Call it choppy, volatile, fickle or lively, market action continued to disappoint last week. Frightened investors pulled out more than $40 billion from long-term mutual funds for the week ended August 10, according to the Investment Company Institute.

The eurozone crisis fueled the outflows as economic growth figures for several eurozone countries disappointed—a hard trend to break given the austerity measures being implemented. Relatively, U.S. stocks have only suffered a fraction of the pain (down roughly 5 percent year-to-date as of August 16) felt by investors in the U.K. (down 9.2 percent), Germany (down 13.2 percent), France (down 15.1 percent) and Italy (21.9 percent).

Given this landscape, the International Strategy and Investment Group (ISI) lowered its forecast for global growth to 2.5 percent in 2012. That’s down from the 4-5 percent growth level many were estimating.

There is a silver lining: Despite all the negative news out there, the global economy will continue to grow.

In fact, the U.S. economy has had several positive developments recently. The four-week average for unemployment claims dropped to 402,000 during the week ending August 13. There is still a large chunk of America unable to find a job, but that group has shrunk 13 percent since August 2010 and is about 40 percent of peak 2009 levels.

Many S&P 500 Index companies have leveraged strong economic growth in emerging markets and a weaker U.S. dollar into higher profits. Second-quarter 2011 earnings for companies in the S&P 500 Index have been superb with nearly 71 percent of company earnings beating expectations, per ISI.

According to Citigroup, this continues a trend established in 2010 when year-over-year earnings for the S&P 500 were up more than 38 percent, more than double the historical average during the first full year following a recession.

In addition, the strong earnings report is across all sectors. These companies are also sitting on nearly the largest cash cushions as a percent of market capitalization (about 11 percent) we’ve seen in 20 years, Citigroup says. Markets have historically bottomed when cash as a percentage of market cap reaches 9 percent.

We’ve also seen a surge in U.S. money supply (M2). ISI says M2 has surged $460 billion (about 5 percent—38 percent on an annualized rate) over the past eight weeks. Though the rise is largely due to a plunge in institutional money funds, increased money supply means more funds are available to be lent out, pushing down borrowing rates. Access to this “cheap capital” can increase confidence and entice businesses to put cash to work.

Around the globe, two recent bright spots have been Taiwan and Russia. Taiwan’s equity market is technology heavy, says BCA Research, and the market’s performance tends to track the global information technology sector, not global markets. BCA says that Taiwan is set to outperform because “after two decades of stagnation, domestic demand has been showing signs of reviving…[and] equity/currency valuations remain attractive.” In Russia, strong cash positions and subdued credit flows since 2008 mean Russia’s “equity and credit markets are likely to outperform in the months ahead,” BCA says.

Stock market corrections are always difficult but they also create opportunities. One tried and true method which allows investors to compare similar companies is through relative valuation. This same process can be applied to asset classes. The S&P 500 currently yields about 2.27 percent—that’s higher than a 10-year Treasury bond which yields roughly 2.07 percent. The choice between the two is obvious for long-term investors: Equities.

If you were to buy the 10-year Treasury today, you would likely earn about 2 percent a year and get your principal back (barring disaster) in 10 years. However, by investing in stocks today, you could receive more in annual income plus the potential growth and appreciation over that time. Granted, the latter hasn’t always been positive. Just look at the past 10 years of returns for the S&P 500. But that’s been one of the worst periods in history for investing in stocks and it is unlikely stocks will suffer the same fate over the next 10 years.

The average annual total return for the S&P 500 during the 20th Century was 10.44 percent—the strongest period coming during the Tech boom in the late 1990s, research from Citigroup shows. Meanwhile, the total return on a 10-year Treasury bond was 4.68 percent over the same time period. Since 1961, there have been 18 years where the S&P 500 rose more than 15 percent compared to only 13 years of declines.

Those investors who have been waiting for a bounce in the markets may not have to wait too long. We mentioned last week that the S&P 500 has historically experienced strong upward moves after the CBOE Volatility Index (VIX) reaches extreme levels. Research from Citigroup backs up this assertion, showing the average return for the S&P 500 is 5.5 percent (three months), 9.4 percent (six months) and 18.9 percent (12 months) following a breach of the 35-40 on the VIX.

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. M1 Money Supply includes funds that are readily accessible for spending. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. M3 money supply is the broadest monetary aggregate, including physical currency, demand accounts, savings and money market accounts, certificates of deposit, deposits of eurodollars and repurchase agreements. Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.

Frank Holmes and the co-managers of the U.S. Global Investors Global Resources Fund (PSPFX), Evan Smith and Brian Hicks, participated in a special webcast for the Peak Advisor Alliance last week. Here are some candid portions of the Q&A:

Q. How are interest rates currently affecting commodity prices?

A. The magic number for real interest rates is 2 percent. That’s when you can earn more than 2 percent on a U.S. Treasury bill after discounting for inflation. Our research has shown that commodities tend to perform well when rates fall below 2 percent.

Take gold and silver, for example. You can see from this chart that gold and silver have historically appreciated when the real interest rate dips below 2 percent. Additionally, the lower real interest rates drop, the stronger the returns tend to be for gold. On the other hand, once real interest rates rise above the 2 percent mark, you start to see negative year-over-year returns for both gold and silver.

Whether you are Republican, Democrat, Independent or Agnostic, it’s important to realize that it’s not about politics, but about policies. During the 1990s when President Clinton was in office, there was a budget surplus and investors could earn more on Treasury bills (about 3 percent) than the inflationary rate (about 2). This gave investors little incentive to embrace commodities such as gold, and prices hovered around $250 an ounce. Now under President Obama, there is a large budget deficit and we have negative real interest rates, and gold is in great demand.

Interest rates in the U.S. have been near zero since 2008 and we don’t see the Federal Reserve increasing them until at least 2012. The U.S. economy remains in intensive care: Stimulus efforts have been unable to stimulate significant job growth and unemployment remains near 10 percent. In addition, the existing home sales figures released last week reminded everyone that housing is still on life support.

Even though there has been a lot of talk about reducing deficit spending and the U.S. House of Representatives voted against raising the debt ceiling this week, we don’t see any desire from the Federal Reserve to raise interest rates. The government realizes it is extremely dangerous to pull back the reins right now.

Q. How do the financial troubles of European countries such as Greece and Portugal affect gold prices?

A. The market has definitely been more volatile as some of the financial problems started to pop up again in Europe. The re-emergence of these issues is just another example of how many developed economies around the world are overleveraged and heavily burdened by their debt.

Some of the weaker countries, particularly Greece, could end up ditching the euro as their main currency. This would obviously be a destabilizing event for the euro and would result in some short-term strength for the U.S. dollar, thus providing a headwind for commodities. However, the U.S. dollar is plagued by the same problems as the eurozone; i.e., a weak economy and higher unemployment.

Meanwhile, central bankers in emerging markets have excess reserves and are looking for ways to diversify away from these paper currencies. To protect themselves from paper currency devaluation many of them have turned to gold. Last year was the first net positive year for central banks’ buying of gold since 1985. They’ve chosen to own gold over trying to guess whether Portugal or Greece’s debt is the best investment.

This isn’t a completely new phenomenon. Russia announced that it was going to diversify roughly 5 percent of its reserves into gold back in 2005 when gold prices were at $500 an ounce. The tipping point came in 2009 when India purchased 200 tons of gold from the International Monetary Fund (IMF), which effectively set a floor under gold prices at $1,000.

Since then, we’ve seen countries such as Thailand, Bangladesh, Vietnam, Venezuela and the Philippines add to their official gold reserves. Earlier this year, Mexico purchased 100 tons of gold to boost its reserve holdings.

This trend should continue.

Q. With oil prices hovering around $100 per barrel, what is the outlook for oil prices for the next two to five years?

A. We remain bullish on crude oil for one simple, fundamental reason: Demand is greater than supply. We don’t see that changing in the foreseeable future.

One big driver is a rapidly growing demand for cars and automobiles in emerging markets (Read: Booming Global Auto Market Good for Many). There’s also rising demand for oil due to urbanization and rising per capita incomes in emerging economies. As their economies grow and their populations become more prosperous, they want and can afford to upgrade infrastructure and other construction projects which require oil to be produced (Read: Why Asia is the Epicenter of Oil Demand Growth).

However, it is important to manage expectations. As the price of gasoline rises and inflation fears grow, countries such as India have been forced to lower government fuel subsidies. This will cause some demand destruction as consumers adjust to paying more at the pump, a situation not very different from what we’ve seen recently in the U.S. Though it has the potential to spread if inflation gets out of control, we think this dip in demand will only be temporary.

On the supply side, it’s getting more difficult to find new supply and even when large reserves are discovered, they lie deep beneath the ocean floor or in parts of the world where it’s dangerous to operate (Read: Why High Oil Prices Are Likely Here to Stay).
We think these trends appear to be firmly intact and are why we remain constructive on crude oil prices over the next several years.

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

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

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

Middle-class, affluent, bourgeois, white-collar … they all describe a group of people who enjoy a comfortable life, have access to healthcare and, most importantly, have discretionary income. And across developing nations, there is a growing group of affluent people that are just settling in to this lifestyle.

A few weeks ago we discussed how economic power is gradually shifting eastward and highlighted a McKinsey Global Institute report that showed China, Latin America and South Asia are projected to account for most of the middle class children by 2025. (Read: Middle-Class Middleweights to be Growth Champions).

Those regions aren’t the only ones. Our emerging markets team uncovered this chart for last week’s Investor Alert which shows a surging middle class exists in Eastern Europe as well. China leads the developing world with a middle and affluent class of 149 million—roughly the same size as the combined total populations of Japan and Taiwan.

While China is far ahead of all developing market countries with 149 million members of the middle and affluent class, investors shouldn’t overlook another important trend: The combined middle and affluent classes of the Czech Republic, Hungary, Poland, Romania, Russia and Turkey equal that of China. Among emerging market nations, Russia has the second-largest middle and affluent class with 70 million people; Poland’s rivals that of India.

Turkey, which currently ranks seventh, has especially strong prospects. Already, its middle class is second among emerging markets in terms of GDP per capita at $17,586. In addition, this class is expected to grow at a 5.1 percent annual rate through 2029.

The Development Centre of the Organisation for Economic Co-operation and Development (OECD) Development Centre identifies the middle class population as the “consumer class” because of its importance on consumption levels. We agree with this designation as this class identifies an important global driver of economic growth.

We believe that people with discretionary income will seek to improve their way of life by buying their first vehicle, upgrading their home, purchasing appliances and gaining access to the Internet. For years to come, these middle and affluent classes should drive demand for new or improved infrastructure and needed commodities, thereby contributing to the substantial economic growth in several emerging nations around the world.