Thanks to the life support of $12 trillion and 515 rate cuts by the world’s central banks since March 2009, the global economy’s heart is beginning to beat again. As the market senses a robust economic recovery is underway, expectations are climbing that this growth will continue. Even the Federal Reserve has hinted that it may taper quantitative easing because of the improved economic situation. As a result, interest rates are increasing.

Europe was the lone wild card, but following Germany’s change of heart away from austerity, a positive outlook for growth, and therefore, rates, is rising in that area of the world as well.

In the chart below, you can see the close correlation between the eurozone’s positive economic surprises and bond yields. The Citi Eurozone Economic Surprise Index, which compares economic data to expectations, has improved, bouncing from a low in April. At the same time, the yield on Germany’s 10-year bond has also begun to increase.

click to enlarge

Given this rising interest rate environment, we wondered how gold, oil, and commodities, as well as energy and materials stocks have historically performed. With a hot economy, will we see hot commodities?

We found some compelling results for resource investors.

Goldman Sachs’ historical playbook finds that “higher rates are ok for Asian equities.” Since 1990, there were 35 periods in which U.S. rates rose 50 basis points or more, and 75 percent of the time, the MSCI All Country Asia Pacific (excluding Japan) Index climbed higher, says Goldman.

The research firm plotted Asian countries as well as Australia according to their growth sensitivity compared to their U.S. rate sensitivity. You can see that the index tends to be positively impacted by rising rates in the U.S. and is relatively growth sensitive.

Across Asia, China, Korea and Taiwan—proxies for global growth—are the most positively affected by rising rates. These three countries are also the highest growth-sensitive areas of the world. That makes today’s situation of economic growth with rising rates a powerful combination for commodity investors. When economies such as China and Korea are growing, their use of commodities tends to expand as well.

click to enlarge

On the opposite end of the spectrum, countries such as India, Indonesia and the Philippines are negatively impacted by rising rates, as their economies are domestic driven and do not benefit from rising growth expectations in the U.S.

The Key is to Take Action Now
Don’t wait for the Fed to officially raise rates, as research shows that investors get the most benefit from materials and energy stocks by getting in now. Take a look at William O’Neil & Co.’s table below, which illustrates how critical it was to be invested in commodities before rates increased.

The firm looked at individual sectors, such as retail, technology, and utilities, along with broad indices, including the S&P 500 Index, the Dow Jones Industrial Average and the Nasdaq over four decades. It calculated the gains not only received during the period of the rate increases, but also six months prior to the initiation of rate increases.

In every instance, the energy sector performed “extremely well during these periods,” with basic materials also outperforming, says William O’Neil.

A Rerun of That ‘70s Show?
Looking ahead, if the economy starts to experience runaway inflation, history shows it makes sense to hold real assets. A decade ago, Investment Advisers Stephen Leeb and Donna Leeb wrote a very informative book on how to profit from the “Turbulent Post-Technology Market Boom.” The book, Defying the Market, discussed how to protect against deflationary and inflationary scares, comparing investment ideas that were likely novel to many people in their day, including energy, food, gold, and small-cap stocks.

One table listed the performance of these investments during an earlier era when Americans faced high inflation—the 1970s.

In that decade, gold, silver and oil outperformed many other areas of the market. Gold stocks rose 28 percent on an annualized basis and oil companies grew 14 percent. The S&P 500 Index, on the other hand, grew 8.4 percent on a nominal basis. After factoring in sky-high inflation of 8.10 percent, gold and oil still added significant real returns. The real return of the overall stock market, on the other hand, was nearly zero.

“Stocks leveraged to growth, such as the oils and oil drillers, did splendidly. But the big-cap stocks [i.e. the general market] … were complete duds,” wrote the Leebs.

While it is still too early to tell whether investors will see “That ‘70s Show” again, one valid consideration to protect from inflationary measures is an allocation to real assets like commodities.

An investment that covers all the commodity bases is the Global Resources Fund (PSPFX), which selects commodity stocks across 10 diverse industries, including oil services, exploration and production companies, as well as precious metals stocks. We believe this approach offers investors the possibility for better growth with lower volatility. Take a closer look today.

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.

The MSCI All Country Asia Pacific (excluding Japan) Index captures large and mid cap representation across 4 of 5 Developed Markets countries (excluding Japan) and 8 emerging markets countries in the Asia Pacific region. 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.

Sometimes following where money is being invested is a solid course of action to gain alpha; other times, a better opportunity lies in going the opposite direction, i.e., thinking contrarian.

Take commodities, energy and materials, which may be the most unappreciated areas of the market these days. According to Bank of America Merrill Lynch’s Global Fund Manager Survey of 250 participants who collectively manage $725 billion, energy, materials and commodities are extremely underowned.

As you can see below, the global asset class positioning during the first week of April compared to historical data shows that energy positions are close to 3 standard deviations below the long-term average. An allocation to materials is more than 2 standard deviations below its long-term average and commodity exposure is close to 2 standard deviations below its historical measure.

click to enlarge

Take note of the timing, though, as it appears that it may make sense to own the most underowned areas of the market. Compare today’s portfolio weightings to the last time fund managers had such a significant underweight in these asset classes. Each bar below indicates whether allocations in energy represented a net overweight or underweight position. Most of the time since 2003, managers maintained an overweight allocation, which means they likely anticipated outperformance in energy companies during this period of time.

However, the last time they had such a big underweight in global energy for this long was at the end of 2008 and the beginning of 2009.

click to enlarge

In materials, there were many more times that managers chose to have an underweight allocation to the sector. But again, the magnitude of today’s allocation decision matches what we saw in the 2008-2009 timeframe.

click to enlarge

A similar picture for commodities reveals this consistent trend. Asset allocation indicating an overweighting in commodities hasn’t been this negative since 2008-2009.

click to enlarge

Given the historical trend in late 2008 and early 2009 when managers were invested in other areas of the market, many likely missed the huge rally in natural resources stocks. From the market bottom on March 9, 2009, the Morgan Stanley Commodity Related Equity Index of commodity stocks grew 156 percent on a cumulative basis over the next two years. This is more than twice the return of the commodities futures index, the Dow Jones-UBS Commodity Index.

click to enlarge

Don’t miss the next potential rally. In one investment, the Global Resources Fund (PSPFX) gives you exposure to all three of these underowned segments of the market. It’s a multi-faceted approach to energy and materials stocks across 10 distinct industries to aim for lower volatility and better growth potential.

We believe the commodity supercycle continues, driven by emerging countries experiencing rising urbanization, increasing wealth and healthy GDP growth rates. What’s important for investors to remember is to build a diversified basket of natural resources companies actively managed by professionals who understand the seasonal and cyclical trends of these specialized assets.

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 a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

The Dow Jones UBS Commodity Index is composed of futures contracts on physical commodities, and includes commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The Morgan Stanley Commodity Related Index (CRX) is an equal-dollar weighted index of 20 stocks involved in commodity related industries such as energy, non-ferrous metals, agriculture, and forest products.  The index was developed with a base value of 200 as of March 15, 1996. 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.

The U.S. mining industry was dealt a devastating blow as Kennecott Utah Copper’s Bingham Canyon Mine experienced a pit wall failure causing a massive landslide with rocks and dirt covering the bottom of the mine pit. It’s a miracle no one was hurt due to the vigilance of its owner, Rio Tinto.

Brian Hicks, portfolio manager of the Global Resources Fund, is very familiar with the mine, having visited it often. He also has personal ties as both of his grandfathers were once employed by the mine. When Brian saw the photo of the landslide posted on the web, he said the substantial destruction of the collapsed wall and falling rock was apparent, yet the tremendous scale and magnitude of the mine cannot be captured in pixels.

Bingham’s immense size is a powerful sight to witness firsthand. It is one of the largest open-pit copper mines in the world, it’s the second largest copper producer in the U.S., and it’s been in operation for more than one hundred years.

The mine supplies about 1 percent of copper to the global market, says research firm Paradigm Capital. In the fourth quarter, the mine produced 59,000 tons and 163,000 tons in 2012. Because of the landslide, analysts expect there to be a huge decline in the overall copper output from Bingham this year.

This is a short-term setback for Rio Tinto, as the mine is one of four main copper assets for the company, but Nomura sees an additional shift in the copper market, “where this could take a market where many observers felt a meaningful surplus was about to emerge, back to remaining quite tight” in 2013.

Copper production had been rising to a new high, as you can see below. Credit Suisse charts the rising supply of copper coming out of Canada, Chile, China, Mexico, Peru and Zambia, which represents 60 percent of global supply. In the fourth quarter of 2012 only, copper in the top 6 countries increased 8.5 percent on a year-over-year basis.

click to enlarge

With production higher, copper has moved from a deficit to a balanced market, which is typical, but “this is not to say that persistent growth of new mine supply is not problematic for a variety of technical and other reasons,” says Credit Suisse. In addition to the setback from Bingham, the new mines under development, including one in Mongolia, might not come on line as quickly as one thinks.

Copper mining has always been dealt more than its fair share of challenges: We’ve discussed labor disputes in the past, such as the massive strike in Grasberg in Indonesia, which significantly reduced production from a pre-disruption level of about 500 to 700 tons to 136 tons in a year, says Credit Suisse. Political issues and weather catastrophes have also hurt copper supply in recent years.

The good news is that demand for copper persists. With four babies born every second, a growing population along with rising urbanization will continue to drive the need for copper.

The red metal is also the most widely consumed base metal, dominated by wire and cable and used in anything that is electrical or electronic. Credit Suisse estimates that about 20 percent of overall copper is made into building wire and construction uses make up almost 30 percent of the world’s copper use.

Another growing use of copper comes from hybrid and electric cars. Many countries, including China which already uses 40 percent of the world’s copper, have been encouraging residents to purchase hybrid and electric cars via subsidies. These fuel-efficient cars consume substantially more copper than an automobile run on gasoline. Whereas a gasoline-fueled car uses 50 pounds of copper, an electric car can consume triple that amount, says the Copper Development Association. I often say, there’s no free lunch on the commodities table: If more hybrids fill the roads, more copper will inevitably be needed.

The landslide in Utah is just one example of how quickly and unexpectedly the supply and demand factors facing the red metal can shift, which I believe underscores the need for nimble active management.

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.

Holdings in the Global Resources Fund as a percentage of net assets as of 3/31/13: Rio Tinto 0.00%.