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Finding Value in Declining Commodity Prices
April 13, 2015

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

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

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

Shanghais-Composite-Breakout-Continues
click to enlarge

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

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

Saving Big on Commodities Slump

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

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

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

Massive-Money-Flow-Shift-Impact-on-Incomes-from-Commodity-Price-Drop-Since-June
click to enlarge

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

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

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

Change-in-Commodity-Prices-Since-June
click to enlarge

Of the 29 resources featured in the chart above, only red meat is in the black.

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

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

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

The Start of Mergers and Acquisitions

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

 

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

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

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

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

Remembering Paul Reynolds

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

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

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

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

 

 

 

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

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

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

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

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

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

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Ralph Aldis: Gold Mining Success Lies in Proper Capital Allocation
April 9, 2015

“The proper use of capital allocation is to maximize long-term value per share.”

More sunshine, less stormy wheather

That’s according to Ralph Aldis, USGI’s resident gold expert and, since 2001, portfolio manager of our two precious metals funds—Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

In a recent Gold Report interview with Kevin Michael Grace, Ralph expresses his thoughts on what’s moving gold prices today and also singles out some of his favorite companies in the gold, silver and royalty spaces.

More important, however, Ralph argues that for gold mining companies to succeed, they need to practice prudent capital allocation and know the proper value of their assets.

Below are some highlights from the interview:

Q: The price of gold is flirting with a five-year low. Do you attribute this solely to the strength of the U.S. dollar, or are there other factors at work?

Gold Flirting with Five-Year Lows as U.S. Dollar Remains Strong

A: There are other factors. Most important is the strength of the equity markets. Looking at a six-year window, we have seen, for the third time in the last hundred years, the highest returns for such a period. This happened before in 1929 and 1999. These phenomenal returns have been fueled not by fundamentals but rather by the U.S. Federal Reserve, which is trying to jumpstart the economy.

Best Six-Year Performance in the S&P 500 Since 1929 and 1999

All this has taken people's eyes off gold, but it won't go on forever.

Q: How do you see the mining industry adjusting to lower gold prices?

A: I look at the income statements from all the mining companies and calculate their breakeven point. Right now, it is about $1,149 per ounce. The forecasted average 2015 gold price remains about $1,200 an ounce. If the gold price continues to fall, companies will adjust. Some projects won't be built, but that is good because those are marginal projects.

About 40 CEOs in the mining industry have lost their jobs in the past couple of years. The new generation of mining CEOs is focused more on profit than growth. They know that even if the gold price falls more, the suppliers to them must drop their prices. If the gold price goes $100 per ounce lower, the smart companies will survive. Meanwhile, gold miners now benefit from lower energy prices, while the stronger U.S. dollar has been very positive for Canadian and Australian miners.

Q: Why do you believe gold stocks can still deliver favorable returns?

A: Because of the mindset of some of these new CEOs. One company doing the right things is Klondex Mines. It was up 29 percent in 2013, while the Market Vectors Junior Gold Miners ETF was down 61 percent. In 2014, Klondex was up 21 percent, while the Market Vectors Junior Gold Miners ETF was down 23 percent.

Klondex Mines Has Consitently Smoked the Market Vector Junior Gold Miners ETF (GDXJ)

Klondex is my favorite junior producer anywhere. Some people might say it has a short-life resource statement, but the recent discoveries at Fire Creek are not yet in the resource statement. And the free cash flow it generates will pay for its exploration program at Midas. I expect more discoveries from Klondex and a bigger resource statement. Its very robust ore body will allow it to produce gold at even lower prices, should the market demand that. I talk to its management team, and they understand capital allocation.

Q: Could you explain the “Five Principles of Capital Allocation” and how they pertain to mining, given that mining companies typically have no revenues for years after their founding?

A: These five principles are the work of a Credit Suisse writer, Michael Mauboussin. They apply to some companies in the exploration and development phase but obviously more so to producers.

Klondex purchased the Midas Mine and Mill Complex, located in Nevada, fromNewmont Mining in February
  1. The first principle is "Zero-Based Capital Allocation." This means, for instance, that you don't give your exploration department $20 million this year solely because they received $20 million last year. Companies need a strategy to determine the proper amount of capital spending.

  2. The second principle is "Fund Strategies, Not Projects." In other words, capital allocation is not about assessing and approving projects; it is about assessing and approving strategies and then determining the projects that support those strategies. It is a common mistake for explorers to continue to push a project forward—particularly if it is its only project—even though it lacks the potential for great returns.

    Randgold Resources is a good example of the proper approach. When it evaluates a project, it's looking for grade sufficiently high that it can produce a good margin at a $1,000 pit shell or even an $800 pit shell. Restricting your return calculation to the pit shell is more conservative, as you are only including those ounces contained within the mine's engineering plan.

  3. Number three is "No Capital Rationing." Typically, miners believe that capital is scarce but free. They believe that profits are free money, or if they're raising equity, they sometimes don't seem to care enough about dilution. Properly speaking, capital is plentiful but expensive. Profits need to be spent in a manner that results in future profitability. And equity financing is only plentiful if you have a good project.

  4. Number four is "Zero Tolerance for Bad Growth." In other words, don't throw good money after bad. Barrick Gold Corp. fell into that trap with its Pascua-Lama project in Argentina. Long before its price tag reached $8.5 billion, the company should have thought hard about whether it would ever generate good returns. Mining companies should always seek to upgrade their portfolios.

  5. Number five is "Know the Value of Assets and Be Ready to Take Action to Create Value." So many people in the mining industry don't know the value of their assets. We value companies based on their resource statements, and we get a very high correlation to where these stocks trade. But we constantly see companies decide to spend, for example, $1.8 billion on a project that the market values at only $800 million. It makes no sense to spend that much because similar projects could be acquired for less capital.

Q: What's your favorite gold producer elsewhere in the world?

A: I like Mandalay Resources Corp. Its management is very experienced in rescuing assets that have been mismanaged. Mandalay has turned around the Cerro Bayo silver-gold mine in Chile and the Costerfield gold-antimony mine in Australia. Last year, it bought the Björkdal gold mine in Sweden from Elgin Mining, and I think Mandalay will turn that around too.

Management owns a lot of stock. Mandalay pays a healthy dividend: 5.4 percent. The market has not yet completely woken up yet to this stock. We still think it's easily a 100 percent gain. It's one of our top five holdings.

Q: What's your favorite royalty company?

A: Osisko Gold Royalties probably has the safest royalties. It has a lot of room to grow but not so much as to draw the attention of Franco-Nevada Corp., Royal Gold Inc. or Silver Wheaton.

One of the advantages Osisko Gold Royalties has is that its assets are not dependent on other commodities. Franco-Nevada has oil exposure, and maybe oil prices don't go up very soon. Royal Gold has base metal exposure in some of its assets, and if prices of those were to drop tremendously, some of its assets could be shuttered. Osisko doesn't have those worries.

 

Read the full interview!

 

 

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.

 

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.

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

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 Corp 0.00%, Elgin Mining 0.00%, Falco Resources Ltd (World Precious Minerals 0.01%), Franco-Nevada Corp (Gold and Precious Metals Fund 6.97%, World Precious Minerals Fund 1.32%), Klondex Mines Ltd (Gold and Precious Metals Fund 10.00%, World Precious Minerals Fund 9.78%), Mandalay Resources Corp (Gold and Precious Metals Fund 3.38%, World Precious Minerals Fund 2.28%), Market Vectors Junior Gold Miners ETF 0.00%, Newmont Mining Corp. (Gold and Precious Metals Fund 1.05%, World Precious Minerals Fund 0.22%), Osisko Gold Corp 0.00%, Randgold Resources Ltd. (Gold and Precious Metals Fund 2.30%, World Precious Minerals Fund 1.43%), Royal Gold Inc. (Gold and Precious Metals Fund 5.99%, World Precious Minerals Fund 1.51%), Silver Wheaton Corp (Gold and Precious Metals Fund 1.36%, World Precious Minerals Fund 0.45%), Virginia Mines, Inc. (Gold and Precious Metals Fund 1.14%, World Precious Minerals Fund 10.35%) .

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

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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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These Signs Point to an Airline Industry Secular Bull Market
April 6, 2015

These Signs Point to an Airline Industry Secular Bull Market

The week before last I was in Melbourne, Australia, attending a conference for chief executives from all over the world. While there, I spoke with many of my peers about the airline industry, which is currently in a­ three-year bull run as measured by the S&P 500 Airlines Index.

I was surprised to learn that several people incorrectly assumed that the airline industry is included in the consumer discretionary sector of the S&P 500 Index. It does seems as if it belongs there, along with travel, hospitality and leisure. But the industry actually qualifies as an industrial.

Regardless of which sector airlines belong in, the fleet has flown past both industrials and consumer discretionaries for the five-year period.

Airlines-Flew-Past-Industrials-and-Consumer-Discretionary
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Not only that, but airlines were the best-performing industry in industrials for the one-year, three-year and five-year periods.

Airlines: The Best-Performing Industry in the Industrials Sector
As of April 1, 2015
Percent Change
1-Year 3-Year 5-Year
Airlines +45% Airlines +288% Airlines +142%
Professional Services +21% Building Products +109% Road & Rail +134%
Commercial Services & Suppliers +19% Aerospace & Defense +75% Aerospace & Defense 93%

A misconception held among some investors is that airline stocks are outperforming right now only because fuel costs are down. Fuel, after all, accounted for about 30 percent of carriers’ operating costs in 2014. The implication, some believe, is that when oil prices begin to recover, airlines will be first to feel the pinch.

This isn’t necessarily the case. The industry is in a much more rational business environment than it was a decade ago. Over the last five years, fundamental changes have taken place, including consolidation, new sources of revenue, better fuel efficiency and additional seats, that have helped airlines excel even when oil is $100 per barrel or more.

In fact, airline stocks for the four industry leaders—United Airlines, Delta Air Lines, American Airlines and Southwest Airlines—began their recent ascent even before oil prices began to plummet 50 to 60 percent starting last summer.

Airline-Stocks-Defied-High-Fuel-Costs
click to enlarge

And because most airlines hedge their fuel, they’re still locked into $100-per-barrel oil prices and therefore haven’t yet felt the full benefits of lower fuel costs. American is one of the few that doesn’t hedge.

Airline research analyst Helane Becker of financial services firm Cowen Group writes:

American participates in 100 percent of the decline in jet fuel prices. The current per gallon price is $1.78, and American uses 4.4 billion gallons of jet fuel annually, so every $1 change in oil [saves the company] approximately $105 million per month.

Contributing to American’s diminishing operating costs is its purchase of dozens of new aircraft—99 delivered last year, 112 expected this year—that will replace older, less-fuel efficient jets. This should help the company save millions not only in jet fuel but also maintenance fees for many years to come.

It should also be noted that new baggage-tracking technology has led to a dramatic decrease in lost and mishandled luggage, helping airlines all over the globe save billions and keep passengers happy. Even as the number of worldwide passengers has steadily increased year-over-year—exceeding a record three billion in 2013—there’s been a drop of 61 percent in missing bags since the peak in 2007. As a result, carriers save a collective $18 billion a year.

Downtrend-in-Lost-and-Mishandled-Baggage-Saves-Airlines-18-Billion-a-Year
click to enlarge

Free Cash Flow

Often it’s not enough to look just at a company’s revenue for any given timeframe to determine its strength. A more precise metric is free cash flow, which tells you how much cash the company has in the bank after taxes and all operating expenses have been paid. In other words, it’s what the company is “free” to spend.

The higher a company’s free cash flow yield, the better. When the yield is higher, the company is more likely to plow that extra cash back into its growth or declare a dividend. American, for instance, began paying a dividend last summer; Alaska Airlines, the summer before last.

Last year, Delta announced a stock buyback plan worth $2 billion and a dividend increase of 50 percent. At this May’s Bank of America Merrill Lynch Industrials Conference, the company is expected to make a similar announcement—another buyback authorization and a possible dividend boost of 25 percent.

As you can see below, U.S. airlines’ free cash flow is expected to reach a record high this year and each subsequent year. Domestic carriers have never had this much cash potential on their hands—cash that can be used to grow and improve their businesses as well as reward shareholders. 

Downtrend-in-Lost-and-Mishandled-Baggage-Saves-Airlines-18-Billion-a-Year
click to enlarge

If we look at individual companies’ free cash flow, three of them—Delta, Southwest and United Airlines—are expected to have yields above an impressive 10 percent in 2015.

US-Airlines-Estimated-2015-Free-Cash-Flow-Yield
click to enlarge

An airline industry report by J.P. Morgan stated last week:

We believe in the persistence of cash flows and the presence of a good structural model. The sector has begun to show us their success instead of repeating “trust me”… [T]he cash is real, the margins are real, the buybacks are real.

In light of this success, some analysts are concerned that airlines, flush with cash for the first time in recent memory, will increase capacity too quickly and outpace demand.

Two main arguments can be made here. For one, the industry is highly correlated to a nation’s GDP, and carriers have historically avoided growing faster than the economy by too wide of a margin. The second argument has to do with what experts believe is an imminent pilot shortage in the U.S.

Pilot Shortage Ahead?

More sunshine, less stormy wheather

The Federal Aviation Administration (FAA) mandates that all pilots must retire at age 65, which should open up many commercial airliner positions over the coming years. But because the starting salary with a regional carrier is around $20,000 per year, fewer and fewer would-be aviators can justify the typical $50,000-a-year flight training, not to mention the required 1,500 hours of flight time before they can even be considered for a position.

You might be wondering why carriers aren’t able to make up the difference by recruiting more pilots out of the military. The reason is because a greater number of people are being trained now to fly drones than jets—and piloting a drone doesn’t count toward commercial flight hours.

This all might sound like troubling news, but it actually has the effect of encouraging discipline, reining in excessive spending and curbing carriers from growing too exuberantly. They can always increase seat capacity—to a certain extent, of course—but generally they’re not going to spend money needlessly on new aircraft if there are fewer people available to pilot them.

Read more about the airline industry:

  • Global Airline Stocks Soaring, and Not Just Because of Low Oil Prices
    Although it’s true that fuel is carriers’ top operating expense—they collectively spent $48 billion on fuel in 2013—there’s more to the industry’s recent bull run than the low price of oil. In fact, airlines are in a better position now to manage an increase in oil prices than they have been in recent memory, for a number of reasons.
  • The Airline Industry Ascended to New Records in 2014
    This year, the daily number of available seats for international-bound flights out of the U.S. will rise to an all-time high of over 350,000. That’s 20,000 more seats per day than were available just last year.
  • Why This Airline Just landed in the S&P 500 Index
    Joining rivals Southwest Airlines and Delta Air Lines, American Airlines is the newest member of the prestigious club for the nation’s largest companies by market capitalization. Not bad for a company that, only four years ago, found itself in bankruptcy court.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Industrials Index comprises those companies included in the S&P 500 that are classified as members of the GICS industrials sector. The S&P 500® Consumer Discretionary Index comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector. The S&P 500 Airlines Index is a capitalization-weighted index.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 12/31/2014: Delta Air Lines, Inc.; Alaska Air Group.

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

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

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China to Take the Reins in Funding Regional Infrastructure Projects
March 31, 2015

This Tuesday marked the last day that countries could submit their applications to become founding members of the new China-led Asian Infrastructure Investment Bank (AIIB). As of this writing, a little over 40 nations have either already been approved or have applied for membership, including strong U.S. allies such as Britain, Germany and Australia.

Notable absentees, as you can see below, are the U.S. and Japan.

Countries that Have Joined or Applied to Join Asian Infrastructure Investment Bank (AIIB)

Conceived to serve as an alternative to Western-dominated sources of credit such as the World Bank, International Monetary Fund (IMF) and Asian Development Bank, the AIIB will aim to invest in regional infrastructure projects ranging from energy to transportation to telecommunications.

The new development bank, which is expected to launch later this year, will have $100 billion in capital to begin with—a massive mountain of money, to be sure, but it falls far short of the estimated trillions that will be necessary to fund Asia’s astronomical infrastructure demand.

China’s creation of its own global bank highlights the country’s desire to wield more control over funding such projects. It currently commands only 5.17 percent of the vote in the World Bank and 3.81 percent in the IMF.

China is aiming for its currency to become part of the Special Drawing Right (SDR), the International Monetary Fund's composite currency unit.

And so the currency wars continue to heat up. China’s move demonstrates its ongoing efforts to establish the yuan as a global reserve currency on par with the U.S. dollar. It’s no secret that the country wants the yuan to become part of the IMF’s Special Drawing Right (SDR), a composite currency unit that now consists of the dollar, Japanese yen, British pound sterling and euro. The founding of the AIIB might very well bring the country closer to realizing these goals.

A-Shares Headed Higher

Chinese stocks are currently having a moment. Mainland A-shares, as measured by the benchmark Shanghai Composite Index, are up an incredible 92 percent for the 12-month period on the back of strong recent performance in the financial, property and infrastructure industries.

There’s generally a high correlation between the A-share market and China and Hong Kong, but the A-shares have outperformed by a wide margin over the past year.

Shanghai Composite's Breakout Continues

Last Wednesday the index fell a slight 0.8 percent, ending a 10-day rally that contributed 12 percent, its longest winning streak in 23 years.

Chinese policymakers have recently eased quota controls for foreign investors in mainland stocks and bonds, as they promote the yuan to be accepted as an SDR. The potential for greater inflows into the market should help the Shanghai Composite head even higher.

Our China Region Fund (USCOX) has participated in this rally through the Morgan Stanley China A Share Fund and a closed-end fund.

Read more about China:

  • China Consumes More Gold Than the World Produces
    “What’s not so well-known—but just as amazing—is that China’s supply of the precious metal per capita is actually low compared to neighboring Asian countries such as Taiwan and Singapore.”
  • China Just Crossed a Landmark Threshold
    “One of the most headline-worthy developments is China’s $16.3-billion infrastructure initiative intended to revive trading routes along the centuries-old Silk Road. Thousands of miles of railways, roads and pipelines will link Beijing to major markets all over Asia, Africa and Europe.”
  • China Wants to Conduct the World’s High-Speed Rail Market
    “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.”

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 12/31/2014: Morgan Stanley China A Share Fund, Inc. 1.52%.

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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Innovation and Efficiency Drive U.S. Oil Supply and Demand
March 30, 2015

Innovation and Efficiency Drive U.S. Oil Supply and Demand

Oil mounted a strong surge last Thursday as Saudi Arabia-led forces carried out a series of airstrikes against Houthi militants in Yemen, part of which is bordered by the Bab el-Mandeb strait, an important shipping “chokepoint.” For the first time in three weeks, Brent oil prices rose to $59 while West Texas Intermediate (WTI) crude closed above $51 after an incredible seven-day rally.

However, the conflict wasn’t enough to sustain the uptrend, and prices slipped today—WTI to $48.41.

“The significance of the conflict was overblown, at least in terms of its effect on oil,” says Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX). “There’s still too much supply.”

Indeed, U.S. crude oil supply is noticeably on the rise. As you can see in the chart below, the weekly crude reserves are significantly above the five-year average and sharply headed higher. 

U.S. Crude Oil Reserves
click to enlarge

Last week we learned that storage at Cushing, Oklahoma, reached 54.4 million barrels, a new high. Cushing is important to monitor because it’s the nation’s largest storage facility and serves as the pricing point for WTI. Since it was upgraded in 2011, maximum capacity now stands at 85 million barrels.

But if the current fill rate keeps up—2.12 million barrels a week—the cap could be reached as soon as this June, however unlikely that seems. Vehicle sales are up, as is the number of miles being driven on U.S. highways, and the busy summer travel season is fast approaching.

American Innovation to Thank

Simply put, technological advances such as hydraulic fracturing, or fracking, have made the oil-extraction process much more efficient than anything we’ve seen before. Amazingly, output continues to climb even as the number of rigs in operation has dropped for the fifteenth week.

U.S. Rig Count Falls for Fifteenth Week, but Oil Production continues to Climb
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“Productivity is up 50 percent over the last five years,” Brian says. “There’s already been some slowdown, but we’re still seeing the strong momentum from last year.”

That momentum could be enough to propel us toward 10 million barrels a day, something we haven’t seen in this country since 1970.

This incredible rise in efficiency has led some analysts to foresee a possible “storage crisis” in North America. It’s possible—though, again, unlikely—that we’ll eventually reach a point when there just isn’t any more commercial storage space. “Crisis” is certainly a loaded word, but such an event could serve as the catalyst that forces companies to make meaningful production cuts, which would help oil prices recover.

In the meantime, energy storage and transportation companies such as Kinder Morgan and Tsakos Energy Navigation are profiting in a world of abundant oil. Tsakos recently saw strong trading after it announced a dividend, and last week Morgan Stanley gave the company a “buy” rating.

Another area that’s benefited in this climate is the plastic packaging and container industry. Since oil prices began to go off the cliff last summer, returns for Graphic Packaging have climbed more than 20 percent; Sealed Air, 39 percent; and Berry Plastics, 42 percent.   

Demand Not Dissipating

At the same time that fracking has pushed daily U.S. oil output to 32-year highs, improvements to our vehicles’ internal combustion engines have increased the number of miles we can drive on a tank of gas to all-time highs.

Fuel Efficiency in U.S. Cars and Trucks is Trending Upward
click to enlarge

Requiring less fuel to get farther doesn’t mean demand is slipping. Quite the opposite, actually. Car and truck sales are expected to climb for the sixth straight year in 2015, a winning streak we haven’t seen in over 50 years.

U.S. Car and Light Truck Sales Return to Pre-Recession Levels
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Automobile pricing and information website TrueCar predicts that 17 million light-weight vehicles will be driven off car lots by the end of 2015, a 10-year high.

Since 2009—when sales plummeted to roughly 10 million units, their most depressed state since 1982—year-over-year sales growth has surged as the U.S. has pulled itself out of the recession. In each of the past 12 months, 200,000 or more new jobs were made available to Americans, the most since 1977.

Americans are not only buying more vehicles—some as new additions, others to replace aging clunkers—but they’re also taking them on the road more, especially now that national average fuel prices have fallen more than 31 percent from a year ago.

In fact, Americans drove a record 3.05 trillion miles on U.S. highways in January for the 12-month period, breaking the previous record set in November 2007. And with the busy summer travel season ahead of us, we should expect to see this number rise even more.   

Americans Drove a Record Number of Miles on U.S. highways in January
click to enlarge

Three trillion miles, by the way, is equivalent to taking more than 200 round trips to Pluto.

Airlines improving their fuel efficiency

That’s a lot of fuel being consumed—even if our vehicles are more fuel-efficient.

According to the Energy Information Administration (EIA), gas consumption in 2015 will rise 1 percent over the previous year to reach 9 million barrels a day—a little under the number of barrels of oil the U.S. now produces daily.

Add to that the fuel consumption coming from U.S. airlines, which are also working on improving fuel-efficiency. As I pointed out earlier this month, the number of miles flown on both domestic and international carriers is flying higher, along with the number of seats per flight.

Down Under

Last week I was in Melbourne, Australia, attending a conference for chief executives from all over the world. It’s always inspiring and exhilarating to meet and share ideas with so many other global innovators, thinkers and problem-solvers. This is ultimately what’s needed to cultivate the ideas that can lead to the sorts of life-changing advancements I discussed above.

Have a blessed week, and 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.

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.

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 12/31/2014: Kinder Morgan, Inc. 0.00%, Tsakos Energy Navigation Ltd 0.00%, Graphic Packaging Holding Co. 0.00%, Sealed Air Corp. 0.0%, Berry Plastics Group, Inc. 0.0%,

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

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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 04/17/2015

Global Resources Fund PSPFX $6.01 -0.06 Gold and Precious Metals Fund USERX $5.63 0.01 World Precious Minerals Fund UNWPX $4.71 0.02 China Region Fund USCOX $9.67 -0.17 Emerging Europe Fund EUROX $6.68 -0.21 All American Equity Fund GBTFX $28.30 -0.33 Holmes Macro Trends Fund MEGAX $20.76 -0.34 Near-Term Tax Free Fund NEARX $2.25 No Change China Region Fund USCOX $9.67 -0.17