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How Gold Miners Can Leverage the Price of Gold

December 7, 2012

Gazing into their crystal balls this week, Wall Street firms interpreted differing futures for gold next year. Morgan Stanley awarded gold the “best commodity for 2013” while Goldman Sachs called the end of the metal’s hot streak. After seeing 11 consecutive years of positive performance from gold, one needs to be wary of research analysts’ price forecasts, as they have consistently underestimated the shifting dynamics driving the precious metal higher.

Take a look at analysts’ annual predictions of gold prices, which is “a telling picture,” CEO Nick Holland of Gold Fields told the crowd at a mining conference last summer. From 2006 through 2011, Bloomberg’s contributing analysts have forecasted that future gold prices would be lower. “The analysts who keep telling us the gold price is going down have been wrong seven years out of seven. That’s a remarkable track record!” says Holland.

Gold Kept Rising Despite Analysts' Forcasts

It is worth keeping gold’s DNA of volatility in mind as the day-to-day price of gold naturally fluctuates, of course. Based on 10 years of data as of September 30, 2012, over any 20 days, there is a 7 percent chance of a 10 percent change in the gold price. Swings have historically been more frequent for gold equities, moving 10 percent up or down about 30 percent of the time over the same time frame.

The upside to gold stocks is that investors historically have received a 2-to-1 leverage by owning gold equities instead of the commodity. U.S. Global’s Portfolio Manager Brian Hicks reminded The Gold Report readers of this fact during an extensive conversation that he and Portfolio Manager Ralph Aldis had with Brian Sylvester.

Leveraging Gold Prices

Read the interview now.

We believe that effective management can help miners gain more leverage over the metal for their shareholders. Picture the gold price as a pulley with gold company executives applying force on one side of a rope. The more disciplined and successful the management, the bigger the potential boost in gold equity returns.

The muscle that gold miners can use to increase their “multiplier effect” for shareholders is three-fold: grow production volume, expand margins or optimize capital, explained Holland. “You want to keep showing that you can increase the return on the mine and that you can increase the cash flow available for shareholders at a particular gold price.”

In recent years, gold mining companies have been facing the dilemma of trying to grow their production profile while also depleting their current resource base. As I explained to Mineweb in a recent podcast, no miner wants to show investors that their production profile is in decline, so there has been a huge push to grow gold production.

However, this “growth for growth’s sake” mind frame has resulted in a congested intersection of projects in the pipeline. Take a look at the chart that National Bank Financial (NBF) put together showing an “unprecedented wave” of projects that mining companies are planning over the next decade. Each dot represents either a gold and precious metals project or a base metals and iron ore project. The bigger the dot, the larger the estimated cost of the project.

The 2006 through 2010 construction history benchmarks the engineering and construction industry’s capacity to build new mines. Relative to the size and number of new projects in the pipeline, the current pool of expertise to build these projects is quite limited.

Overabundance of Mining Projects Planned Over Next Decade

NBF’s mining analysts indicate that about 30 projects can be completed in a two-year time frame.

The critical shortage of technically skilled people has been driving up the cost of projects and resources. “Mines that used to cost $2 billion only a few years ago, now cost $5 billion,” and the beneficiaries of these projects have not been shareholders, but contractors, employees, consultants, governments and equipment suppliers, says Stifel Nicolaus’ George Topping, a well-respected analyst with years of experience in capital markets.

In his research, “Don’t Build It And They Will Come,” he analyzed the projects that four senior miners, Barrick, Goldcorp, Kinross and Newmont, have in the pipeline, looking at the capital expenditures, cash costs and internal rates of return to determine whether he thought the projects should be continued or deferred.

Of the 14 he looked at, only five were worth pursuing, in his view. Instead of spending the money on these projects, “senior producers would be able to pay higher dividends, say yielding 5 percent at current prices,” according to Stifel. A monthly or quarterly dividend program shows that gold miners have a pulse and are taking disciplined action in paying back some of their capital.

The Fairytale Land of Cash Costs
The other factor that has been hurting gold miners is the outdated use of a cash costs measure which doesn’t reflect the true costs of mining. In the Mineweb podcast, Ralph and I discussed these “cash cost fairytales,” with Ralph pointing out that only governments believe gold miners have seen a windfall profit from the rising price of gold. He says,

“You’ve got to thank your cash cost marketing for basically taxing 50 percent of your gains away in the form of taxes when the government has risked no capital on the project and not borne any of the risks during the construction of the project.”

Research indicates that an “all-in cost” is much more indicative of the true cost of mining, as it takes into consideration operating costs, sustaining capital, construction capital discovery costs, and overhead tax along with acceptable profit. For example, CIBC’s research calculates that a sustainable number for mining an ounce of gold would be $1,700.

Listen to the Mineweb podcast.

These factors highlight the importance of active management, as gold companies that are successful at executing what they’ve articulated to the public should be more effective at leveraging the price of gold.

In addition, as Brian explains to The Gold Report, “The precious metals market is surprisingly inefficient,” meaning that active managers such as U.S. Global can take advantage of dislocations in the market. We believe this is how the 4-star rated Gold and Precious Metals Fund (USERX) has been able to outperform its benchmark, the FTSE Gold Mines Index, over the 1-, 5- and 10-year timeframe as of September 30, 2012.

*Morningstar Overall Rating™ among 70 equity precious metals funds as of 9/30/12.

Total Annualized Returns as of 9/30/2012
  1-year 5-year 10-year Gross
Expense
Ratio
Gold and Precious Metals Fund 0.26% 4.31% 16.97% 1.58%
FTSE Gold Mines Index -5.5% 3.23% 10.89% n/a

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Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average gained 0.99 percent. The S&P 500 Stock Index climbed 0.13 percent, while the Nasdaq Composite fell 1.07 percent. The Russell 2000 small capitalization index closed the week with a 0.04 percent gain.
  • The Hang Seng Composite rose 1.10 percent; Taiwan gained 0.82 percent, while the KOSPI increased by 1.27 percent.
  • The 10-year Treasury bond yield was unchanged this week, at 1.62 percent.

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Domestic Equity Market

The S&P 500 Index rose modestly this week but has strung together gains for three weeks in a row. Financials were the standout leader this week, while materials and technology lagged.

Domestic Equity Market - U.S. Global Investors

Strengths

  • Financials rallied this week as mega cap financials such as Citigroup, Bank of America and JP Morgan gained. Insurance companies also posted a strong week, likely bouncing back from weakness related to Hurricane Sandy.
  • The industrials sector also rallied this week, likely driven by building positive sentiment toward a Chinese economic recovery and optimism toward a global economic recovery in 2013.
  • Seagate Technology and Western Digital were the best performing stocks in the S&P 500 this week, up 12.87 and 12.44 percent respectively. Both stocks are in the hard disk drive industry and presented at a conference this week. Speculation of industry consolidation and supply discipline were the most likely reasons the stocks rose sharply.

Weaknesses

  • The materials sector was the worst performer this week driven lower by Freeport-McMoran, which fell 18.74 percent. The company announced a dilutive acquisition of two related energy companies and the market reacted negatively to perceived corporate governance issues and lack of obvious synergies.
  • The technology sector also underperformed with Apple falling 8.92 percent pulling the sector lower. There was considerable speculation on what the driver of the decline was, but with capital gains taxes likely headed higher next year some tax planning was probably involved and contributed to the recent selling.
  • Freeport-McMoran was the worst performing stock in the S&P 500 this week as discussed above. Darden Restaurants was the second worst performer, down 11.76 percent. The company, which owns Olive Garden and Red Lobster, gave a profit warning for the quarter and cut estimates significantly.

Opportunity

  • The market has been resilient even as the fiscal cliff remains uncertain, giving hope the market can continue its historical seasonal strength into year end.

Threat

  • Lots of economic data noise due to Hurricane Sandy that will likely depress reported economic results for November.

Shareholder Report 2012

The Economy and Bond Market

Treasury bond yields were little changed this week as economic data was mixed and the fiscal cliff continued to dominate the news flow but without much progress. The chart below is of the University of Michigan Consumer Confidence Index which fell by an unexpectedly large amount, likely driven by concerns regarding the fiscal cliff and the related tax and spending implications for consumers.

University of Michigan Confidence Index

Strengths

  • November unemployment fell to 7.7 percent and nonfarm payrolls expanded by 146,000 which was better than expected as Hurricane Sandy was expected to have a negative impact on job creation but apparently it only had a modest impact.
  • U.S. auto sales were strong in November, driven by Hurricane Sandy replacements. It was the best month in five years as industry-wide sales grew 15 percent over last year.
  • Factory orders rose 0.8 percent in October, ahead of expectations for a 0.1 percent increase.

Weaknesses

  • The University of Michigan Consumer Confidence Index fell sharply and well below estimates.
  • The ISM Manufacturing Index fell to a three-year low and is at a level that would indicate contraction in the manufacturing sector.
  • Eurozone retail sales fell 1.2 percent in October. This was the biggest drop in six months and well below expectations.

Opportunity

  • The fiscal cliff is front and center on investors’ radar and if a compromise can not be reached that would be a negative for the market and economy.
  • Europe appears to be on the verge of another crisis but policy makers continue to bicker, just adding to the uncertainty.

Threat

  • The fiscal cliff is front and center on investors’ radar and if a compromise can not be reached that would be a negative for the market and economy.
  • Europe appears to be on the verge of another crisis but policy makers continue to bicker, just adding to the uncertainty.
In The News

Gold Miners to Focus on Growing Returns, Say Ralph Aldis and Brian Hicks

Ralph Aldis and Frank Holmes: Talking Gold Stocks with Mineweb

Canada’s BNN Discusses the Global Economy with Frank Holmes

World Precious Minerals Fund - UNWPX • Gold and Precious Metals Fund - USERX

Gold Market

For the week, spot gold closed at $1,704.05, down $10.75 per ounce, or 0.63 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 3.50 percent. The U.S. Trade-Weighted Dollar Index gained 0.32 percent rise for the week.

Strengths

  • Both CIBC World Markets and Paradigm Capital initiated coverage of Dundee Precious Metals with a Sector Outperformer/Buy rating with one-year price gain expectations of roughly 50 percent to 60 percent. The analyst indicated Dundee has several potential positive catalysts in 2013 which they believe will continue to build investor interest and confidence thus raising its appeal to a larger pool of investors. One of those catalysts materialized later in the week with Dundee announcing it had secured an agreement with Xiangguang Copper for the sale of up to 200,000 tons per annum of gold bearing pyrite concentrates produced at their Chelopech mine starting in 2014. Gold associated with pyrite minerals currently not captured in the processing circuit will be recovered and sold as a gold concentrate boosting the project’s overall gold recovery to approximately 90 percent.
  • PMI Gold and Keegan Resources announced that they have entered into a definitive arrangement agreement to combine their respective businesses to create a leading West Africa gold development company. Keegan has enough cash on hand such that PMI Gold can likely complete the construction of their first mine. PMI Gold’s share price jumped 12 percent on the announcement.
  • Central banks continue to be active buyers in the gold market. The Bank of Korea announced it increased gold reserves 20 percent last month to diversify investments, boosting holdings for the fourth time since June.

Weaknesses

  • BNP Paribas SA lowered its 2013 gold price forecast to $1,865 an ounce from $1,900 an ounce. An analyst for the bank, Anne-Laure Tremblay, suggested prices will average $1,780 an ounce in 2014, for the first annual decline in 14 years.
  • Gold imports by China from Hong Kong dropped 32 percent in October from a month earlier as slowing economic growth cut purchases. China stock market indexes are approaching their 2009 lows. In contrast, there have been reports of buying picking up in India.
  • Congress and the White House remain deadlocked on the fiscal cliff for another week as it continues to threaten the economy and jobs.

Opportunities

  • Randgold Resources held its investor day recently. The company’s production guidance was outlined showing growth going from currently 850,000 ounces to 1.3 million ounces in 2015 with projected free-cash flow of $700 million per annum at that time. At this rate, Randgold could build a new mine every year as well as pay out some $200 million to shareholders in dividends.
  • Drill results from Pilot Gold’s early stage joint-venture project with a Turkish subsidiary of Teck Resources were published. Results from the latest eight holes at the TV Tower project include 193 grams gold per ton, 9.8 grams silver per ton and 0.46 percent copper over 12 meters in drill hole KCD-50. The interval, located at a vertical depth of 100 meters, also demonstrated visible gold in several veins. Pilot Gold’s chief geologist, Moira Smith, commented that the location of the intercept and the near perpendicular orientation of the gold-bearing veins relative to the hole orientation, suggest the interval may reflect true width of the zone.
  • UBS AG said its expectation of additional quantitative easing next week by Federal Reserve is not priced in the gold market, and any aggressive move by the FED would prompt a sizeable response. Index rebalancing will also cause gold to be bought.

Threats

  • On December 3 before market, Newmont Mining announced that President and COO Gary Goldberg will become President and CEO, and join Newmont Mining’s Board of Directors on March 1, 2013. This is the third major gold company with a CEO change, but this change appears to have been more orderly.
  • Anita Soni from Credit Suisse First Boston expects no change to Newmont’s strategy. The company will still focus on reducing all-in cost and returning capital to shareholders. But with most budgeting programs reeling in capital spending, it could result in limited production growth for Newmont. Soni notes there is increased likelihood of negative news flow in early 2013 with the change in CEO.
  • Goldman Sachs sees potential for higher gold prices in early 2013 but the gold cycle could be set to turn lower on the improving U.S. recovery.

4-Star Gold and Precious Metals Fund

Energy and Natural Resources Market

US Dependence on Oil Imports May Fall Faster and Steeper Than Previously Forcasted

Strengths

  • Copper consumption in China may climb 4.8 percent to 7.68 mn metric tons this year, compared with a 7.8 percent growth last year, Beijing Antaike Information Development said at the Mines and Money conference in London. China’s copper demand will be 8.1 mn tons in 2013 and 8.53 mn tons in 2014. Demand will exceed local output by 2 mn tons next year, with the gap narrowing to 1.93 mn in 2014. Copper stockpiles in bonded warehouses are at about 650,000 tons, Antaike said.
  • Nucor hiked sheet-steel prices by $20 per ton; at a 3 percent increase. This follows two earlier price increases in the fourth quarter totaling $90 per short ton, which have pushed hot rolled coil from $580 per ton to $640 per ton.
  • Bloomberg news reported that hedge funds increased bullish bets on commodities by the most since August as evidence that China is accelerating outweighed concern that U.S. lawmakers have yet to resolve an impasse over automatic spending cuts and tax rises. Speculators and money manager increased net-long positions across 18 U.S. futures and options by 9.8 percent to 929,588 contracts in the week ended November 27, the biggest gain since August 21, U.S. Commodity Futures Trading Commission data show.

Weaknesses

  • Rates to ship iron ore dropped the most this week since August, as demand declines on a seasonal slowdown in Chinese industrial output. Capesize freight earnings fell 7.4 percent to $12,827, the lowest since October 15. That’s the biggest decline since August 15, and it led the Baltic Dry Index, a broader gauge of commodity shipping costs, down 3.1 percent to 990 points, the bourse’s figures showed today.
  • U.S. total oil and natural gas rig count was down 11 rigs this week to 1,800. The oil rig count decreased by four rigs to 1,382, while the gas rig count was down seven rigs to 417.

Opportunities

  • Reuters wrote this week that China’s crude oil imports from Saudi Arabia will probably increase by about 11 percent in 2013 as refiners increase output in anticipation of an economy recovery and an increase in fuel demand.
  • U.S. oil production is likely to increase to 7.5 million barrels a day in the year 2019 due to rising output from onshore shale formations, the Energy Department said.
  • Companies are expected to shell out $28 billion to develop Texas’ Eagle Ford Shale in 2013, a pattern expected to continue in the next few years, energy analyst group Wood Mackenzie said this week in a new report. The play, whose biggest players are named as American explorers EOG Resources, ConocoPhillips and Australian miner BHP Billiton, is continuing to “exceed expectations” the firm said in a report. “In terms of overall investment, from 2012 through 2015, Wood Mackenzie expects capital expenditure in the Eagle Ford to surpass the projected capex of the entire Kashagan project in Kazakhstan, the world’s most expensive standalone energy project,” Callan McMahon, Upstream Research Analyst for Wood Mackenzie, said in a statement. The latest figures indicate the Kashagan project will cost $116 billion, WoodMac said. Since early 2011, liquids production in the play has grown from about 100,000 barrels per day to 700,000 bpd. Average third quarter 2012 production was over 1 million barrels of oil equivalent per day, including natural gas, WoodMac said.
  • In related news, a study commissioned by the U.S. Energy Information Administration examining the economic impact of liquid natural gas (LNG) exports from the U.S. concluded that net economic benefits would result from all levels of LNG exports considered, with increases in resource income and net transfers outweighing reductions in capital and wage income. This represents a major hurdle cleared for LNG exports from the U.S., although the debate will likely continue in the public sphere. The Department of Energy will begin to act on export applications after a 75-day comment period.
  • China may rely on imports for more than 35 percent of its natural gas supplies by 2015, up from 15 percent in 2010, according to estimates by the National Energy Administration from the nation’s five-year plan.

Threats

  • The Energy Security Leadership Council said in a report earlier this week that “No matter how much oil is produced domestically, the U.S. economy is vulnerable to the risk of global price shocks caused by unrest or production cuts in the Middle East…We caution that the situation has not fundamentally changed, and that it would be dangerous to allow a false sense of security to result in complacency and inaction.”

2012 Post-Election Outlook - Webcast on Demand

China Region Fund - USCOX  •  Eastern European Fund - EUROX
Global Emerging Markets Fund - GEMFX

Emerging Markets
 

Strengths

  • Xi Jinping, the new leader for China, reiterated China will promote urbanization which the premier-in-waiting Li Keqiang identified as one of the main engines for the economic growth for the next decade. Shanghai Composite Index was up 4.12 percent for the week as domestic investors are building up their confidence that the new government will continue to support economic growth, particularly urbanization related sectors.
  • HSBC China November manufacturing PMI was 50.5 versus consensus 50.4. The October PMI was 49.5. PMI above 50 indicates expanding manufacturing activities.
  • China released its 12th-Five Year Plan for the natural gas industry. The consumption target is lifted to 7.5 percent annual growth from the present 4 percent. The supply will reach 176 billion cbm by 2015.
  • Philippines November inflation came in at 2.8 percent, lower than the consensus forecast of 3 percent.
  • Indonesia also saw its inflation dip to 4.3 percent in November from 4.6 percent in October.
  • The Hong Kong Monetary Authority showed loans and deposit (ex-Rmb deposit) grew by an annualized rate of 8.4 percent and 9.4 percent for the first ten months of the year. The relatively benign liquidity is positive for funding costs and the property market.
  • Korea’s exports increased by 5.2 percent month-over-month in November 2012 after increasing 2.2 percent month-over-month in October, which indicated Asia ex-Japan external demand continues to recover.
  • November China’s power generation growth set the monthly high at 13 percent, while developers continued to show their positive monthly sales.

Weaknesses

  • Taiwan's exports increased only 0.9 percent year-over-year in November (vs. -1.9 percent in October), significantly below consensus forecast of 7.8 percent.
  • November new loans from China’s big four banks came through at Rmb168 billion, compared with Rmb220 billion in October.
  • Indonesia’s October trade balance dipped back into deficit territory as exports contracted 7.6 percent year-over-year and imports rose to 10.8 percent. The current account deficit may argue for Bank Indonesia to assume a tightening monetary policy bias.

Opportunities

Strong Weekly Fund Flowers to China and Hong Kong Should Reinforce Market Rally

  • The chart above shows the fund flows to China and Hong Kong, which has been a net increase since mid September this year benefiting from the U.S. Fed’s QE3 program and the expectation that China’s GDP growth had stabilized. Morgan Stanley showed there was $1.4 billion net inflow to China alone last week.
  • China will reform on policies that can facilitate urbanizing migrant workers. The process can be a long driving force for infrastructure and housing construction and private consumption. Recently strong stock price performance of construction related companies may directly indicate market optimism toward China’s urbanization drive.
  • The Shanghai Composite Index will rally 48 percent within nine months after its decline below 1,960 signaled selling has climaxed earlier in the week, according to Tom DeMark, a market chartist in the U.S.
  • Opportunity to gain exposure to consumer growth in emerging markets varies by country, from 20 percent in the case of Russia to over 70 percent of the Turkish equity market. But even in the latter country, the exposure can be achieved primarily through financials. Only in Indonesia, Malaysia, South Africa, Mexico, and South Korea do consumer discretionary and staples represent more than 20 percent of their respective markets.

Weight of Consumer-Oriented Sectors in the MSCI Country Indicies

Threats

  • U.S. Securities and Exchange Commission (SEC) sued the Chinese subsidiaries of four big U.S. auditing firms for not providing audit files related to nine undisclosed Chinese ADRs listed in the U.S. The SEC also threatened to delist those companies if it cannot get hold of audit documents from those firm’s China offices. The dilemma for those accounting firms in China is that the Chinese laws prohibit them from disclosing audit documents to foreign governments. Although legal and accounting professionals believe a compromise between the Chinese government and the SEC can be reached, it creates another uncertainty which caused stock price volatility.
  • In CLSA’s recently published research Asia Greying, Asia ex-Japan’s age 65 and above population will rise almost 50 percent in the current decade, even in countries with relatively young demographic profiles such as India and Philippines. The aging population will slow down economic growth, but will create opportunities for healthcare and pharmaceutical products and services, such as adult diapers which are selling more than baby diapers in Japan due to its aging population.
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A Blog by Frank Holmes, C.E.O. and Chief Investment Officer

Leaders and Laggards

The tables show the performance of major equity and commodity market benchmarks of our family of funds.

Weekly Performance
Index Close Weekly
Change($)
Weekly
Change(%)
Korean KOSPI Index 1,957.45 +24.55 +1.27%
Hang Seng Composite Index 3,032.09 +32.89 +1.10%
DJIA 13,155.13 +129.55 +0.99%
S&P Energy 533.69 +3.48 +0.66%
10-Yr Treasury Bond 1.62 +0.01 +0.37%
S&P 500 1,418.07 +1.89 +0.13%
Russell 2000 822.27 +0.35 +0.04%
Natural Gas Futures 3.55 -0.01 -0.28%
Gold Futures 1,705.50 -7.20 -0.42%
Nasdaq 2,978.04 -32.20 -1.07%
S&P Basic Materials 226.53 -4.42 -1.91%
Oil Futures 85.93 -2.98 -3.35%
S&P/TSX Canadian Gold Index 297.04 -12.89 -4.16%
XAU 162.08 -8.12 -4.77%

Monthly Performance
Index Close Monthly
Change($)
Monthly
Change(%)
Russell 2000 822.27 +17.75 +2.21%
Oil Futures 85.93 +1.49 +1.76%
DJIA 13,155.13 +222.40 +1.72%
S&P 500 1,418.07 +23.54 +1.69%
Nasdaq 2,978.04 +40.75 +1.39%
Korean KOSPI Index 1,957.45 +19.90 +1.03%
S&P Energy 533.69 +4.25 +0.80%
Gold Futures 1,705.50 -10.70 -0.62%
S&P Basic Materials 226.53 -1.49 -0.65%
Natural Gas Futures 3.55 -0.03 -0.75%
10-Yr Treasury Bond 1.62 -0.03 -1.58%
S&P/TSX Canadian Gold Index 297.04 -37.20 -11.13%
XAU 162.08 -20.31 -11.14%
Hang Seng Composite Index 3,032.09 -332.01 -14.83%

Quarterly Performance
Index Close Quarterly
Change($)
Quarterly
Change(%)
Natural Gas Futures 3.55 +0.78 +27.92%
Hang Seng Composite Index 3,032.09 +441.53 +17.04%
Korean KOSPI Index 1,957.45 +76.21 +4.05%
Gold Futures 1,705.50 -2.40 -0.14%
S&P Basic Materials 226.53 -1.77 -0.78%
S&P Energy 533.69 -5.18 -0.96%
S&P 500 1,418.07 -14.05 -0.98%
DJIA 13,155.13 -136.87 -1.03%
Russell 2000 822.27 -15.68 -1.87%
10-Yr Treasury Bond 1.62 -0.06 -3.39%
Nasdaq 2,978.04 -157.77 -5.03%
XAU 162.08 -11.69 -6.73%
S&P/TSX Canadian Gold Index 297.04 -24.59 -7.65%
Oil Futures 85.93 -9.60 -10.05%

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.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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

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 Eastern European Fund invests more than 25 percent of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Morningstar Ratings are based on risk-adjusted return. The Overall Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

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 percent to 10 percent of your portfolio in these sectors. Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent 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. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

Past performance does not guarantee future results.

These market comments were compiled using Bloomberg and Reuters financial news.

Holdings as a percentage of net assets as of 09/30/12:

Dundee Precious Metals Inc.: Gold and Precious Metals Fund, 7.27%; World Precious Minerals Fund, 4.36%; Global Resources Fund, 0.79%; Eastern European Fund, 2.77%
PMI Gold Corp.: World Precious Minerals Fund, 1.70%
Keegan Resources Inc.: 0.0%
Yanggu Xiangguang Copper Co., Ltd.: 0.0%
Randgold Resources Ltd.: 0.0%
Pilot Gold Inc.: World Precious Minerals Fund, 0.04%
Teck Resources Ltd.: 0.0%
Citigroup Inc.: 0.0%
Bank of America Co.: 0.0%
JPMorgan Chase & Co.: 0.0%
Seagate Technology PLC: Global MegaTrends Fund, 2.51%
Western Digital Corp.: 0.0%
Freeport-McMoRan Copper & Gold Inc.: Global Resources Fund 2.12%
Apple Inc.: All American Equity Fund, 5.73%; Holmes Growth Fund, 6.19%; Global MegaTrends Fund, 2.62%
Darden Restaurants, Inc.: 0.0%
Newmont Mining Corp.: Gold and Precious Metals Fund, 5.92%; World Precious Minerals Fund, 1.79%
The Goldman Sachs Group, Inc.: 0.0%
Nucor Corp.: 0.0%
EOG Resources, Inc.: 0.0%
ConocoPhillips Co.: All American Equity Fund, 0.82%
BHP Billiton Ltd.: Global Resources Fund, 1.84%
Gold Fields Ltd: 0.0%
Goldcorp, Inc.: Gold and Precious Metals Fund, 2.68%; World Precious Minerals Fund, 2.05%
Barrick Gold Corp.: Gold and Precious Metals Fund, 4.33%; World Precious Minerals Fund, 1.38%
Kinross Gold Corp.: Gold and Precious Metals Fund, 2.48%; World Precious Minerals Fund, 0.81%; Global Resources Fund, 0.00%

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The S&P BARRA Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios.
The S&P BARRA Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The MSCI Russia Index is a free-float weighted equity index developed in 1994 to track major equities traded in the Russian market.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
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 S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The Bloomberg Gold Bear/Bull Sentiment Indicator charts the percent of respondents in a weekly Bloomberg News survey of traders, investors, and analysts predicting gold prices will rise the following week. The number of participants in the survey, which is completed every Friday, may vary.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.
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.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The Producer Price Index (PPI) measures prices received by producers at the first commercial sale. The index measures goods at three stages of production: finished, intermediate and crude. The University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan. The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spend money.
The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.
The Baltic Dry Freight Index is an economic indicator that portrays an assessed price of moving major raw materials by sea as compiled by the London-based Baltic Exchange.
The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.
These market comments were compiled using Bloomberg and Reuters financial news.

 

Net Asset Value
as of 10/29/2014

Global Resources Fund PSPFX $8.33 -0.02 Gold and Precious Metals Fund USERX $5.78 -0.23 World Precious Minerals Fund UNWPX $5.26 -0.14 China Region Fund USCOX $7.97 0.03 Emerging Europe Fund EUROX $7.37 -0.09 All American Equity Fund GBTFX $32.53 -0.15 Holmes Macro Trends Fund MEGAX $23.02 -0.13 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 -0.01