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7 Things about Saudi Arabia You Need to Know
January 29, 2015

A week ago we learned that the king of Saudi Arabia, Abdullah bin Abdulaziz Al Saud, passed away at the age of 90. Following the announcement, crude oil immediately spiked 2.5 percent over uncertainty of how this might affect the Middle Eastern kingdom’s position on keeping oil production at current levels.  

But the new leader, King Salman bin Abdulaziz Al Saud, has already tamped down this uncertainty, stating that Saudi Arabia will hold to the decision made at last November’s Organization of Petroleum Exporting Country (OPEC) meeting.

All of this speculation just shows that Saudi Arabia is indeed the 800-pound gorilla when it comes to oil. Until very recently, it was the world’s top oil producer and exporter, before the American shale boom catapulted the U.S. into first place. Now, however, with prices less than half of what they were in July, many U.S. oil companies have been forced to shut down rigs, effectively slowing down output.

Total Number of U.S. Oil Rigs in Use Sharply Declining
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These events got me curious to dive deeper into Saudi Arabia’s economy and the extent to which it’s dependent on crude revenues. Below are some of the most interesting facts, gathered from a September case study by Richard Vietor and Hilary White of Harvard Business School.

1. Despite beliefs to the contrary, Saudi Arabia requires a breakeven price of $80 per barrel of oil. True, the stuff is easy and inexpensive to extract in Saudi Arabia’s desert—the prevailing notion is that one need only stick a straw in the ground and oil comes gushing out—but to afford its bloated social spending program, the government needs prices to be much higher. Right now, oil revenues make up a whopping 90 percent of the country’s budget.

OIl Rigs

2. Recognizing that its economy and energy portfolio are too oil-dependent, the kingdom is seeking ways to diversify. Before his death, King Abdullah ordered that other sources of energy be pursued, including nuclear and renewable energy. State-owned Saudi Aramco, the largest oil producer in the world, is currently ramping up exploration for natural gas. The company estimates that only 15 percent of all land in the nation’s borders has been adequately explored for the commodity.

3. Saudi Arabia is nearing completion of a 282-mile high-speed rail line connecting the holy cities of Mecca and Medina. It’s unclear how many Saudis will use the trains, though, since fuel prices are extremely low as a result of government subsidization. Prices are so low, in fact—a gallon of diesel is less than $0.50—that it has led to excessive and wasteful use of energy resources that could be reserved or exported instead.

Haramain High Speed Railway

4. Saudi Arabia maintains a strong pro-business climate to reel in foreign investors. It offers low corporate taxes (20 percent), no personal income taxes and attractive perks, including land, electricity and free credit. Because of these efforts, the country boasts the highest amount of foreign investment in the Middle East—$141 billion in the past five years alone.

5. Saudi Arabia, believe it or not, has the largest percentage of Twitter users in the world. One of the main reasons for this is that more than half of its 29 million citizens are under the age of 25. As is the case in India, which also has a high percentage of young people, this is seen as an opportunity for the country’s future productivity.

Saudi Arabia twitter users

6. However, the kingdom has high unemployment among not just young people but also women. About 30 percent of working-age young people are without jobs; the figure is 34 percent for women. The country also has a shockingly low labor force participation rate of 35 percent. Saudi Arabia relies on cheap migrant workers, who now make up about 30 percent of the population.

7. A vast majority of Saudis work for the government. Only about 10 percent of working Saudis are employed by private companies. Why? Workers can make either $400 a month on average in the private sector, where working conditions tend to be dubious at best, or $2,000 a month in the public sector. In 2011, about 800,000 new private-sector jobs were created, but of these, 80 percent went to foreign workers.

But this trend is not restricted to Saudi Arabia. As you can see in the chart below, here in the U.S., government jobs growth has broadly outpaced all other industries over the years.

U.S. Government Jobs vs Private Sector Jobs, by Industry
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This saps intellectual capital from the real engine of innovation and ingenuity, the private sector. A robust private sector is necessary to create and foster successful companies such as Apple, held in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX). The tech giant’s iPhone 6 sales led the way to a record earnings report of $74.6 billion—the largest corporate quarterly earnings of all time.

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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 All American Equity Fund and Holmes Macro Trends Fund as a percentage of net assets as of 12/31/2014: Apple, Inc. 3.52% All American Equity Fund, 5.37% Holmes Macro Trends Fund; Saudi Amarco 0.00%; Twitter, Inc. 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. 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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There’s More to the Gold Rally Than European Market Fears
January 27, 2015

Gold is having a spectacular run so far this year.Gold was down 1.72 percent at the end of 2014, but things are looking up for the yellow metal. Last week I returned from presenting at the Vancouver Resource Investment Conference, where sentiment for gold was through the roof.

And with good reason. Even though gold was down last year, it still ranked as the second-best-performing currency, following the U.S. dollar. The metal has risen about 10 percent year-to-date, and last Tuesday, for the first time since mid-August, it broke through the $1,300 mark.

Are you excited yet?

Our two gold funds, the Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), have responded positively to the rally. Both have jumped above their 50-day moving averages, a key trend indicator many investors use to decide when to allocate assets.

Gold and Precious Metals Fund (USERX) Breaks Out
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World Precious Minerals Fund (UNWPX) Breaks Out
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You’ve probably heard or read that gold’s breakout is a direct result of what’s currently happening in Europe, but there’s much more to the story.

To be clear, the events I’m referring to are a huge deal and shouldn’t be discounted. As we say at U.S. Global Investors, government policy is a precursor to change, and certainly gold has struck a musical chord in the world of currency symphonies.

The European Central Bank’s (ECB’s) unveiling of a much-needed, trillion-dollar quantitative easing (QE) program will hopefully lead to a stronger economy in the eurozone. For two years now, it seems the region has held much of the world hostage with its lack of growth.

Switzerland unexpectedly unpegged its currency, the Swiss franc, from the euro, shocking money managers all over the world. The country also let its 10-year government bond yield sink into negative territory, joining Germany, Spain and Italy, whose yields now hover near record lows. This makes other assets, especially gold, look much more attractive.

And in Greece, the radical far-left, anti-austerity Syriza party just took control of the government, sending shockwaves throughout the European markets and raising the possibility that the Mediterranean country might leave or be booted out of the eurozone.

All of these developments have spurred investors to seek safety in gold. But there’s more at work fueling the metal’s ascent.

Currency Wars

As I’ve discussed many times before, the strong U.S. dollar—it’s currently up 2.2 standard deviations for the 10-year period—has not only weighed on crude oil but also caused other global currencies to depreciate. Both have helped many foreign gold producers expand their profit margins, as bullion is then able to gain in value more quickly.

“The Canadian dollar has weakened quite a bit against the U.S. dollar for a lot of our gold stocks in Canada,” Ralph Aldis, portfolio manager of our gold funds, explained during our most recent webcast. “These producers benefit when the local currency depreciates.”

This is because they pay their workers in the weaker local currency but sell their bullion in U.S. dollars.

When expressed in Canadian dollars, gold has sharply ramped up to a nine-month high:

Gold Price in Canadian Dollar Terms
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Gold has also shot upward in Japanese yen and euro terms:

Gold Price in Japanese Yen Terms
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Gold Price in Euro Terms
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A weaker South African rand has been a tailwind for two of our South African holdings, Gold Fields and Harmony Gold Mining. Below you can see that both companies have broken free of their 50-day moving averages—by a much wider spread than we’ve seen since at least March of last year.

Low Fuel Costs and a Weakened Rand Have Benefited South African Godl Producers
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Then there are falling fuel costs, ordinarily gold miners’ biggest expense.

“If you factor in lower energy prices, that basically gives companies a double whammy in terms of margin expansion,” Ralph said.

Headquartered in Toronto, Barrick Gold, the world’s largest gold producer, saves about $25 per ounce on lower diesel expenses, according to BullionVault.

Before it started recovering at the beginning of January, gold had been pretty banged up since mid-August. As a result, companies have slashed capital spending, especially the junior miners.

But recently we’ve seen merger and acquisition (M&A) activity in the gold space, typically a good sign. In late November, Osisko Gold Royalties announced it would buy Quebec City-based Virginia Mines for $424 million, and last week we learned that Vancouver-based Goldcorp will be acquiring precious metals explorer Probe Mines for $440 million. Probe is a relatively new player in the field, having made two discoveries in Ontario since 2009.

This makes sense. If you’re looking to expand your company, you might as well do it when everything’s on sale. But these M&As also indicate that there’s enough confidence in the future of the precious metals industry to justify such capital spending. It says a lot about the market that Goldcorp would agree to purchase a younger exploration company, a move we haven’t seen in a while.

Repatriation Games

This is what largely drives gold demand: confidence in the metal as a store of value, in good times and in bad. Gold is much more than a commodity—it’s a form of currency, one that “has never required the credit guarantee of a third party,” as former Federal Reserve Chair Alan Greenspan made clear in September.

Last year, gold was the second-strongest currency in the world, trailing only the U.S. dollar. It’s amazing how well it held up under the pressure of the greenback. Not just investors but also central banks recognize this.

The Bundesbank, Germany's central bank, repatriated 120 tonnes of gold in 2014.

“If the dollar or any other fiat currency were universally acceptable at all times,” Greenspan said, “central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute.”

Indeed, we’re seeing central banks all around the world shoring up their own gold reserves by repatriating bullion from foreign institutions. December saw the biggest monthly outflow of gold from the New York Fed since 2001, bringing its holdings to their lowest level this century. 

Gold Held in New York Fed Drops to Lowest in 21st Century AFter Biggest Monthly Withdrawal Since 2001
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Central banks might be jittery from global growth concerns—the International Monetary Fund just downgraded its growth forecast for 2015—or simply recognizing the tenuousness of fiat money. Either way, the message is resounding: gold is an essential component to a strong portfolio and an excellent store of value.

As always, we recommend a 10-percent weighting in gold: 5 percent in bullion, 5 percent in gold stocks, then rebalancing every year.

I’ll have more to share with you when I return next week from Zurich, where I’ll be presenting at its International Business School.

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 12/31/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Gold and Precious Metals Fund (USERX) -14.00% -15.67% 0.38% 2.15% 1.90%
World precious Minerals Fund (UNWPX) -16.52% -18.79% -2.57% 1.86% N/A

Expense ratios as stated in the most recent prospectus. The expense ratio after waivers 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 (e.g., short-term trading fees of 0.05%) 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.

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.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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 12/31/2014: Barrick Gold 0.00%; Gold Fields Ltd. 1.51% in Gold and Precious Metals Fund, 0.36% in World and Precious Minerals Fund; Goldcorp, Inc. 1.03% in Gold and Precious Metals Fund; Harmony Gold Mining Co. Ltd. 0.90% in Gold and Precious Metals Fund, 0.82% in World Precious Minerals Fund; Osisko Mining 0.00%; Probe Mines Ltd. 0.00%; Virginia Mines, Inc. 1.14% in Gold and Precious Metals Fund, 10.35% in World Precious Minerals 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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Palladium Was the Winner in 2014
January 20, 2015

Near the beginning of every year, we update and publish what can safely be called our most popular piece: the Periodic Table of Commodities Returns.

Below are the latest year-end results, which show the historical performance of commodities from best to worst. A larger, high-definition version of the table is available for download.

The Perodic Table of Commodity Returns
click to enlarge

Last year we experienced one of the biggest commodity corrections in recent memory—the biggest since 1986, in fact—and we’re happy to put it in our rearview mirrors.

Base Metals Boasted Mettle

Ford's 2015 F-150 features a military-grade aluminum-alloy body and bed. Although it came in second overall, right behind palladium, nickel was the real standout of 2014. With a shabby 10-year annualized track record of -1.8 percent, the metal gained nearly 7 percent on the back of supply scares after Indonesia, the world’s largest producer, unexpectedly banned all nickel exports last January to meet domestic demand. By May, the metal had rocketed up more than 50 percent before cooling to 37 percent in July, when it was then the best-performing commodity.

Aluminum also managed to beat its 10-year annualized performance by close to 3 percentage points, owing to global production cuts and increased industrial usage of the metal in automobiles and aeronautics. The 2015 F-150, for example, is the first mass-produced truck in its class to feature an aluminum-alloy body. Because of these developments, Texas-based aluminum-producer Alcoa, which we own in our Global Resources Fund (PSPFX), enjoyed its best year since 2008, delivering 50 percent.

Precious Metals Pressured

Palladium, 2014’s top commodity, performed relatively according to script. For the year it was up 11.35 percent, compared to its 10-year annualized returns of 14 percent. Much like nickel, palladium was spurred by extenuating circumstances. Between January and June, a labor strike in South Africa, the world’s second-largest producer of the metal following Russia, halted production, which depleted reserves and sent palladium to a three-year high of $850 an ounce.

Although nickel doesn’t have an exchange-traded fund (ETF), we manage to capture this growth through a palladium ETF.   

The five-month labor strike in South Africa wasn't enough to boost platinum's performance to palladium levelsThe South African labor strike didn’t seem to help palladium’s sister metal, platinum, which ended the year down 11.79 percent. To combat and find solutions to years’ worth of flat sales, six South African platinum producers launched the World Platinum Investment Council in December. CEO Paul Wilson summed up the group’s mission:

To date, the investment potential of platinum has been largely overlooked. We believe that presenting the platinum investment proposition to a wider range of investors will result in it rightfully being considered favorably as an investment.

Silver had its second straight down year, falling 19 percent, despite record sales of Silver Eagle coins. According to the U.S. Mint, 44 million ounces were sold in 2014, outpacing Gold Eagle sales by 59 percent. The U.S. Mint’s stock of bullion completely dried up on Christmas Eve.

However, silver mining also accelerated to record highs last year. This, coupled with weak industrial use of silver in the first half of 2014, led to falling prices.

And then there’s gold, which also fell (slightly) for the second consecutive year. As I’ve already reported, even though the yellow metal dropped 1.72, it still remained a more reliable form of currency than any other globally, excluding the U.S. dollar.

Gold is Second Best Performing Currency of 2014
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Energy Feeling Sluggish

Besides crude oil, the biggest loser was natural gas. A particularly brutal winter in late 2013 helped make it the top performer for that year. But even though the polar vortex—remember that?—dragged frigid temperatures into the beginning of the new year, natural gas couldn’t quite manage to ignite the flame in 2014, which turned out to be one of the warmest years on record.

Natural gas remains the worst-performing commodity for the 10-year period, down 3.73 percent.

All three energy-related commodities—coal, natural gas and crude oil—showed up in the bottom five, their first time to do so since 2006.

Weighed down by crude oil, which tanked 46 percent in 2014, the energy component of the S&P Goldman Sachs Commodities Index (GSCI) lost 44 percent for the year.

Energy Had Largest Price Declines in 2014
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By all accounts, crude oil’s collapse was both unexpected and swift—and it looks as if the bottom has not yet been reached. Goldman Sachs recently reduced its six- and 12-month West Texas Intermediate (WTI) crude forecasts to $39 per barrel.

It’s disconcerting to recall that as recently as July, Brent oil set a record for trading between $107 and $112 per barrel for 12 consecutive months. It now trades for less than half that, at approximately $50 per barrel.

$500 Billion Peace Dividend for Global Consumers and Businesses
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The selloff is so extended now that crude’s weekly relative strength index (RSI) is at 8.5, which is even lower than its RSI during the 2008-2009 crisis. 

Year-over-Year Percent Change Oscillator: WTI Crude vs. U.S. Dollar
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Where’s the Global Demand?

In response to unraveling crude prices, several companies, from the small caps to the majors, announced they would be laying off workers in huge numbers. Schlumberger, the world’s largest oilfield-services company, will reportedly be letting go of 9,000 of its workers, or 7 percent of its workforce; Suncor Energy, Canada’s largest, will cut 1,000 members of its staff and slash $1 billion in capital spending.

Many more companies have had little choice but to cut costs by halting exploration and production. The U.S. oil rig count saw its largest one-week drop in six years, losing 74 last week alone. As disconcerting as all this might sound—especially the job losses—these decisions are necessary to rebalance supply and demand and stabilize prices.

After peaking at $10 per 1,000 cubic feet in 2008, prices for natural gas—remember, it’s the worst-performing commodity of the last 10 years—plummeted and never fully recovered, which is why you see a gradually diminishing number of gas rigs in the chart below.

Total Number of U.S. Oil and Gas Rigs in Use Sharply Declining
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When the shale oil revolution began in 2009, the number of rigs steeply ramped up, adding approximately 200 new rigs each year. And not just any rigs, but much more efficient, technologically-advanced pieces of machinery, capable of extracting crude from places that until now were inaccessible.

Nobel Price Winning Economist Robert Shiller on CNBCThat’s what American ingenuity has given the world: cheap oil and cheap fuel. Speaking on CNBC last week, Nobel Prize-winning economist Robert Shiller praised the U.S.’s drive and innovative spirit: “This country is proud of our oil technology and it’s been boosting our spirit, our animal spirits.”

But just as the U.S. has provided the world with plentiful oil, the rest of the global economy has cooled, especially Europe, choking demand.

“The global economy today is much larger than what it used to be,” World Bank Chief Economist Kaushik Basu recently stated, “so it’s a case of a larger train being pulled by a single engine, the American one.”

Tough Times Don’t Last Forever

Speaking to Fox Business last Monday, PSPFX portfolio manager Brian Hicks explained where we continue to see opportunity and value in this low-price environment:

Certainly the [oil] selloff is getting long in the tooth and we’re actually becoming more and more constructive as [it] continues… These prices are not sustainable [and] not high enough to replace production going down a few years from now. We think the stocks look very attractive here, and if you look at their performance to crude oil, they’ve actually been outperforming since mid-December.

Oil Producers Outperforming Crude for the 30-Day period
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Michael Waring, CEO and Chief Investment Officer of Toronto-based Galileo Global Equity Advisors, visited our office last week and reminded our team of the cyclical nature of the energy sector. We’ve been through similar downturns in crude oil, Michael noted—in 1986 and 2008-2009, most recently.

“I’ve seen this movie so many times, I already know the ending,” Michael said, suggesting that oil has tended to move back to its mean eventually.

The chart below shows the inverse relationship between crude and the dollar, going back to 1984. The current standard deviation spread between the two is clearly widening to 1985 and 2008-2009 levels. But as strong as the dollar or as depressed as oil got, both eventually reverted back to their means. 

30- Year Research in Oil and U.S. Dollar Volatility
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For the past 30 years, the 12-month rolling sigma or volatility for oil is ±30 percent 70 percent of the time; the dollar’s is ±9 percent. Today the odds are high that the dollar will correct and oil will rise. In 30 years, this is the third-widest gap between oil falling and dollar rising. But if you look over the same amount of time, you’ll see that oil has historically bottomed in February and subsequently rallied.

I cannot stress enough how greatly low gasoline prices have benefited consumers. They might also contribute to non-oil-services employment. According to BCA Research:

In the U.S., the decline in gasoline prices should boost household disposable incomes by around $150 billion this year, with an additional $30 billion coming from lower heating bills [and] decreased airline fares… The money spent, in turn, will generate additional demand for goods and services. This will lead to faster employment growth, translating into more income and spending.

Mark Your Calendars

  • I just presented at the 20th Anniversary Vancouver Resource Investment Conference 2015. I’ll be sure to inform you of the main takeaways from the conference.
    Watch my preconference interview with Vanessa Collette, host of Cambridge House Live.
  • This Wednesday, January 21, we will be hosting our first webcast of the year, “Bad News Is Good News: A Contrarian Case for Commodities.” The presenters include me, Director of Research John Derrick and portfolio managers Brian Hicks and Ralph Aldis. Don’t miss out on this special opportunity to gain expert insight on where commodities might be headed this year!
    You can register here.
  • On Wednesday, February 18, we will be conducting our second webcast, which will focus on China and Emerging Europe.
  • And finally, look out for our Shareholder Report magazine, which will be arriving in mailboxes soon!

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.

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.

The Goldman Sachs Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

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 9/30/2014: Alcoa, Inc. 1.40%; Chevron Corp. 1.90%; Devon Energy Corp. 1.82%; EOG Resources, Inc. 2.13%; Ford Motor Co. 0.00%; Schlumberger Ltd. 0.00%; Suncor Energy, Inc. 2.13%.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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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You’ll Be Shocked to See How Few Equity and Bond Funds Have Risen for 14 Straight Years
January 15, 2015

Six years. That’s the longest duration of time that U.S. equities have consecutively risen.

Since 1871, it’s happened only twice—once between 1898 and 1903, and again between 2009 and 2014.

Meaning, if the market is up by the end of this year, we will have crossed into uncharted territory—seven straight years of sustained equity growth.

U.S. Equities Have Never Risen 7 Consecutive Years
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While the possibility of setting a new record certainly sounds exciting, a quick glance at the chart above reveals what some could perceive as troubling news. A majority of the gainful blocks of time lasted only two or three years before dipping into the red. What the market giveth, the market taketh away.

Yet this is how the market (normally) works. One year it’s up, the next it’s down, and there’s money to be made in both directions. As Warren Buffett famously quipped, “I’d be a bum on the street with a tin cup if the market was always efficient.”

Indeed, you can make the argument that the market tends to do exactly that which displeases the most people. But just as a smooth sea never makes a skilled sailor, an ever-efficient market never leads to skilled investment management.

If you want to know what skilled looks like, check out the following chart:

Near-Term Tax Free Fund Annual Total Return
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What resembles the Manhattan skyline is actually the 14 straight years of positive returns in our Near-Term Tax Free Fund (NEARX). That’s more than twice the number of such years the general equities market has delivered.

Now get this:

According to Lipper, among 26,000 equity and bond funds in the U.S., only 70 have achieved the feat of giving investors positive returns for the past 14 years.

That equates to a scant 0.3 percent.

Here’s another way of looking at it:

Near-Term Tax Free Fund vs. S&P 500 Index
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As you can see, a hypothetical $100,000 invested in an S&P 500 index fund in December 2000 would have taken almost 14 years to catch up to and surpass a similar investment in NEARX.

Although we can’t guarantee how the fund will perform in the future, NEARX has historically shown an ability to dodge the dramatic swings and volatility in the equities market, similar to the ones we experienced during the first decade of the century—the dotcom bubble, for instance, and the Great Recession. And there will be times, of course, when products such as an S&P 500 index fund will strongly outperform NEARX.

But unlike the equities market, NEARX has a time-tested history of no drama. As the one has swung wildly this way and that, the other has calmly, confidently ticked up each year.

What’s more, NEARX continues to maintain its coveted 5-star overall rating from Morningstar, among 173 Municipal National Short-Term funds as of 12/31/2014, based on risk-adjusted return.

The equities market can at times be an incomparable place to make money, and we hope for another (and unprecedented) year of growth.

But for those who are looking for something a little less stomach-churning, there’s NEARX. Request more information here.

Happy investing!

 

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/173
     3-Year/173
     5-Year/142
    10-Year/103

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-term funds
Through: 12/31/2014

Past performance does not guarantee future results.

Total Annualized Returns as of 12/31/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fund (NEARX) 3.07% 2.64% 2.98% 1.21% 0.45%
S&P 500 Index 13.69% 15.45% 7.76% n/a n/a

Expense ratio as stated in the most recent prospectus. The expense ratio after waivers 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.

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.

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

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.)

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.

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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Bad News Is Good News: A Contrarian View of China Investing
January 12, 2015
Year-of-the-Ram

When China celebrates its new year next month, we will transition into the Year of the Ram, also known as the Year of the Goat or Sheep. If you believe in luck, this could be a good sign. The ram comes eighth in the 12-zodiac cycle, and in Mandarin, “eight” sounds very similar to the words meaning “prosper,” “wealth” or, in some dialects, “fortune.” As you might imagine, the Chinese consider the number to be very lucky.

But of course successful investing involves so much more than luck. In a time when not only China but much of the rest of the world is trying to get its groove back, it’s important to be cognizant of the factors that shape the markets, including changing government policy. We often say that government policy is a precursor to change, so it’s important to follow the money.

With that in mind, I asked Xian Liang, portfolio manager of our China Region Fund (USCOX), to outline a few of the most compelling cases to remain bullish on the Asian giant.

Below are some highlights from our discussion.

A Healthy Balance Between Monetary and Fiscal Support

Good Luck in 2015

Back in October, I pointed out that one of the main contributors to the European Union’s sluggish growth is its inability to balance its monetary and fiscal policies. It has been eager to tax everything and everyone who moves. Waiting for European Central Bank (ECB) President Mario Draghi to act often feels a little like waiting for Godot. Investors’ patience is wearing thin.

China, on the other hand, is much more responsive and actively committed to making full use of both policies in its arsenal to spur its cooling economy.

On the monetary side, according to Xian, are interest rate cuts and a loosening of reserve requirements for certain deposits. The goal is to ease access to loans for businesses and individuals seeking to purchase big-ticket items such as homes. As a result, Chinese entrepreneurs have increasingly been able to start more businesses.

 

chinas-reduction-of-red-tape-has-increased-business-startups-despite-slowing-growth
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Jobs growth has been so robust, in fact, that the government has managed to attain its job creation target outlined in its current Five-Year period ahead of schedule and by a wide margin. The country has grown millions of jobs with great efficiency, even as GDP sags.

Although the Chinese housing market has stagnated in recent months, these new monetary measures will help it pick up steam. Already we’re seeing some improvement, with home property stocks moving higher.

Regulations are an indirect taxation of the economy, whereas deregulation unleashes entrepreneurial spirit.

Chinese-Housing-Market-Showing-Signs-of-Improvement
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On the fiscal front, the government is reportedly planning to spend $1.6 trillion over the next two years on infrastructure projects in various industries—300 separate infrastructure programs, to be exact, according to BCA Research.

As I pointed out last month, many of these projects will largely involve high-speed rail, both domestically and abroad. China has already secured multiple construction deals with countries ranging from Brazil, South Africa, Nigeria, India, Russia, the U.S. and others.

Government to Remain Accommodative

There are a couple of reasons the Chinese government has accelerated support to capital markets, according to Xian:

One, a significant deflationary threat has been driven by slumping energy prices. And two, there are potentially lower exports to commodity producing nations.

 

Indeed, sluggish global demand has contributed to China’s weak December purchasing manager’s index (PMI), which dropped to an 18-month low of 50.1. China has been quick to respond to lower PMI data with a drop in interest rates.

 

Chinas-Manufacturing-Industry-in-Slight-Contraction-Mode
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But Where There’s Bad News, Good News Is Often Not Far Behind

The silver lining to falling commodity prices is that since China is a net-importer of raw materials—crude oil especially—the country has been able to save tremendously on its oil and gas bills. Back in November, I reported that for every dollar the price of a barrel of oil drops, China’s economy saves about $2 billion annually. From its peak in June, crude has slipped close to $50—you do the math. This has served as a major wealth transfer from oil-producing countries into China’s coffers.

Oil Sinks, Airlines Take Flight

Speaking of crude, declining oil prices—they’re currently below $50 per barrel—have been good for airlines, Chinese companies included. As you can see, there’s been a clear inverse relationship between crude oil returns and airline stocks.

Low-Oil-Prices-Have-Benefited-Chinese-Airlines
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China is the largest investor in U.S. government bonds. The country has accumulated close to $1.3 trillion, so a strong dollar and falling oil prices benefit its economic flexibility.

More middle-class Chinese might be able to afford to travel abroad, specifically here to the U.S., where inevitably they will spend their money.

Chinese-Outbound-Travelers-Increasing-Every-Year
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According to Carl Weinberg, founder and chief economist of High Frequency Economics:

Chinese President Xi Jinping has estimated that there will be more than a half-billion Chinese tourists traveling to the West in the next 10 years. You can work out the impact if all of them came to New York and spent $2,000 or $3,000 each. That would be enough to add a half-percentage point to U.S. GDP every year over the next decade.

Reasonable Stock Valuation

Chinese stocks are currently valued below their own historical averages as well as those among other global emerging markets, making them both attractive and competitive.

“Odds favor mean reversion to continue,” Xian says. “The better the Chinese markets perform, the more global liquidity they might attract.”

Chinese stocks, as expressed in the MSCI China Index, are currently a much better value than those in the S&P 500 Index, trading at 10 times earnings whereas the U.S. is trading at 18 times.

Chinese-Stocks-Valuation-Has-Been-Attractive
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A-Shares Still a Huge Draw

Chinese A-Shares surprised the market by breaking out last summer, having delivered 66 percent for the 12-month period. It looks like a breakout from the long-term bear market.

Undervaluation-of-Chinese-Stocks-Indicates-Favorable-Risk-Reward
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What’s more, the upside is unlikely to have been exhausted. Although they aren’t as stellar of a bargain as they once were, they’re not yet overvalued, and retail and institutional investors might accumulate on pullbacks.

Emerging-Markets-Total-Returns-for-2014
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For the A-Shares market, USCOX has recently added exposure to A-Shares to capture more attractive valuation. In today’s environment, we believe the safer bets are investable H-Shares, which are driven by A-Shares and, in 2014, returned 15.5 percent. H-Shares comprise the vast majority of the fund’s exposure to Chinese equities, with further exposure gained through A-Shares exchange-traded funds (ETFs).

To the right you can see merely a sampling of the ever-popular emerging markets periodic tables, which will soon be available exclusively to subscribers of our award-winning Investor Alert.

The Ram Is the New Bull

As GARP (growth at a reasonable price) hunters, we’re prudently optimistic about the upcoming year and anticipate great things out of the world’s second-largest economy. China’s government and central bank are committed to jobs and manufacturing growth as well as policy easing. Its stocks are reasonably valued, and low commodity prices should continue to offset slowing global demand.

As Xian eloquently put it last month:

China’s leadership appears to be delivering on the promises it made in November 2013 at the Third Plenary Session, specifically the liberalization of the financial sector and reform of the role capital markets play in allocating resources. This leadership is determined and committed to putting China on the right path.

A Special Announcement

Please mark your calendars for January 21, as we will be conducting our first webcast of the year. We will be discussing the state of commodities, and as a loyal subscriber, you’ll be first to receive the registration this week. We’ll be following up with an emerging markets webcast on February 18 that will focus on China and Emerging Europe.

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.

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 HSBC China Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives at more than 400 private service-sector companies.

The MSCI China Free Index is a capitalization weighted index that monitors the performance of stocks from the country of China.

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

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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 9/30/2014: Air China Ltd. 0.00%, China Eastern Airlines 0.00%, China Southern Airlines Co. 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. 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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Net Asset Value
as of 01/28/2015

Global Resources Fund PSPFX $6.32 -0.15 Gold and Precious Metals Fund USERX $5.92 -0.22 World Precious Minerals Fund UNWPX $5.11 -0.16 China Region Fund USCOX $8.31 -0.04 Emerging Europe Fund EUROX $6.37 -0.18 All American Equity Fund GBTFX $27.12 -0.35 Holmes Macro Trends Fund MEGAX $20.09 -0.17 Near-Term Tax Free Fund NEARX $2.27 0.01 China Region Fund USCOX $8.31 -0.04