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UPDATE: China Wants to Conduct the World’s High-Speed Rail Market
December 15, 2014

The construction of the American transcontinental railroad in the 1860s, which cost upwards of $136 million and covered 1,800 miles over arduous terrain, could not have been as easily accomplished without the major influx of Chinese immigrants into California. Tens of thousands of Chinese laborers worked grueling 12-hour days, six days a week, often at paltry wages and with little or no accommodations. They gained a reputation as indefatigable and resilient workers because they rarely became ill, a result of boiling their drinking water and pasteurizing their food.

In the 1860s Central Pacific Railroad Employed Over 12000 Chinese LaborersNow, close to a century and a half later, the Chinese want to return to the railroad business. This time, however, they strive to become the world’s leading go-to provider of high-speed rail and exporter of mass transit technology.

They certainly have the credentials and experience to back up their ambitions. By the end of last year alone, more than 6,800 miles of high-speed rail spanned the fourth-largest country, with another 7,500 miles currently under construction. UBS’s research reports that “China has the largest high-speed rail network in the world, with a total of more than 20,000+ kilometers [12,400+ miles] high-speed passenger-dedicated lines scheduled to be operational by end-2015.”

ost-Cities-Network-Connected-Next-Five-Years
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A lot has changed with Chinese rail since I previously wrote about it in March 2012. Back then, the country was struggling to get new projects off the ground, one of the catalysts of which was a bullet train crash in 2011. At the time, out of five countries, including Australia, the U.S., Russia and China, the Asian giant came in last place for the total length of railway per capita.

Then, in August 2013, BCA Research highlighted the massive surge in the country’s urban subway systems, as the “length of light rail and metro will be extended by 40 percent in the next two years, and tripled by 2020.”

The Closer: Chinese Premier Li KeqiangWe’re currently seeing the boom of this Chinese railway Renaissance.

As I told Wall St for Main St a couple of days ago: “The [Chinese] government is promoting light rail train everywhere in the world, and it’s only accelerating.”

China Courting Buyers

In recent months, Chinese Premier Li Keqiang has emerged as the nation’s top salesman for what he calls the “New Silk Road”—miles upon miles of high-speed transportation connecting all corners of the world. His plan might very well become one of China’s most lucrative exports and culturally significant contributions to the world: fast, efficient and reliable railways.

Which many areas of the world sorely need.  

In numerous countries, including here in the U.S., rail systems are outmoded and deteriorating. Five years ago, the U.S. Department of Transportation’s Federal Transit Administration concluded that “more than one-third of [rail] agencies’ assets are either in marginal or poor condition, indicating that these assets are near or have already exceeded their expected useful life.” A whopping 92 percent of railroad ties in the U.S. are still made of wood and, in many cases, fall within a range of 15 to even 100 years old. A few lines, such as the one that connects Los Angeles and Las Vegas, no longer receive regular service.

In India, where thousands of citizens rely on mass transportation, railroads have been combating a years-long rash of onboard fires relating to aging equipment and poor electrical maintenance. Last month, the state-owned India Railways chalked out plans with China to improve its lines and begin construction on a $33 billion, 1,090-mile high-speed rail connecting Delhi and the southern coastal city of Chennai.

remier-Li-Keqlang-to-Indian-commuters-here-let-us-give-you-a-hand

In November, China Railway Construction Corp. (CRCC), which we own in our China Region Fund (USCOX), signed a contract with Nigeria to construct a $12 billion, 870-mile rail system from Lagos, the nation’s second-most populous city, to the seaport town of Calabar. In an effort to shed China’s reputation for using only Chinese workers in foreign projects, CRCC Chairman Meng Fengchao “pledged to hire at least several thousand workers from Nigeria,” according to Bloomberg Businessweek.

China at the starting gates

But China’s most ambitious plan to date comes in the form of a proposed $230 billion high-speed rail system linking Beijing and Moscow, which will largely replace the storied 100-year-old Trans-Siberian Railway. Whereas the Trans-Siberian takes about six days one-way, the new high-speed line will cut travel time down to only two days. The estimated distance is 4,350 miles, “more than three times the world’s current longest high-speed line, from the Chinese capital to the southern city of Guangzhou,” according to Business Insider.

Following the announcement, the market handsomely rewarded CRCC. Since the end of October, its stock has gained 16 percent, beating for the first time this year the Hang Seng Composite Index, the benchmark for USCOX.

China-Railway-Construction-Corporation-CRCC-LEaps-Ahead-of-Hang-Seng-Index
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Just as significant as the proposed line itself is what it symbolizes: a strengthening relationship between Beijing and Moscow. Already Russia has signed a multibillion-dollar gas and oil export deal with its southern neighbor, a clear snub at the European market.

In any case, China’s goal is to do for other countries what it has done for its own. In only ten years’ time, China has amassed an impressive network of rails that helps citizens from all corners of the nation—from the rural to urban—stay connected. Modern rail makes the nation more energy- and time-efficient, and concentrates real estate development.

Emerging-High-Speed-Rail-Hub-Cities
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Unfathomable Amounts of Resources Will Be Needed

As impressive as the Beijing-Moscow project is, it only begins to touch on the large host of jobs China has lined up, which will require untold amounts of raw materials.

In the map below, each shaded country denotes the location of current or pending Chinese projects, with many more possibly to come. UBS reports that 64 new projects have been signed in 2014 alone, with the months of October and November seeing a huge spike in approvals.

Countries-That-Have-Either-Already-Signed-Contracts-or-Are-Negotiating-with-Chinese-Infrastructure-Complex
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A few highlights are worth mentioning. Last March, CNR Dalian Locomotive and Rolling Stock Company signed a $17.6 million contract with Ethiopia to provide 41 modern tramcars. Around the same time, South Africa ordered 232 diesel locomotives from CNR, a job worth $930 million. In July, China, Peru and Brazil agreed to cooperate on the construction of a railway that would connect the Peruvian Pacific coast to the Brazilian Atlantic coast. And in October, the Massachusetts Department of Transportation awarded a $567 million contract to CNR to build 284 train cars for Boston’s subway system.

Frank Holmes - High-Speed Train, ChinaThese projects will require astronomical amounts of resources and raw materials, including heavy-duty steel, carbon fiber, aircraft-grade aluminum, copper and concrete—all of which should bode well for our Global Resources Fund (PSPFX).

As for concrete, would it surprise you to learn that China has used more of it in the last three years than the U.S. used during the entire 20th century? “Where there’s cement consumption, there’s growth,” reports Business Insider, “and there’s never been anything like what’s happening in China.”

Missing in action in the map above is California, but perhaps not for long. Next year, the California High Speed Railroad Authority will begin accepting bids on what will eventually be the U.S.’s first high-speed rail system. Right now a bidding war for the estimated $566 million contract is brewing between China’s CSR Corporation Limited and China CNR Corporation.

Also missing is Mexico. Early last month, CSR won the bid to manufacture train cars while CRCC arranged to build the Latin American country’s first-ever high-speed railroad. Costing $4.3 billion, the line would have spanned 130 miles, from Mexico City to Queretaro. But just days after the contract was signed, Mexico canceled the deal “amid new reports that one of the bid partners built a home for [Mexican] first lady Angelica Rivera,” according to Bloomberg. CRCC has since threatened legal action.

Still, there are numerous investment opportunities in Premier Li’s “New Silk Road” initiative, as you can see below.

Chinese-Railway-Infrastructure-Investment
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And the opportunities don’t stop there. Along with a greater number of domestic Chinese rail lines comes an explosion in service industries catering to weary travelers, including restaurants, hotels, car rentals, discretionary goods, property and more.

Many of these companies, in fact, hail from the U.S. Fast food restaurants such as McDonald’s, KFC, Pizza Hut and Starbucks—which we own in both our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX)—have lately taken aggressive positions in and around China’s growing number of depots.

American hotels have also seized on the opportunity to service Chinese travelers making overnight stays along the way, with massive growth down the road.

Hotel-Operators-Current-Market-Share-Pipeline
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In a recent Barron’s piece, emerging markets analyst Shuli Ren highlighted the attractiveness of investing in China rail stocks, especially in light of the People’s Bank of China’s (PBoC’s) recent interest rate cut, which will help railroad companies deleverage:

While China Railway Construction Corp. [which we own in USCOX] and China Railway Group both are major winners, given their 40 to 45 percent market share each in railway construction in China, CRCC currently has only a small exposure overseas, which means more upside. About 25 percent of CRCC’s new contracts come from overseas markets, the highest among its peers. CRCC is also less indebted, with “only” 94 percent net gearing.

Chinese banks’ recent decision to lower financing costs and increase lending has helped railroad companies, both state-owned and listed, gain a market advantage throughout the world.

Mcdonalds-presence-in-ChinaBCA Research has additionally cited the PBoC’s rate cuts and the Chinese leadership’s efforts to lower the cost of borrowing as further enticing reasons to consider Chinese rail: “interest rate sensitive sectors such as… ‘asset-heavy’ industries such as materials, industrials and energy” all benefit. As these industries are directly and indirectly related to the construction and maintenance of railroads, they are also clear beneficiaries.

Expressing positivity in “Chinese growth, especially on stocks, going into the New Year,” BCA encourages readers “to be invested in Chinese shares and overweight Chinese equities in managed global and EM [emerging market] portfolios.”

One such EM portfolio that investors can take advantage of to catch opportunity is our very own China Region Fund (USCOX).

On Our A-Game

One final note I want to leave you with is the strong performance of Chinese A-shares lately. Even though they tend to be volatile, they’ve been climbing pretty steeply since the summer.

Shanghai Composite Index
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The financial sector has been the clear winner, which USCOX maintains significant exposure to. And as I’ve previously said, materials, utilities and industrials all have residual benefits to the railway industry.

Rally-Leaders-China-Domestic-A-Shares-6-Month-Return
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As I told CNBC Asia’s Squawk Box regarding China A-shares:

I think people finally woke up to the breakout that took place in the summer. You saw that reversal, those long-term moving averages and it was defying all the negativity. We went long A-shares starting in September and being overweighted in our China opportunity 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.

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.

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.

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

The Hang Seng Composite Index is a market-cap weighted index that covers about 95% of the total market capitalization of companies listed on the Main Board of the Hong Kong Stock Exchange.

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

The Shanghai A-Share Stock Price Index is a capitalization-weighted index.  The index tracks the daily price performance of all A-shares listed on the Shanghai Stock Exchange that are restricted to local investors and qualified institutional foreign investors.  The index was developed with a base value of 100 on December 19, 1990.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: Accor 0.00%, China CNR Corporation 0.00%, China Railway Construction Corp. in China Region Fund 1.05%, CNR Dalian Locomotive and Rolling Stock Company 0.00%, CSR Corp. Ltd. 0.00%, China Railway Group 0.00%, Hilton Worldwide 0.00% Hyatt Hotels Corp. 0.00%, InterContinental Hotels Group 0.00%, Marriott International Inc. 0.00%, McDonald’s 0.00%, Shangri-La Asia 0.00%, Starbucks Corp. 0.00%, Starwood Hotels and Resorts Worldwide 0.00%, Wyndham Worldwide 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. 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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Don’t Let Fear of Motion Sickness Keep You from Missing the Boat
December 8, 2014

By most accounts, major U.S. markets have performed positively this year, generating significant wealth for many investors. The S&P 500 Index has made fresh highs pretty regularly and is currently up 12 percent, and so far the Nasdaq Composite Index has returned 14 percent.

The upside to falling oil prices is consumers are heading in to the holiday shopping season with extra money in their pockets. At a handful of stations in Oklahoma and Texas, gas prices fell below $2 last week. Consumer airlines are also benefitting from the “tax break” of low fuel prices. Year-to-date, the NYSE Arca Airline Index has delivered a stellar 43 percent and the benefit is not limited to the U.S.  China Airlines is up 31.5 percent.

Airline Stocks Soar High as a Result of Declining Fuel Prices
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The most welcome news coming out of Europe is that although its central bank did not take concrete action this week, European Central Bank (ECB) president Mario Draghi offered assurances that more aggressive stimulus to help jumpstart the eurozone’s flagging economy is just around the corner. The plan is called—deep breath—Targeted Long-Term Repo Operation (TLTRO) and will allow the ECB to purchase covered bonds and asset-backed securities over the next two years. Such a plan will hopefully stimulate bank lending to non-financial corporations.

Below are some of the other programs in the ECB’s arsenal, courtesy of Visual Capitalist:  

TLTRO Compared to other ECB programs
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While Europe is seeking stimulus, Russia is staring down a recession next quarter because of international sanctions, declining oil prices and a weakening ruble. The combined costs of these setbacks are expected to reach a stunning $140 billion a year. Our Emerging Europe Fund (EUROX) has  benefited  from our decision to pull out of Russia last year.

And we must not forget the positive U.S. jobs data, released Friday. Last month payrolls grew an astounding 321,000, exceeding market-watchers’ expectations, while the jobless rate holds at 5.8 percent. As many commentators have pointed out, this year has shaped up to be the strongest for job creation since President Clinton resided in the White House.

U.S. Jobs Data Continues to Improve
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But Many Investors Stymied by Uncertainty

Despite all of the good news, the recent threat of market volatility, which we’ve seen plenty of in commodities and emerging markets, seems to have pushed close-to-retirement folks away from equity securities. The August and October downturns, not to mention the decline in gold and oil prices, have understandably heightened consumer fears.

Sways and Surges in the Russell 2000 Are Enough to Make Many Investors Peakish
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Fair enough. I’ve spoken with a lot of people who have shown the symptoms of seasickness from the dips and swings in the market.

A new study, in fact, highlights the growing number of green-faced investors who may be missing out on the long-term wealth creating opportunities of the market.

Allianz Life recently polled close to 800 Americans, none of them retired yet, and found that a vast majority—78 percent—said they “preferred financial products with guarantees over products with higher growth potential but the possibility of losing value.”

Also interesting, when Allianz asked them what they would do if they had extra money to invest, too many people chose inaction.

Surprisingly, over 30 percent said they would either put the cash in a savings account earning next-to-zero interest or keep waiting for the market to correct before investing. Caution is one thing, paralysis is another altogether.  As President George H. W. Bush once said: “If Columbus had waited until all the problems of his time were solved, the timbers of the Santa Maria would be rotting on the Spanish coast to this day.”

Another block of respondents, nearly 40 percent, said they preferred some balance. That is to say, they would invest in a product that provided a little growth and a little protection.

In other words, they’re perfectly willing to embark on what could be a rewarding voyage, so long as they have some Dramamine on hand—you know, the stuff that treats motion sickness.

As you shall see, a portfolio that strategically balanced both stocks and municipal bonds for the long term historically gave back healthy returns while protecting against some loss.

Balancing Act

Take a look at the chart below. What it shows are the risks and rewards of holding various instruments for one, five, 10 and 20 years.

Range of Stock, Bond and Blended Total Returns
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Based on annual returns from 1950 to 2013, the rewards were huge when securities were held for one year—but so were the risks. While stocks could have netted up to 51 percent, they could also have taken back as much as 37 percent. Bonds returned a little less, up to 43 percent, but the average loss was only 8 percent—a 29-point spread from stocks. A 50/50 portfolio, held for only a year, trailed both, returning up to 32 percent.

But a funny thing happened if you extended the holdings out. The blended portfolio began to play catchup not only on the upside but also the downside. Held for 10 years, such a portfolio outperformed bonds and was only two percentage points shy of matching stocks. It was also less risky.

Twenty years out, a 50/50 portfolio handily beat bonds and had an approximate amount of risk as stocks.

Investors who blended their portfolios might have made out with a little less than those who held only equity securities, but they also underwent a lot less stress and fewer sleepless nights—especially if they invested during the first decade of the century, when there were not one but three major financial crises.

Near-term tax free fund NEARX - Dramamine

14 Years of Positive Returns

For those investors who know that life offers few guarantees and appreciate balance in their life and investments, we have a product that has worked similarly to offset, but not entirely eliminate, the volatility you might experience in the major markets: the Near-Term Tax Free Fund (NEARX).

Many of you have no doubt seen the following chart, but it’s worth sharing again. Whereas the S&P 500 showed extreme volatility last decade because of the dotcom bubble, 9/11 and the financial crisis, NEARX climbed modestly upward, oblivious to the ups and downs that created so much heartache and anxiety for stockholders.

I shared a story about a couple of weeks back that dramatizes this very point, and already I’ve received quite a lot of positive feedback. You can read it here if you haven’t already done so. It’s not to be missed!

Near-Term Tax Free Fund vs. S&P 500 Index
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What’s most striking about this chart is that, following a hypothetical investment of $100,000 in 2000, it took the S&P 500 nearly 14 years to catch up with NEARX.

Naturally, past performance doesn’t guarantee future results, and you shouldn’t reasonably expect the fund to keep pace with an index of equity securities like the S&P 500 over the next 10, 15 and 20 years. However, NEARX has historically shown a greater likelihood of dodging the dramatic swings the equity market has often experienced in times of uncommonly high volatility, such as we saw in the first decade of the century.

I’ve just returned from London where I spoke at the Mines and Money Conference and I’ll share insights from that event soon. In the meantime, you can catch my interview with Bloomberg TV while I was there.

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 9/30/2014
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Ratio After Waivers
Near-Term Tax Free Fund 3.26% 2.59% 2.97% 1.21% 0.45%
S&P 500 Index 19.72% 15.68% 8.10% 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, 2014, 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). After December 31, 2014, this arrangement will become a voluntary limitation that may be changed or terminated by U.S. Global Investors at any time, which may lower the 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.

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.

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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The NYSE Arca Airline Index is designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified as being in the airline industry and listed on developed and emerging global market exchanges. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: Allianz Life Insurance Company of North America 0.00%, China Airlines 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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Are Oil Prices Ready to Break out of the Trough?
December 4, 2014

American business holds up the rest of the world.In ancient Greek mythology, the Titan Atlas was charged with holding up the world. Today, that task largely falls on the shoulders of American businesses.

For the month of November, the Manufacturing Institute for Supply Management (ISM) reading was 58.7, marking the 18th consecutive month of manufacturing expansion in the U.S. Anything above 50.0 denotes growth, anything below, contraction. Among the areas that showed particularly strong growth were new orders and exports.

But while the U.S. continues to expand, the rest of the world cools or, at best, remains in a holding pattern. The J.P.Morgan Global Manufacturing Purchasing Manager’s Index (PMI), released Monday, registered a 14-month low of 51.8.

Had the U.S.’s individual score not been as strong, the global PMI number might not have exceeded the expansion threshold.

JP Morgan Global Manufacturing PMI One-Month Reading Still Trails the Three-Month Reading
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The eurozone and China were the largest drags on global manufacturing. Whereas Europe registered a 50.1 for November—even usually dependable Germany scored a 17-month low of 49.5—China remained flat with a 50.0, the country’s lowest reading since May.

You might wonder how this relates to oil prices. The answer: Quite a lot, actually. Just as the U.S. is the standout in manufacturing growth, it's also now the world leader in oil production, thanks largely to hydraulic fracturing. The two combined—global slowdown and abundant oil—have prompted the rapid decline in prices.

Slow Global Manufacturing Growth Contributes to Slump in Oil Prices

Not only is the global PMI at a 14-month low, but it also marks the fourth-consecutive month that the one-month reading has stayed below the three-month.

Regular readers might recall seeing the following chart, which helps explain why oil prices are so depressed:

Commodities and Commodity Stocks Historically Rose Six Months After PMI "Cross-Over"
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When global manufacturing has slowed in the past, so too has oil demand, driving prices down 7 percent 100 percent of the time. Today, crude has fallen much more steeply than that—35 percent since June—but other factors have contributed to the recent slump, from the strong U.S. dollar to oversupply fears.

The chart also shows that when manufacturing activity has ramped up, prices have jumped over 16 percent 100 percent of the time three months later.

Oil in Oversold Territory

So short of an unexpected jumpstart to global manufacturing, how else might oil break out of its trough?

“The theme going into 2015 is mean reversion,” says Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX). “Oil prices are below where they should be, and hopefully they’ll start gravitating back to the equilibrium price of between $80 and $85 a barrel.”

Crude oil is currently down 1.2 standard deviations for the 10-year period. This might not sound like much, but as you can see, oil has rarely gone above or below one standard deviation during this time. Plus, its wild volatility during the financial crisis rejiggered the commodity’s mean.

Year-Over-Year Percent Change Oscillator: WTI Crude Oil
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What the oscillator above also shows is that oil has eventually returned to where it should be, as it did not only after the financial crisis but also in the third quarters of 2011 and 2012. Barron’s pointed out in a piece published this week that “prior price slides lasted roughly 20 weeks. The current slide is already at week 24. History suggests the panic… is near its end.”

Indeed, oil markets have historically been quick to recover because exploration and production become unsustainable otherwise. Several shale regions in Texas were already unprofitable at $75 per barrel. At $70, expect more companies, especially those involved in fracking and deepwater drilling, to cut production even further. The problem is, they really can’t afford to do so. It currently takes output from four or five new wells to replace the cost of one previously drilled unconventional well, which is why companies must keep up with exploration and production.

And that’s just in the U.S. Many countries whose economies rely on oil exports, including Russia, Venezuela and Nigeria, will be unable to balance their budgets with $65-per-barrel oil. Though not yet underwater, Saudi Arabia might soon begin to feel the pinch, as Brent is getting treacherously close to the Kingdom’s breakeven price, which has risen about $10 per barrel in only five years.

Price of Brent Oil vs. Current Account Breakeven Estimate for Saudi Arabia
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At the same time, many of Saudi Arabia’s traditional vertical wells can continue to operate at less than $10 per barrel. A production cut, then, is not as imperative to the Kingdom’s budget as it is to Russia’s or Venezuela’s. However, Prince Turki bin Faisal, former Saudi ambassador to the United States, stated on Tuesday that Saudi Arabia would agree to cuts only if other countries, including non-Organization of the Petroleum Exporting Countries (OPEC), participated. This indicates that, while the Kingdom doesn’t want to lose market share, it realizes action must be taken to prop up prices.

And herein lies the opportunity.

“Oil is way oversold right now on a relative strength basis,” Brian says.

With the commodity at a five-year low, oil stocks are on sale, just in time for holiday shopping.

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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

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 Global Resources Fund as a percentage of net assets as of 9/30/2014: Transocean 0.00%, Oasis Petroleum 0.00%, Exxon Mobil 0.00%, Chevron Corp. 1.90%.

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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Giving Thanks to the Innovators and Creators of Capital
December 1, 2014

DrKaye-E-WilkinsOur office recently had the pleasure of welcoming Dr. Kaye E. Wilkins, who practices pediatric orthopedic surgery here in San Antonio. The recipient of the 2008 American Academy of Orthopedic Surgeons (AAOS) Humanitarian Award, Dr. Wilkins has made it his mission to bring life-changing treatments to underprivileged parts of the world. He established the Haiti Clubfoot Project, which trains nonphysician technicians to correct this debilitating deformity and give Haitian children a second chance at life. We were humbled to see and hear of Dr. Wilkins’s lifelong altruism and passion for helping others, no matter their background. 

No one needs justification to tout Dr. Wilkins’s accomplishments, but I bring him up because he’s reflective of the America I believe in. The United States ranks as the most giving, charitable country on Earth, and this is especially true during the Thanksgiving and Christmas seasons. Near the end of last year, Facebook CEO Mark Zuckerberg and wife Priscilla Chan donated nearly $1 billion to charity. One billion dollars! The combined amount of the top 20 largest donations of 2013 actually exceeds a mind-boggling $5.7 billion.

Breakdown-of-How-High-Net-Worth-Individuals-DonateTo the right you can see where high net worth individuals donate their money, broken down by the value and number of gifts. But a person need not travel abroad to poverty-stricken countries or donate thousands of dollars to make a difference. Our capitalist system allows entrepreneurs to find solutions to problems as well as profit from these solutions. Many critics tend to focus their derision on profit-seeking while taking for granted how much their own lives have improved as a result of private innovation and entrepreneurialism.      

In a scintillating essay, Professor of Economics Mark Hendrickson writes that this Thanksgiving, we should be grateful for such entrepreneurs, the creators of our wealth:

Wealth doesn’t just appear spontaneously; someone has to produce it… In a free-market economy characteri zed by voluntary, and therefore positive-sum, transactions, the profits of entrepreneurs signify that at least that much wealth has been created for their customers. In other words, the larger profits are, the more wealth the entrepreneur has created for others, and indeed, the largest profits accrue to those firms that have supplied valuable goods and services to the masses.

Google, for instance, has made co-founders Larry Page and Sergey Brin billionaires many times over. But how much capital would you say it’s generated for the world? The amount is unfathomable. On top of that, Google employs about 55,000 people across the globe and each year hires an additional 6,000. The company’s success benefits not just its bottom line but also the lives of millions upon millions of people, from its employees to the users of its many services.

Calpians-Money-on-mobile-Payment-Service-Indians-make-transactionsI’m grateful to live in a society that monetarily rewards such innovation and problem-solving, in addition to the intrinsic rewards entrepreneurs receive for improving the lives of others.

Here’s another example:
Last week we were visited by the management team of Calpian, including Chairman and CEO Harold Montgomery, President Craig Jessen and Chief Financial Officer Scott Arey. You might not have heard of Calpian before now, but the company is already changing people’s lives for the better by facilitating electronic and mobile payments, especially in India, the world’s second-largest cell phone market. In many parts of India, there’s poor to nonexistent point-of-sale payment mechanisms, and even though most transactions are done with cash, ATM machines are often very spotty. Calpian’s Money on Mobile service allows Indians of all classes to make transactions using their cell phones, thereby eliminating the need to carry cash or stand in hours-long lines to pay their water bills. Two years after its launch, Money on Mobile is used by approximately 112 million Indians.

I’m also thankful to be blessed with 1,440 minutes each day. So much can be achieved in this short amount of time—whether it’s staying active or helping others—so long as you have the will to put it to good use.

I asked our portfolio managers what they were most thankful for this season, with regard to a fund they manage. Here’s how they responded:

John DerrickJohn Derrick – Near-Term Tax Free Fund (NEARX)

I’m most thankful that our fund received the 5-star overall rating from Morningstar, among 164 Municipal National Short-Term funds as of October 31, 2014, based on risk-adjusted return. Despite the global slowdown and decline in gold and oil prices, the municipal bond market this year has been up every month through October. I’m grateful that we have continued to perform well and deliver solid risk-adjusted returns for our investors to meet their high expectations of what a municipal bond fund is supposed to do.

Aside from that, I’m incredibly fortunate to work with such a dedicated team of portfolio managers, analysts and other investment professionals. Their support and camaraderie are greatly appreciated.

Xian Liang – China Region Fund (USCOX)

Xian Liang I would say I’m most grateful that China’s leadership appears to be delivering on the promises it made last November at the Third Plenary Session, specifically the liberalization of the financial sector and reform of the role capital markets play in allocating resources. Just as there was in the 1990s, there’s going to be some bullet-biting in the face of reforms, but short-term discomfort is often necessary for long-term growth. This leadership is determined and committed to putting China on the right path.

I also want to thank my fellow investment team members. We cross-pollinate our ideas and are always looking for ways to strengthen what we do.

Ralph AldisRalph Aldis – World Precious Minerals Fund (UNWPX) and Gold and Precious Metals Fund (USERX)

I’m going to have to go with Klondex Mines. It’s the largest holding in both funds, and it’s performed exactly how the management team said it would. In December of last year, Klondex raised the money to buy Midas Mine and Mill from Newmont Mining, and since then it’s been a steady grower. It looks as if it’ll conclude the year with $45 million in cash, which is even more remarkable when you recall that in the first quarter of 2014, it had just $6.8 million. Institutional investors tend to be reluctant about buying a new name in gold mining, but I think Klondex will prove to be too compelling to pass up much longer. 

Brian Hicks – Global Resources Fund (PSPFX)

Ralph AldisEven though commodity prices are in a slump right now, I’m grateful for quite a few things. I’m thankful for our five-factor model, which is designed to identify only the best-of-the-best stocks—I’m looking forward to using it when commodities recover. We’ve weathered this storm well, and I believe we’re in a good position to catch the upswing. Two very recent events have boded well for the fund: the Baker Hughes takeout and China’s rate cut, which will help stabilize commodity demand and improve market sentiment.

Commodities Update

Crude Oil
Last Thursday, the Organization of the Petroleum Exporting Countries (OPEC) unveiled its decision to keep oil production levels where they’ve been for the last three years, “in the interest of restoring market equilibrium.” Soon after this announcement, Brent and West Texas Intermediate (WTI) crude prices dropped to $72 and $68 per barrel, their lowest levels since May 2010. WTI plunged to a five-year intraday low of $63.

Another significant consequence of OPEC’s inaction is that the Russian ruble immediately fell to an all-time low of 49.90 versus the dollar. Since half of Russia’s budget revenue comes from oil and gas exports, OPEC’s decision to maintain current production levels is likely to hobble the country’s already fragile economy even further. We’ve been out of Russia since August, and this economic activity justifies our decision.

Precious Metals
As expected, Switzerland voted against having its central bank hold more bullion, resulting in a 2-percent decline. Leading support to falling prices is the Reserve Bank of India’s announcement last Thursday that it was lifting gold import curbs ahead of the country’s wedding season.

At the same time that spot prices are falling, more money is being pulled out of gold exchange-traded products (ETPs), suggesting that the market believes this decline to be long-term.

S&P 500 Economic Sectors
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We’re seeing the opposite behavior when it comes to platinum, palladium and silver. Even as prices dip, more money is being placed into ETPs.

As-Commodity-Prices-Fall-ETP-Holdings-Rise
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Although gold has many industrial applications, it’s seen more as currency. With the dollar still very strong, investors might be choosing to keep their wealth in cash instead.

The other metals, on the other hand, have well-known industrial uses—platinum and palladium in automobile production and silver in film, surgical instruments and solar panels. Some investors might be willing to risk short-term losses for long-term gain.

I wish to conclude by giving thanks to our loyal Investor Alert readers as well as investors. Visit us on Facebook or Twitter and let us know what you’re thankful for this season!

 

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/164
3-Year/164
5-Year/137
10-Year/103

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-term funds
Through: 10/31/2014

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.

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.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: Baker Hughes, Inc. 0.00%; Calpian 0.00%; Facebook 0.00%; Google 0.00%; Klondex Mines 7.76% in Gold and Precious Metals Fund, 7.51% in World Precious Minerals Fund, 1.22% in Global Resources Fund; Newmont Mining Corp 1.11% in Gold and Precious Metals Fund, 0.26% in World Precious Minerals Fund; Twitter 0.00%.

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.)

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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With Oil and Gold Prices Depressed, Halliburton and Osisko Play Defense
November 26, 2014

Silver-Fabrication-Demand-Has-Shifted-Toward-ElectronicsA typical American Thanksgiving meal usually consists of gravy-drenched turkey, stuffing, a heaping mound of buttery mashed potatoes and a slice of pumpkin pie. After dinner, most people are incapable of doing anything other than sitting, digesting and watching the football game. All activity comes to a halt. In the time it takes for their stomachs to completely process the meal, the treadmill in the other room starts to grow cobwebs.

Something similar occurs when one company acquires another. Digestion of the acquired company often takes a while, during which time the buyer tends to experience a short-term slowdown. Its stock typically falls because, among other reasons, it must pay a premium for the acquisition.

In this month alone, two large acquisition announcements were made in the energy and mining sectors as oil and gold prices remain low. Oil field services giant Halliburton, which we own in our Global Resources Fund (PSPFX), plans to buy rival Baker Hughes for $35 billion, pending an antitrust approval—the two are the second- and third-largest companies in the industry. Meanwhile, Montreal-based Osisko Gold Royalties is set to take over Quebec City-based Virginia Mines, the second-largest holding in our World Precious Minerals Fund (UNWPX), for $424 million. The deals will give Halliburton a market capitalization of $70 billion; Osisko, $1.2 billion.

As expected, the buyers showed a slight dip following the announcements, while the companies being bought enjoyed a rally.

Silver-Fabrication-Demand-Has-Shifted-Toward-Electronics
click to enlarge

We saw the same behavior occur last year after Canadian petroleum exploration and production company Pacific Rubiales announced it would acquire Petrominerales, whose stock immediately jumped 42 percent.

Shareholders of the acquired company often benefit because, in an effort to sweeten the deal, they’re given attractive stock swap privileges or other perks. For each Baker Hughes share, stockholders receive 1.12 Halliburton shares plus an additional $19 in cash. Virginia Mines stockholders get a premium of 41 percent to the current share price, just above $13.

“We feel vindicated by having such a strong weighting in Virginia Mines relative to our peers,” Ralph Aldis, portfolio manager of UNWPX and our Gold and Precious Metals Fund (USERX), said. “Our management style is to seek value names, and compared to some other royalty companies, Virginia is definitely undervalued.”

Playing Defense

One of the reasons why Baker Hughes might give Halliburton a touch of heartburn is the steep premium. At 56 percent, the premium is the largest of any U.S. merger in the past 20 years worth more than $20 billion. Halliburton has also agreed to pay Baker Hughes a fee of $3.5 billion if it fails to obtain antitrust and regulatory approvals.

But the long-term rewards of taking over Baker Hughes appear to outweigh the short-term risks. The combined company will control 53 percent of the Williston Basin market in North Dakota, which includes the lucrative Bakken shale play. It will also control 36 percent of the fracking business in the Williston Basin. According to Chairman and CEO Dave Lessar, Halliburton stands to save $2 billion annually from personnel reshuffling, research and development, real estate, operational improvements and other costs. All of this will help the company better compete with the global industry leader, Schlumberger.

Silver-Fabrication-Demand-Has-Shifted-Toward-Electronics

By all accounts, Halliburton’s timing was on the money. Crude oil prices have declined to $75 per barrel, driving down oil industry shares and making Baker Hughes much more of a bargain. If the Organization of the Petroleum Exporting Countries (OPEC) agrees to a production cut when it meets tomorrow, oil prices might rise sooner rather than later, which could nudge up Baker Hughes’s asking price.

Depressed oil prices have already put a strain on companies’ bottom line and forced them to temporarily discontinue costlier projects. Bloomberg reports that 19 shale regions here in the U.S. are now unprofitable, including parts of the Eaglebine and Eagle Ford shale plays in Texas. In such a climate, Halliburton’s purchase of Baker Hughes could be described as a defensive move.

The same could be said for Osisko’s takeover, as gold prices still hover close to $1,200. The company already owns a royalty in the Canadian Malartic mine, Canada’s largest gold mine. Acquiring Virginia Mines means that it will also gain a substantial interest in Quebec’s Éléonore mine.

Before leaving you, I want to wish all of my American readers a blessed Thanksgiving! Our family at U.S. Global Investors is grateful to have such supportive shareholders, and for the opportunity to continue to serve you.

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.

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 funds mentioned as a percentage of net assets as of 9/30/2014: Apache Corp. 0.00%; Baker Hughes, Inc. 0.00%; Continental Resources, Inc. 0.00%; Goldman Sachs 0.00%; Goodrich Petroleum Corp. 0.00%; Halliburton Co. 2.19% in Global Resources Fund; Osisko Gold Royalties 0.00%; Pacific Rubiales Energy Corp. 1.16% in Global Resources Fund; Petrominerales, Ltd. 0.00%; SandRidge Energy, Inc. 0.00%; Schlumberger, Ltd. 0.00%; Virginia Mines, Inc. 7.13% 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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Net Asset Value
as of 12/17/2014

Global Resources Fund PSPFX $6.71 0.25 Gold and Precious Metals Fund USERX $4.97 0.15 World Precious Minerals Fund UNWPX $4.49 0.14 China Region Fund USCOX $7.96 0.06 Emerging Europe Fund EUROX $6.76 0.05 All American Equity Fund GBTFX $32.22 0.62 Holmes Macro Trends Fund MEGAX $22.35 0.48 Near-Term Tax Free Fund NEARX $2.26 No Change China Region Fund USCOX $7.96 0.06