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Obama’s China Challenge
November 13, 2009
With President Obama scheduled to make his first presidential trip to Beijing this weekend, China Region Fund (USCOX) co-manager Romeo Dator appeared on CNBC’s “Power Lunch” today to discuss the U.S.-China relationship.
The other guest in the segment was former U.S. Secretary of Commerce Carlos Gutierrez, who stressed that the U.S. relationship isn’t the only one that’s important to China.
[Obama] won’t be able to give them a public lecture. He’s going to find a more assertive, a more confident China. The only thing playing in our favor this time is that the whole of Asia is up in arms about the dollar.
Since the Chinese peg their currency to the dollar, it’s giving them a benefit versus the rest of Asia. The only real chance we have here is for Asia to convince China (to let the yuan appreciate).
Romeo predicted that Asia on the whole will grow in importance for investors.
I think going forward the Asian countries are going to show stronger growth than we’ll have here in the United States and as a result, that’s where money is going to flow. So I think [investors] need to make some sort of allocation toward these markets.
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.
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. Holdings in the China Region Fund as a percentage of net assets as of 9/30/09: Baidu 2.12%, Ctrip.com International 1.68%. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. #09-806
A Warning Shot for Washington
November 12, 2009
I often say that money goes to where it’s treated best, and a Bloomberg News story this week shows that I’m not the only one who believes that.
The CEO of Emerson Electric, which makes a wide range of industrial and technology products, says the U.S. government’s plans for greater regulation and higher taxation are pushing his company to move more of its business operations overseas.
David Farr, who heads the $21 billion company, didn’t pull any punches: “Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing.”
And Farr predicts he will have plenty of company in the exodus to China, India and other places “where people want the products and where the governments welcome
you to actually do something… I'm not going to hire anybody in the United States. I'm moving.”
Government policies for peace and prosperity are a key component in determining a country’s growth prospects and attractiveness for investors.
Worries about the unintended consequences of Washington’s policies have been growing – David Farr’s blunt assessment speaks for those concerned about the risks of governmental overreaching.
By clicking the link, you will be directed to Bloomberg.com. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 9-30-09. #09-798
Why the Fall of the Wall Meant So Much
November 11, 2009
Twenty years ago this week, the Berlin Wall fell and in doing so, set off a string of momentous events that in short order saw the reunification of Germany, the collapse of the Soviet Union, and freedoms and democracy spread across a long-oppressed part of the world.
Few events in modern history have had such a significant impact on the lives of so many people, but momentum for the wall’s fall began years earlier.
A member of our investment team who grew up in Poland points out the important role played by Polish leader Lech Walesa, the shipyard electrician who led the Solidarity labor movement that drew support from around the world.
Solidarity’s success in creating the first free trade union behind the Iron Curtain weakened the region’s Communist governments and won Walesa the Nobel Peace Prize. Walesa, later Poland’s first post-Communist president, was in Berlin this week to tip over the first in a series of artistic dominos representing pivotal events from that time.
A member of our team who grew up in Azerbaijan during the Soviet era describes the Berlin Wall as the line in the sand for the Soviets. Once it was gone, it was a natural next step for the former Soviet republics to pursue their own independence.
Prior to the wall’s fall, defiance of Moscow was rare in the Soviet republics, but that changed quickly. By the early 1990s, the Soviet Union was no more – an outcome that few would have believed possible just a couple of years earlier.
As global investors, we watch government policies for peace and prosperity as part of our investment process. The dramatic changes in the former Soviet bloc, for example, led us to create our Eastern European Fund (EUROX) in 1997 – this was one of the first funds focusing on this region. Having a diverse investment team is a tremendous asset in helping us to spot opportunities arising from important global events.
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.
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. 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. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile. #09-795
Gold is Strong Money
November 10, 2009
I appeared on CNBC’s “Squawk Box” this morning to discuss gold’s bullish run. One point I tried to stress to host Carl Quintanilla was that countries are intentionally weakening their currencies to benefit their export sectors, and this is one of the key factors driving gold higher.
I appeared on CNBC’s “Squawk Box” this morning to discuss gold’s bullish run. One point I tried to stress to host Carl Quintanilla was that countries are intentionally weakening their currencies to benefit their export sectors, and this is one of the key factors driving gold higher.There’s a competitive currency devaluation taking place with many of the Western currencies, and countries like India don’t want to dump the dollar – they just want to diversify (their foreign reserves) and they don’t want to buy the euro…We’re seeing some really fascinating currency devaluations going around and I think that this bodes well for having gold as a component of your portfolio.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The COMEX is a commodity exchange in New York City formed by the merger of four past exchanges. The exchange trades futures in sugar, coffee, petroleum, metals and financial instruments. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. #09-785
India-IMF Deal: Tipping Point for Gold
November 09, 2009
India’s deal to buy 200 metric tons (6.4 million troy ounces) of gold from the International Monetary Fund (IMF) is a huge deal – not just the fact that the New Delhi government is handing over $6.7 billion for the metal, but what it may mean for gold going forward.
India’s deal to buy 200 metric tons (6.4 million troy ounces) of gold from the International Monetary Fund (IMF) is a huge deal – not just the fact that the New Delhi government is handing over $6.7 billion for the metal, but what it may mean for gold going forward.India, the world’s largest gold jewelry market, is making a rational and bullish call on gold. The supply of gold continues to decline - the biggest supply is from governments with socialist policies that are selling their gold to pay for social welfare and bailout programs. The IMF is a classic case of this.
What’s particularly interesting in this case is that the buyer is a developing economy that’s the largest democracy in the world. I see this as another sign of the wealth shift away from the developed markets of North America and Western Europe toward the emerging world.
A decade ago, many of the major emerging markets were in shambles, with contracting economies and huge current account deficits – now many of them have large surpluses to deploy, and they’re thinking beyond Treasuries.
Energy analysts at Merrill Lynch came out with a research note predicting the price of gold will top $1,500 an ounce within the next 18 months. The rationale – a lack of confidence in major currencies will push investors toward gold as a hedge against competitive devaluation by the world’s largest economies.
The chart below lays out this scenario in a succinct way. Annual gold production is on a downward trend while the growth in money supply in both the United States and the Eurozone is bent almost straight up. Economics 101 - more money competing for a declining resource tends to drive up the price of that resource.
The note goes on to say that if gold prices rise, the price of energy and other commodities will rise as well. The chart below from Merrill Lynch shows the strong capital inflows into emerging markets starting in the second quarter of 2009 have both strengthened their currencies and boosted commodities demand.
You also see that dynamic at work in the relationship between gold and oil over more than a century. Historically there is a strong positive correlation between gold and oil, and with 2009’s global monetary expansion, that correlation is being further strengthened. We’ve been writing about this correlation for many years.
It’s significant that, on an inflation-adjusted basis, all of the natural resources except gold and silver have surpassed their previous all-time highs. Gold is only approaching the halfway mark to $2,300 an ounce, which would be its 1980 high when adjusted for inflation.
Just like in the U.S., money supply is exploding in China, as you can see in the chart above.
Greg Weldon, who analyzes money supply in the Weldon Money Monitor, had this to say recently: “September’s +29.5 percent year-over-year pace of monetary expansion represents the fastest ever recorded in China… Against a U.S.-focused macro-monetary backdrop that is defined by intensifying risk to reflation, the pressure on the (U.S. dollar) against the Chinese currency, in line with the highly expansionary monetary dynamic dominant in China, makes us more willing to explore the bullish side of global equities and commodities.”
Along with India, China has also been a major gold buyer – its reserves have nearly doubled since the start of 2003, when the price was about $345 an ounce. And, of course, now there’s talk that China may buy the remaining 203 metric tons that the IMF is seeking to sell.
Another thing about India or China is that their governments won’t be criticized for buying gold because as a nation, they have a strong cultural affinity toward it. It’s how they store their wealth, and they can wear it as jewelry.
If the U.S. government went out and spent nearly $7 billion for the IMF’s gold, there would be no end to the howling.
The disconnect amazes me – the U.S. holds virtually all of its foreign reserves in gold. We are the world’s largest gold holder, with more than double the amount as #2 Germany, but as a nation Americans are gold skeptics. Just this week, I was interviewed twice on television by two old-timers who are still clearly anti-gold. It appears they would prefer to live in a state of denial.
But in emerging Asia, the citizens get it. They say it’s a good move because they are buying gold, too - they believe in it.
And with this purchase from the IMF, India has gone from being a price taker as a jewelry consumer to being a price maker as an investor. This is the sort of change in government policy that we watch for in shaping and maintaining our investment models. It is significant that India, the second largest country in the world by population and the largest gold jewelry consumer, may have created a new floor for gold at $1,000 per ounce.
The presence of a big bullish buyer tends to create a big bullish buzz for gold. We’re seeing it now – gold on Friday surpassing $1,100 an ounce – and history suggests it may last a while.
Around this time in 2005, for example, Russia announced that it was doubling its gold holdings from 5 percent to 10 percent of its reserves. At that time, gold was selling for about $490 an ounce. A year later, the price was up 30 percent.
Of course, Russian purchases weren’t the only thing that drove up gold – back then the dollar was dropping, federal deficits were colossal, markets were volatile and investors faced negative real interest rates.
We have the same conditions now, but on an even greater scale following the credit crisis, steep recession and the massive economic stimulus programs created around the world.
Our consistent suggestions is that investors consider a maximum 10 percent allocation to gold – half of the exposure in bullion and the other half in gold equities. The factors we’ve described above tend to be positive for gold and gold investing – the vote of confidence by a serious buyer like India may make a good situation even better.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-781
Net Asset Value
as of 11/20/2009
- Global Resources Fund
PSPFX $8.53 -0.06 - Gold and Precious Metals Fund
USERX $16.05 -0.08 - World Precious Minerals Fund
UNWPX $17.97 -0.02 - China Region Fund
USCOX $8.24 No Change - Eastern European Fund
EUROX $8.97 -0.10 - Global Emerging Markets Fund
GEMFX $7.94 -0.02 - Global MegaTrends Fund
MEGAX $7.94 -0.04 - All American Equity Fund
GBTFX $19.21 -0.10 - Holmes Growth Fund
ACBGX $15.12 -0.06 - Tax Free Fund
USUTX $12.24 +0.01 - Near-Term Tax Free Fund
NEARX $2.22 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change