motivated project that’s scheduled to be completed by 2022.

Does Iceland have the answers?
Many people are aware that Iceland has the cleanest energy in the world by far. The island-nation generates 100 percent of its electricity from renewables such as hydroelectric and geothermal sources, and it’s also flirting with wind power. What those same people might not realize, however, is that this results in some of the cheapest electricity in the world.

Landsvirkun, Iceland’s national power company, offers electricity to buyers for as low as 4.3 cents per kWh, which is nearly on par with what can be found in Washington State. Coupled with 20 percent corporate tax rates, the nation’s low energy prices have attracted not just data centers, methanol producers, silicon metal producers but also aluminum companies—which, again, consume massive amounts of electricity.

Aluminum production, in fact, has in the last few years outpaced fisheries as Iceland’s leading industry.

Iceland's competitive electricity prices have attracted some of the world's top aluminum manufacturers

Alcoa, the third-largest aluminum producer in the world, which we own in our Global Resources Fund (PSPFX), has maintained an aluminum smelter at Reydarfjordur in Eastern Iceland since 2007. Other world-class aluminum producers operating in Iceland include Rio Tinto Alcan and Century.

Diversification in your investment and energy portfolio.
The takeaway here is simple. As is the case in Washington and Iceland, if a state or country has an abundance and availability of natural resources, it should take advantage of them to drive down the price of a kWh to attract businesses. Diversification is especially essential where possible. Without businesses and industries paying to draw power from the electrical grid, the local economy stagnates.

Savvy investors know the importance of diversifying their portfolios. Electric companies need to learn to do the same.

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.

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 specific industries, 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. 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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources Fund as a percentage of net assets as of June 30, 2014: Microsoft (0.00%), Amazon.com (0.00%), Expedia.com (0.00%), Boeing (0.00%), General Electric Co. (0.00%), United Technologies (0.00%), Landsvirkun (0.00%), Alcoa Inc. (2.42%), Rio Tinto Alcan (0.00%), Century (0.00%).      

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July 21, 2014
The Municipal Bond World, According to John Derrick

As we move into the second half of 2014, the Federal Reserve has continued to reduce its stimulus measures intended to boost the U.S. economy. Just last week we heard rumors from Fed officials that if the job market improves faster than expected, key interest rates may be increased sooner than expected.

The Municipal Bond World, according to John Derrick

While the Fed is gradually reducing stimulus measures in the U.S., other areas of the world are embarking on new monetary stimulus measures. More than ever before, we are feeling the impact of the global economy, with monetary stimulus programs in Europe and Japan taking pressure off of the Fed, and ultimately contributing to the bond market rally we have seen so far this year. The European Central Bank (ECB) recently cut its rates to negative on worries of deflation and on the possibility of slower or no growth in the eurozone.

I sat down with Director of Research John Derrick, who also manages our Near-Term Tax Free Fund (NEARX), to get his thoughts on interest rates, the bond market and what investors should pay attention to as we move into the second quarter of 2014.

After hearing what the Fed officials said on interest rates last week, what is your outlook?
There are a lot of Fed officials with their own opinions, but I think it’s important to focus on what the Fed Chairman is saying. Janet Yellen said that rates are not going up, and although we’ve seen steady labor market improvements, it hasn’t been anything dramatic. For these reasons, I think an interest rate increase is still at least a year away.

How will this affect the municipal bond market?
Each time the Fed has announced tapering measures, investors have been fearful. If you look back at each of these instances, though, whenever the Fed took stimulus away, the market rallied due to fear of economic slowing. We did see a solid rally in the bond market during the first half of this year. I think interest rate increases are far enough away to still have a constructive position within the bond market, so to me the outlook is positive moving towards 2015.

How can investors take advantage of municipal-bond benefits?
On a tax-adjusted basis, municipal bonds have a very compelling risk-reward profile, which means the risk-adjusted returns are high. To take advantage of this, I would encourage investors to add exposure to their portfolio by investing in a product that holds high-quality, traditional municipal bonds. These are the type of bonds we look for and hold within the Near-Term Tax Free Fund. Our fund is in the “sweet spot” you could say; not too long, not too short, with some interest rate risk, but manageable for most investors. NEARX has generated consistent, positive annual returns and has been run by the same portfolio manager for 15 years.

Near-Term-Tax-Free-Fund-Annual-Total-Return
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For investors that like to sleep well at night, I think the fund is an attractive way to gain exposure to muni bonds. This is not the type of fund where you are going to be surprised with an unusual credit event that causes a significant impact. When choosing investments for the fund, I have a buy and hold mentality, letting the investments benefit the fund over time. The turnover of NEARX is very low and it has performed very well against its peers; take a look at the recent performance. Additionally, the fund seeks preservation of capital, and has a floating $2 NAV that has demonstrated minimal fluctuation in its share price.

How has the situation in Puerto Rico spooked the bond market?
Puerto Rican municipals are an area of the market that nobody really thought could declare bankruptcy, so what happened there didn’t help investors’ views of the muni market. We still have a small exposure to Puerto Rico within our fund. Our Puerto Rican positions are insured, however, which is important to help mitigate the risk aspect in this type of investing.

Our Near-Term Tax Free Fund has an overall Morningstar rating of 4 stars.* The fund is diversified and invests in municipal bonds with relatively short maturities, seeking to provide tax-free monthly income. If you’re looking to add tax-free bonds to your portfolio, with the option of modest allocation to this area of the market, I encourage you to request an information packet and take a closer look.

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 Overall Rating™ among 163 Municipal National Short funds as of 06/30/2014 based on risk-adjusted return.

Morningstar Ratings are based on risk-adjusted return. The Overall Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) 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.)

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

Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. 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. The Near-Term Tax Free Fund may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

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July 17, 2014
Domestic and Indian Gold Rally Points to a Strong Second Half

Earlier this week we reported that gold, defying expectations, is one of the best-performing commodities of the year so far.

And now we’ve learned that gold bullion imports by India climbed a stunning 65 percent last month after the country’s central bank allowed more investors to buy foreign bullion. Imports rose to $3.12 billion in June from $1.89 billion this time last year.

India is the world’s second-largest consumer of gold after China, accounting for approximately 25 percent of all gold consumption. Gold is the country’s second-largest import item after oil.
The Indian wedding season has historically been a major driver of gold consumptionThis news comes closely on the heels of the recent election of Prime Minister Narendra Modi, whose Bharatiya Janata Party (BJP) seeks to loosen import restrictions and other government regulations that tend to stifle economic growth. The rally also coincides with the Indian wedding season, which typically ends on July 7 and 8.

More importantly, what this news could portend is a stronger-than-normal second half of the year for the gold market. Data points going back 35 years confirm the probability of gold gaining strength in the second half, thanks largely to international celebrations such as Diwali, Ramadan and Christmas. This year in particular looks very promising indeed.

Keep your eyes on real interest rates.
Recently I chatted with Daniela Cambone during my weekly Gold Game Film program on Kitco. I pointed out that, with the end of the Indian wedding season, we’re historically due for a slight correction in the gold market. But whereas last year saw a huge contraction and liquidation of gold around this time, the gold bullion exchange-traded funds (ETFs) around the world this year actually expanded.

Daniela and I also looked ahead at the gold market in the coming months. One of the points I shared dealt with the strong correlation between gold performance and real interest rates, which you arrive at after subtracting inflation from the nominal interest rate.

If we go back to when gold was at $1,900 [in August 2011], the negative real interest rates were 200 basis points. Then by December of last year, it went to plus 50 basis points. Now it’s gone negative again, and gold is rallying. And I think that that’s a key factor when we look forward, and I think we’re going to continue to have negative real interest rates. So when inflation starts to rise like it did in the ‘70s, [the Federal Reserve isn’t] going to be able to lift rates as fast as the inflationary rate because it will stifle the economy dramatically.

Gold Rebound Linked to Fall in Interest Rates
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One last point I want to emphasize is our perennial suggestion to investors: 5 percent exposure to gold bullion, 5 to gold stocks, and rebalance each year for an overall 10 percent weighting in your portfolio.

Last year the stock market boomed, whereas bullion disappointed and gold stocks dramatically underperformed. Had investors taken their profits in the stock market and rolled it into gold, they would have done exceptionally well this year.

That continues to be our discipline here at U.S. Global Investors, and the recent gold rally, domestically and in India, substantiates this position.

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.

Past performance does not guarantee future results.

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July 14, 2014
2014 Commodities Halftime Report

What a difference six months can make.  After a disappointing 2013, the commodities market came roaring back full throttle, outperforming the S&P 500 Index by more than 4 percentage points and 10-year Treasury bonds by more than 6.

Commodities Are The Best Performers for First Half of 2014
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Leading the rally was nickel, delivering a 37.14 percent return, followed by palladium (17.70 percent) and gold (10.90 percent). Nickel also saw the largest gain from last year, climbing more than 55 points to settle close to $19,000 per metric tonne. Gold jumped 38 percentage points to $1,327 an ounce, and palladium rose 16 points to $843 an ounce.

At the back of the herd lagged lead, copper and wheat, which was the best performer only two short years ago.

Below you can see the 2014 halftime edition of our periodic table of commodity returns, which has proven to be a perennial favorite among our investors.

The Periodic Table of Commoditiy Returns
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That commodity prices often fluctuate so wildly supports the need to have your investments in the resources space diversified and actively managed by an experienced team of professional investors. Simply put, there are far too many worldly factors—some of them political, others acts of God, all tugging and pulling at the market in tandem—for any one person to reasonably keep track of. It’s important to have a limber group of managers and analysts with the expertise and diligence to monitor and anticipate the most pressing global trends.  

What we know is that now many investors have become bullish on resources. At a conference in New York at the end of last month, Credit Suisse polled 350 investors and found that 42 percent of them were planning to be overweight in commodities in the coming months. For some perspective, when the same question was asked of them the previous year, only 19 percent had a rosy attitude toward commodities.

As I said, what a difference six months—or, in this case, a year—can make. With money flowing back into commodities, the market is finally trying to reverse the downtrend that we’ve been up against since 2011.

Commodities Markets on the Rise
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Nickel
As usual, government policy is often a precursor to change. Nowhere did we see this adage in action more transparently this year than in Indonesia, whose government shocked the market in January by enacting an outright ban on nickel ore exports. Because the Southeast Asian country is the world’s second-largest producer of nickel ore, accounting for about a fifth of global supply, any alteration to its export policy was bound to send far-reaching ripples throughout the market.

Nickel prices have soared this year as a result of supply shortageChina, one of the leading importers of not just Indonesian nickel but other global raw materials as well, reacted by stockpiling the silvery-white metal, 75 percent of which is used worldwide in stainless steel production. This in turn encouraged investors to drive prices even higher out of fear of a supply shortage.

A repeal of the export ban is unlikely to happen in the near-term, as both Indonesian presidential contenders, Joko Widodo and Prabowo Subianto, who are both claiming victory in the recent election, favor its continuation. We will keep our eyes on nickel, as a correction might very well come when and if the ban is ever rescinded.

Palladium and Platinum
Prices of the platinum group metals (PGMs) hit three-year highs following the double whammy of a five-month-long miner strike in South Africa and trade sanctions against Russia, the world’s leading producer of palladium. Fear of a shortage in PGMs, which are essential to the production of catalytic converters in automobiles, drove prices skyrocketing.

This comes at a time when U.S. auto sales have surged to 16.9 million in June alone, an increase of 9.2 percent over the same time last year. Auto manufacturing is expected to grow 10.3 percent in the third quarter, according to International Strategy & Investment (ISS).

Increase in Platinum & Palladium Prices, Compared to Rise in Number of U.S. Auto Sales
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Although the labor strike ended last month, PGM production cannot reasonably resume within the next three to five months. And with a separate strike underway, this one led by the National Metalworkers of South Africa, country leaders fear yet another economic setback that has already threatened a third of South Africa’s manufacturing output.

Gold
International celebrations such as Ramadan, the Indian Festival of Lights and Christmas drive the gold Love TradeOur Gold and Precious Metals Fund (USERX), rated four stars by Morningstar,* continues to excel because we intimately understand the dynamics of both the Love and Fear Trade in the global goldmarket. We also know how to read and act on China’s positive purchasing managers index (PMI), which has recently hit a six-month high of 51. Any number over 50, of course, indicates strong growth in the manufacturing sector. China is already the world’s largest producer andconsumer of gold, and because its middle class is swelling in rank—the country is expected to have over 670 million middle class citizens early next decade—gold sales should remain robust.

Besides China, other global drivers of gold consumption at this time include India and the Middle East. Diwali—otherwise known as the Indian Festival of Lights—Christmas and other international celebrations encourage generous giving of gifts, of which gold jewelry is one of the most traditional and popular. Ramadan, scheduled to end on July 28, involves a type of alms-giving called zakat, which is one of the Five Pillars of Islam. Zakat is obligatory for all observant Muslims, who handsomely give precious metals such as gold to those in economic hardship.

As I told Catherine Murray on BNN’s Business Day PM back in May:

So we’re coming to that trough on a seasonal pattern, and that seasonal pattern is predominated by what I call the Love Trade, where you have jewelry demand, et cetera, coming out of Asia, Middle East and India... And this is the first time that we had what they call the Flash HSBC PMI. And this is very important for job creation and GDP per capita rising, and that’s highly correlated with consumption of gold for the jewelry trade. So the second half [of 2014] looks great, and I think it’s also very important for all exports of any resources.

Crude Oil
Although not one of the top leaders in the first half, crude oil deserves a shout-out. Its 7.06 percent annual return is closing in on the 7.19 percent return in 2013, when oil was the second-best performer. Because of unrest in Iraq, North Sea Brent crude has set a record for trading between $107 and $112 a barrel for 12 consecutive months, handily beating the 170 consecutive days in 2008 when it traded over $100 a barrel.

In its monthly energy report, the U.S. Energy Information Administration (EIA) forecasts that 2015 will represent the highest level of West Texas Intermediate (WTI) crude production since 1972. Global consumption of oil, driven largely by China once again, is expected to reach 94 million barrels a day (bbl/d) by the end of next year.

World Liquid Fuels Production and Consumption Balance
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Global Resources Fund (PSPFX) portfolio manager Brian Hicks reiterates these points on why we are bullish in light of the current domestic oil production boom:

Within our portfolio, we are investing heavily in the shales through upstream oil and gas companies, oil services companies and equipment companies. Shale is transformational; it is really changing the energy landscape. Almost overnight, companies are developing resources that are long-lived and repeatable. Remember, only five years ago we were talking about peak oil. Now, we're producing roughly 8.4 million bbl/d. That's the highest we've seen since the mid-'80s. It is a trend that is going to continue.

Always Remaining Vigilant
Even though the commodities market has so far exceeded everyone’s expectations this year, especially following a lackluster 2013, a correction could occur with little warning. That’s why the portfolio managers of PSPFX, USERX and our World Precious Minerals Fund (UNWPX) are constantly looking out for opportunities and threats as well as ensuring that the fund is optimally diversified to protect against changes in the market.

For now, however, it appears as if resources could continue their strong performance for at least the near-term and hopefully much longer.

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 Overall Rating™ among 71 Equity Precious Metals funds as of 6/30/2014 based on risk-adjusted return.

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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. 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. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price. The HSBC Flash China Manufacturing PMI is published a week ahead of the final HSBC China PMI every month. It analyzes 85-90 percent of the responses to the Final PMI from purchasing executives in more than 400 small, medium and large manufacturers, both state-owned and private enterprises.

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 (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Ratingä 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.)

Diversification does not protect an investor from market risks and does not assure a profit.

Share “2014 Commodities Halftime Report”

Net Asset Value
as of 07/29/2014

Global Resources Fund PSPFX $10.19 -0.01 Gold and Precious Metals Fund USERX $7.71 -0.08 World Precious Minerals Fund UNWPX $7.26 -0.06 China Region Fund USCOX $8.39 -0.01 Emerging Europe Fund EUROX $8.26 -0.08 All American Equity Fund GBTFX $33.14 -0.12 Holmes Macro Trends Fund MEGAX $23.97 -0.06 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change