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Palladium Was the Winner in 2014
January 20, 2015

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

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

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

Base Metals Boasted Mettle

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

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

Precious Metals Pressured

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

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

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

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

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

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

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

Gold is Second Best Performing Currency of 2014
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Energy Feeling Sluggish

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tough Times Don’t Last Forever

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

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

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

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

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

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

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

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

Mark Your Calendars

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

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

Past performance does not guarantee future results.

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

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources Fund as a percentage of net assets as of 9/30/2014: Alcoa, Inc. 1.40%; Chevron Corp. 1.90%; Devon Energy Corp. 1.82%; EOG Resources, Inc. 2.13%; Ford Motor Co. 0.00%; Schlumberger Ltd. 0.00%; Suncor Energy, Inc. 2.13%.

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

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

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15 Charts to Keep Your Eyes on for ‘15
January 8, 2015

In anticipation of the new year ahead, I’ve pulled together 15 charts that we’ll be watching and might help guide our expectations for what 2015 has in store for us. After looking them over, be sure to share some of your own via Facebook, Twitter or Instagram.

A Not-So-Crude Trend

Crude oil has recently dipped below $50 per barrel for the first time since 2009, one of the reasons for which is the rise of oil production in the United States. The glut has already prompted many U.S. companies to halt or limit projects, especially those that make use of hydraulic fracturing, or fracking. With oil prices as low as they are, it’s possible even more companies will join them.

1.

The Rise of Oil Production in the United States
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The bright side, however, is that a bottom and subsequent rally might emerge as early as next month, if the 5-, 15- and 30-year trend stays in place.

2.

West Texas Crude Oil Historical Pattern
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Airline Stocks Taking Off

Low oil prices have certainly hurt companies involved in the exploration and production of oil, but cheap fuel has benefited many companies that consume barrelsful of the stuff, airlines included. Despite some turbulence, such as the October pullback and pre-election Ebola scares, airline stocks have continued to ascend.

3.

Airline Stocks at a 12 Year High
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PMI: The Economic Soothsayer

Gross domestic product (GDP) tells you where you’ve been. Only the global manufacturing purchasing manager’s index (PMI) can tell you where you’re headed. Our research shows that when the one-month PMI reading crosses above the three-month moving average, gains have been made in select areas six months afterward:

4.

Commodities and Commodity Stocks Historically Rose Six Months After PMI "Cross-Over"
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Since September of last year, the global one-month reading has remained below the three-month moving average.

5.

Global Manufacturing PMI's One-Month Moving Avergae Remains Below the Three-Month Moving Average
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We’ll be eyeing the global PMI closely this year because when the “cross-above” occurs, it’ll be time to act!

End of One Secular Cycle, Start of Another?

We might be nearing the end of another 30-year-or-so secular market cycle, which is both exciting and a signal for caution. Adjusted for inflation, each of the three cycles—1921-1949, 1949-1982 and 1982-2015—have risen successively in performance.

6.

Three S&P 500 Secular Market Cycles from the Last 100 Years
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This raises more than a few questions, two of which immediately spring to mind: When will this current cycle end? And will the next one follow the trend of even better inflation-adjusted returns?

Ruble Rubble

We all know Russia’s going through tough times. International sanctions, sliding oil prices and a collapsing currency have all contributed to dire economic straits.

7.

Russian Ruble Volatility Looks SImilar to Moves During 2008 Financial Crisis
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The Federation’s economy is expected to contract by almost 5 percent, and Standard & Poor’s recently announced that it could very well downgrade Russian debt to junk status within the next three months.

Whatever your opinion on Russia is, it’s important to acknowledge that ours is a global economy. It would be in our country and company’s best interest for Russia to transform itself into a more attractive place to conduct business.

BRICS of Gold

Many investors are aware that gold is often used as a safe-haven currency. We’re witnessing this fear trade unfold right now in most of the BRICS countries—Brazil, Russia, India, China and South Africa.

By year’s end, Russia had snapped up 130 tons of the precious metal, a 73-percent increase from 2013. Since India eliminated its 80:20 rule in November, which mandated that 20 percent of all imported gold must be exported before any new shipments could be brought in, gold demand has exploded. In South Africa, gold producers are currently leading a stock market rally.

And in China, wholesale gold demand has remained steady as its economy has slowed. Total withdrawals from the Shanghai Gold Exchange came in just shy of the record set in 2013.

8.

China's Wholesale Gold Demand in 2014 Was Just Shy of 2013 Record
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We’ll see if China can sustain its robust demand throughout the next 12 months.

Year of the Bull Market

Speaking of China, its A-Shares have rallied strongly since the summer despite the country’s slowdown. They continue to be undervalued and offer a favorable risk-reward profile.

9.

Undervaluation of Chinese Stocks Indicates Favorable Risk-Reward
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The rally in Chinese equities cannot be overstated. Over the past six months, China’s market capitalization has surpassed that of other BRIC countries combined.

10.

China's Market Value vs. Other BRIC Countries
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Brightest of the Bunch

Although gold had another down year in 2014, losing 1.7 percent, it still smoked all other major world currencies except for the U.S. dollar, whose mounting strength has put pressure on the yellow metal.

11.

Gold is Second Best PErforming Currency of 2014
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With the global downturn in effect, gold appears likely to remain an attractive investment.

Borrowing for Free

Bad news is often good news for gold: For the first time ever, the German 5-year and 10-year bond yields have fallen below zero, indicating unambiguous deflation in the eurozone.

12.

German Five-Year Breakeven Rate Gauges Inflation Outlook
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This means that German bondholders are effectively paying the government to hold on to its debt. As a result, international investors might look elsewhere for better performance—gold, for instance, or the U.S. municipal bond market, which was valued at $3.6 trillion by year’s end.

The S&P 500 Index Paying Dividends

Nearly 85 percent of companies in the S&P 500 currently pay a dividend, with dividends per share (DPS) having grown 11.3 percent in the past 12 months.

13.

More BLue Stocks Paying Dividends
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What’s more, FactSet analysts expect DPS to increase over 8 percent in the next 12 months, with the financial and consumer discretionary sectors to report double-digit growth.

Watch the Big Apple

As the U.S.’s largest company by net capitalization, Apple has had mixed results after launching its flagship devices. When it released the first iPhone back in June 2007, its stock surged 16 percent within the next month. More recently, however, Apple stock tumbled following reports that the iPhone 6 was prone to bending.

Will the Apple Watch, to be released sometime early this year, lead company stock higher? Or will it take a bite out of gains? We’ll have to wait and see, but for now, analysts are already making their product shipment forecasts for 2015.

14.

Estimated 2015 Apple Watch Shipments
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Don’t Fear Rising Rates

15.

Historically, Rising Interest Rates Have Helped Boost Stocks on Average

This one remains filed under “considerable time,” as we have no idea when or to what extent the Federal Reserve will decide to raise rates this year. I’ve previously written about how rate increases might affect Treasuries. But what about stocks? Historical precedent, going back to 1971, shows that stocks have on average increased by nearly 4 percent six months following a rate hike.

What other charts do you think are important to keep in mind as we embark on a new year? Again, you’re invited to share them via Facebook, Twitter or Instagram.

Past performance does not guarantee future results.

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

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.

The NYSE Arca Airline Index is an equal dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines.

Shanghai Gold Exchange is a non-profit self-regulatory organization, approved by the State Council, organized by the People's Bank of China, and registered with the State Administration for Industry & Commerce, for the purpose of trading gold, silver, platinum and other precious metals.

BRIC refers to the emerging market countries Brazil, Russia, India and China.

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. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 9/30/2014: Apple, Facebook.

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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Gold Beat All Other World Currencies in 2014
December 30, 2014

Gold is money. Everything else is credit. Gold as currency.

Gold is money. Everything else is credit.
~J.P. Morgan in 1912

Loyal readers of our Investor Alert and my blog Frank Talk are no doubt aware that the U.S. dollar’s rising strength has put pressure on commodities such as oil and gold. I wrote about this as recently as my roundup of the top commodities stories of 2014, which you can read here.

Gold took a blow in the second half of 2014 as a result of the dollar’s ascent, and sentiment toward the yellow metal right now is less than ideal. But to keep things in perspective, its performance this year has far outpaced that of 2013, when it fell 28 percent—its worst showing since early into President Reagan’s first term.

Even though gold has lost 0.8 percent year-to-date as of this writing, it still leads all major world currencies except for the U.S. dollar.

Gold is Second Best Performing Currency of 2014
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The Case for Gold as Currency

Alan Greenspan: Gold is money. In his most recent book, former Federal Reserve Chairman Alan Greenspan convincingly makes the case that gold is indeed money:

Yet gold has special properties that no other currency, with the possible exception of silver, can claim. For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation; it was the only form of payment, for example, that exporters to Germany would accept as World War II was drawing to a close.

Greenspan goes on to make another astute point. If gold is nothing more than a commodity, then why do most developed countries’ central banks see the need to hold the stuff? Wouldn’t some other commodity suffice? Diamonds perhaps, or soybeans?  

During a Congressional monetary policy meeting in 2011, Texas Representative Ron Paul squared off against former Fed Chairman Ben Bernanke over this very topic. When asked why central banks still insist on holding the precious metal in their reserves, Bernanke responded that it was simply tradition.

Tradition, yes, but the reason goes so much deeper than that. Gold has an intrinsic value that transcends its commodity-ness, something that’s recognized by nations all over the globe.

For example, we’re seeing a trend among European central banks seeking to bring their gold reserves back under their jurisdiction. Although Switzerland recently voted down a referendum that would have done just that, there’s talk now that Austria, Belgium and France are interested in shoring up their own gold reserves. The Netherlands and Germany have already brought some of their gold home.

Alan Greenspan: Gold is money.China and India’s central banks are in the buying mood. Russia is currently snapping up gold at an astounding rate: 130 tons this year alone, up 73 percent from 2013.

Of course, if you’re Russia, buying that much bullion makes perfect sense. When your currency is the worst-performing in the world, you sorely need something in your coffers with greater value, ample liquidity and no credit risk.

Diversify and Rebalance

For the rest of us, gold remains an exceptional instrument to diversify your portfolio with. Despite its decline midway through the year, its price has remained relatively stable, much more so than oil’s. What investors—especially the gold bears—need to remember is that bullion has a 12-month standard deviation of ±18 percent, meaning that its price action this year is well within normal behavior.

As always, I advocate a 10-percent weighting in gold: 5 percent in physical metal, 5 percent in equities, then rebalance every year.

Speaking of which, look out for my special New Year’s edition of the Investor Alert this Friday. I’ll be discussing what steps you can take to maximize your portfolio going into 2015! 

Past performance does not guarantee future results.

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. Diversification does not protect an investor from market risks and does not assure a profit. 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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Epic Price Reversal for Commodities in 2014
December 29, 2014

If you want to know what happened in 2014 with regard to gold and oil, it’s important to appreciate the inverse relationship between the U.S. dollar and commodities. The following chart is a good place to start:

Commodities Were Best Performers for FIrst Half of 2014, But the Strong U.S. Dollar Put Pressure on Commodities in the Second Half
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Whereas total returns for the S&P 500 Index and 10-Year Treasury bond stayed relatively stable throughout the year, commodities and the U.S. dollar both made an incredible about-face starting around late June, early July. If you don’t factor in China’s renminbi using purchasing power parity, the dollar is the world’s strongest currency. As I’ve written about on multiple occasions, this has weighed heavily on the commodities we track very closely and report on here at U.S. Global Investors, especially gold and crude oil.

According to BullionVault, in fact, 2014 was the worst year for commodities since 1986, when they gave back 8.85 percent.

That being said, let’s open up the Frank Talk archives and look back at the most important commodity stories of 2014.

Oil Dropped Nearly 50 Percent Since the Summer

It should come as no surprise that oil dominated the news in the second half of the year. Since its peak in June, when West Texas Intermediate (WTI) crude was priced at around $105 per barrel, oil has tumbled nearly 50 percent to settle in the mid-$50s. We haven’t seen a decline such as this since the financial collapse of 2008 and 2009.

So how did prices get here? How did they fall so steeply, so unexpectedly?

It’s been a perfect storm, to be sure. For one, the U.S. shale boom has brought about what some call an oil glut in the market. The Saudis have resisted oil production curbs with the intention of undercutting the world’s competition, namely the U.S., Russia and fellow members of the Organization of the Petroleum Exporting Countries (OPEC).

Global growth and the Purchasing Manager’s Index (PMI) are also cooling, leading to tepid demand for oil. As I’ve mentioned on numerous occasions, when the one-month moving average for the global PMI falls below the three-month moving average, WTI crude has fallen 100 percent of the time six months later. Though past performance can’t predict future results, history illustrates a convincing trend.

Commodities and Commodity Stock Historically Rose Six Months After PMI Cross-Over
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And finally there’s the strong dollar, which has historically put pressure on commodities, most notably crude.

Year Over Year Percent CHange Oscillator: WTI Crude vs. U.S. Dollar
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Granted, battered oil prices have led to cheap gasoline, giving consumers all around the globe a welcome tax break this holiday season—a $330 billion tax break, to be exact.

But many oil companies involved in hydraulic fracturing, which is a pricier process than more conventional drilling methods, are starting to feel the pinch. Several companies have already been forced to temporarily close rigs in pricier shale regions, including the Eagle Ford in Texas and Bakken in North Dakota.

As calamitous as this might appear, there are still investment opportunities aplenty. In this recent Frank Talk, I took a contrarian view, arguing that, because oil stocks are currently priced so reasonably, now might be the time to pick up some exposure to this space. As I wrote:

For far too many investors, by the time they gain back the confidence to put money into oil stocks again, the rally might have already taken off, making it challenging to capture the full benefit of the upswing.

And there’s reason to believe that prices will normalize sooner rather than later. Brian Hicks, portfolio manager of the Global Resources Fund (PSPFX), stated that “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.”

Gold Found the Support Where Oil Didn’t, Was the Second-Best Currency of the Year

Like oil, gold was punished in the second half of the year because of the strong dollar. In the following chart, from an October Frank Talk, you can see just how much of an impact the greenback has had on the yellow metal this year alone:

Strong Contrast in 2014 Gold and Dollar Changes vs. Historic Averages
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In this Frank Talk, posted in June, I wrote:

There is always an emotional bias against gold, whether it is soaring high or dipping low, and that is why it’s important to manage these emotions when positioning a portfolio. At U.S. Global Investors we look objectively at the action of both gold stocks and gold bullion by monitoring these long-term data points and paying attention to buy and sell signals based on the trend of mean reversion.

This, of course, was back when gold bullion was priced at above $1,300. Since then it’s slipped nearly 10 percent, which might have discouraged some gold bugs.

But according to a recent article from Hard Asset Investor, gold was actually the second-best-performing currency of the year, second only to the U.S. dollar:

Given the strength of the dollar, it’s surprising that gold has held up as well as it has. At current prices, gold is only down 2 percent year-to-date, which is actually the best performance of any of the major non-fixed currencies.

Gold is Second Best Performing Currency of 2014
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Before gold and other commodities began to slump, they were actually performing very well, as I mentioned at the beginning of the piece. Back in July, this is what it looked like when you compared gold spot prices and the NYSE Arca Gold BUGS Index:

Gold Mining Stocks Are Beating Bullion (Year-to-Date Performance)
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For the first time in two years, gold mining stocks were beating bullion, which was good news for both the commodity and equities. When miners do well, gold has tended to follow suit.

But then in mid-summer, prices began to fizzle. When you chart the two asset classes for the remainder of the year, this is what you get:

But as Gold Prices Declined, So Did Gold Mining Stocks
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The problem is that when spot prices are between $1,000 and $1,200 an ounce—which is now the case—it’s challenging for miners to break even in terms of cash flow. Gold royalty companies, however, continue to impress. Royal Gold has returned 39 percent year-to-date, while Franco-Nevada has delivered 22 percent.

According to Ralph Aldis, portfolio manager of the Gold and Precious Metals Fund (USERX) and World Precious Metals Fund (UNWPX):

Much of the gold mining industry is underwater and can’t make money with these prices. We’ve seen capital programs being significantly cut back, in terms of companies looking to expand and build new mines. That’s all been put on hold. Those companies have been sufficiently scared enough that, even when gold prices do recover, they’re going to hold off on expansions because they might have lost the appetite to risk capital on new projects.

But on a positive note, “Because of this, we might see prices firm up, and companies will be rewarded.”

As always, we recommend a 10-percent weighting in gold: 5 percent in bullion, another 5 percent in gold stocks. Then rebalance every year.

In a Time When Many Commodities Were Depressed, Diamonds Retained Their Glitter

I spend a lot of time writing and speaking about gold and, more recently, oil. But another commodity that we at U.S. Global Investors care about is diamonds. After all, the U.S. is the world’s largest diamond market, responsible for half of the world’s $72 billion in sales made annually.

Tiffany Stock Was a Better Investment Than Diamonds wereWe hold luxury retailer Tiffany & Co. in our Gold and Precious Metals Fund (USERX). Although physical diamonds are a sound investment, diamond stocks can be even more of a prudent buy.

As you can see to the right, a $6,000 diamond purchased in 1987 would now be worth double that. But $6,000 in Tiffany stock purchased at the same time? Yeah, that would have returned 5,108 percent.

So guys, think about that next time you’re picking out a diamond ring or necklace for your significant other. Which do you think she might appreciate more?

In Frank Talk from August, I discuss diamond exploration and mining company Lucara Diamond, held in both USERX and our World and Precious Minerals Fund (UNWPX). Lucara continues to be an attractive asset, returning 18.5 percent year-to-date. Since June, it has been paying dividends.

South African Labor Strike Brought Platinum and Palladium into the Headlines

Back in June, a five-month labor strike in South Africa, the country’s longest, was seriously threatening the world supply of platinum and palladium, used predominantly in the production of catalytic converters. The African country is responsible for 37 percent of the world’s palladium, 78 percent of the world’s platinum, with Russia largely taking up the rest of the slack. Every day the strike dragged on, thousands upon thousands of both platinum group metals were being lost.

Because of the strike and supply concerns, prices of the precious metals surged, platinum to $1,500 an ounce and palladium to $850 an ounce.

The conditions of the strike were finally resolved by the end of June—and not a moment too soon, as reserves were beginning to run dry. Since then, prices have stabilized. Platinum is now just above $1,200, palladium, around $815.

Solar Energy Will Increasingly Drive Silver Demand

Tom Werner, president and CEO of solar panel-maker SunPower, believes that solar energy could be a $5 trillion industry within the next 20 years. It’s easy to see why he feels this way, as demand for photovoltaic (PV) installation ticks up every year.

U.S. Solar Installation Forecast
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This news bodes well for silver, between 15 and 20 grams of which is used in every solar panel manufactured. In fact, for the first time in over a hundred years, silver fabrication demand in photography has been outpaced by this new-ish, burgeoning technology.

Once a pie-in-the-sky idea, solar has finally emerged as a viable, near-mainstream source of energy that will increasingly play a crucial role in powering residences, businesses and factories. Some of the nation’s largest companies, including Walmart, Apple and Ford, already depend heavily on solar to power many of their facilities.

And with solar installation prices falling all the time—year-over-year, they’ve declined around 9 percent—more and more businesses and homeowners will join them, which should support silver demand.

Good Times, Bad Times

As I write in my whitepaper, “Managing Expectations”:

A keen awareness of the ebbs and flows of historical and socioeconomic conditions, on both the macro and micro scales, allows our investment management strategy to be more proactive than reactive.

Everything operates in cycles, including the weather, gold seasonal trends, four-year election terms and more. The domestic and global markets are no different. Commodities might be down this year, but as recently as 2009 and 2010, they were the best-performing asset class.

According to our Periodic Table of Commodities Returns, a perennial favorite among Frank Talk and Investor Alert readers, oil was the second-best performer just last year, returning 7.19 percent, while gold had its worst year since 1981. Such is the nature of investing. Every asset class, as I often say, has its own DNA of volatility.

Each Asset Class Has Its Own DNA of Volatility
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Speaking of the Periodic Table, we will be sharing the eagerly-awaited commodities returns for 2014 early next year. Subscribers to our Investor Alert will be first to see them, so be sure to subscribe if you haven’t already done so.

I wish you all a safe and prosperous 2015! A perfect New Year’s Resolution is to supplement your retirement income with investment-grade municipal bonds, which you can accomplish through our Near-Term Tax Free Fund (NEARX). Read my latest story, “A Little Pillow Talk Turned Her Husband on to Bonds,” to learn more!

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.

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.

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. Bond funds are subject to interest-rate risk; their value declines as interest rates rise.

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 S&P Stock Market Composite is a combination of major market indices used to gauge overall equity performance dating back to the earliest days of the market.

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.

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 NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.

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.

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

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, World and Precious Minerals Fund, Global Resources Fund and Near-Term Tax Free Fund as a percentage of net assets as of 9/30/2014: Apple 0.00%; Ford 0.00%; Franco-Nevada Corp. 6.44% in Gold and Precious Metals Fund, 1.16% in World Precious Minerals Fund; Lucara Diamond Corp. 1.07% in Gold and Precious Metals Fund, 1.58% in World Precious Minerals Fund; Royal Gold 3.44% in Gold and Precious Metals Fund, 1.01% in World Precious Minerals Fund; SunPower 0.00%; Tiffany & Co. 0.44% in Gold and Precious Metals Fund; WalMart 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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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
click to enlarge

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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Net Asset Value
as of 01/26/2015

Global Resources Fund PSPFX $6.45 0.07 Gold and Precious Metals Fund USERX $5.99 0.04 World Precious Minerals Fund UNWPX $5.13 No Change China Region Fund USCOX $8.48 0.03 Emerging Europe Fund EUROX $6.53 -0.07 All American Equity Fund GBTFX $27.81 0.07 Holmes Macro Trends Fund MEGAX $20.42 0.12 Near-Term Tax Free Fund NEARX $2.26 No Change China Region Fund USCOX $8.48 0.03