Manufacturing around the world weakened in June, according to the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI). Its reading of 48.9 was the lowest in three years and the first dip below 50 since September 2011. The current reading is also below the three-month moving average for the second month in a row. As you can see on the chart, PMI crossed below the three-month in May.

While Europe, China and the U.S. were primarily responsible for the slowed activity, we believe the trend is your friend. In April, global PMI crossed above the three-month moving average, and historically, when a “cross-above” has happened, it’s signaled higher prices for many commodities. Take a look at the chart below which shows the following:

Ninety percent of the time, copper rose 10 percent over the following three months. Eighty-five percent of the time, West Texas Intermediate oil has also increased. Its median three-month change has been an increase of 11 percent.

Materials and energy were also positively affected, with modest results: When the PMI crosses above the three-month average, 70 percent of the time, the S&P 500 Materials Index rose, with a median return of about 3 percent. The S&P 500 Energy Index had a median three-month return of about 5 percent, with an 80 percent chance of the three-month change being positive.

Using history as a guide, this suggests that by the end of July, we could see strength in these commodities and energy and materials stocks. Although volatility and uncertainty rule the markets these days, we believe that the world’s central bankers are taking note of slowed activity and will act if deemed necessary.

The trend is your friend only if your portfolio is “resourceful” enough to benefit. Read the Financial Planning article, which showed how U.S. Global Investors’ Global Resources Fund strengthened a diversified portfolio over the past 10 years. Read the article.

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.

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.

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. 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.

A few months ago, we created two visuals we felt captured the emotions of how people respond to gasoline prices around the U.S.

With an increased dependency on our cars these days to get to work, school and grocery stores, the price of gas is a constant reminder of how “rich” we feel. When it seems as if filling the SUV costs an arm and a leg, we shift patterns by carpooling, forgoing the trip to the beach or decreasing spending elsewhere. On the other hand, falling gas prices act like a stimulus—according to the Wall Street Journal, “a 10-cent drop in prices can add about 0.1 percent to disposable household income.”

The second visual shows the price of gas on a global scale. Using data from mytravelcost.com, the infographic illustrates two concepts. The dollar figure represents the cost of a gallon of gas in several countries. Whereas the price of a gallon of gas in the U.S. seems high at $3.75, in every other country shown, except Russia, it’s much higher. In China, it is $4.88, in Colombia, drivers pay $6.17 and in Hong Kong, a gallon of gas costs $8.36! 

The gas can shows how much gasoline you’d get for $3.75 across several countries. Whereas you’d fill the gas can in the U.S., in Hong Kong, you get less than half of a can.

This translates to considerably higher fuel costs: In a mid-sized car that gets 25 miles to the gallon, using the average annual passenger car mileage of 12,500 miles, gas costs over one year would be $1,875 in the U.S. If gas were priced like it is in Hong Kong, annual costs would more than double to $4,180.

We challenge investors to view these graphics differently. For example, U.S. Global’s Director of Research John Derrick gets a daily gas price reminder from his office window as it overlooks an Exxon station. However, the station’s sign is only a minor visual cue that supports the detailed analytical research guiding our investment decisions. For example, countries such as Russia benefit when the price of gas is rising, and falling prices help countries, including Turkey, that depend on energy imports.

Here are a few other observations for global investors:

1. Through incentives or taxes, government policies have significant effects on directing its countries’ traffic to foot, car, bus or train. Consider public transportation, which is considerably cheaper in other countries compared to the U.S. According to Deutsche Bank, the minimum fare cost in New York City is $2.50. In Hong Kong, it’ll cost a fraction of that—only $0.44. In China, the minimum fare is $0.30. The only countries on Deutsche Bank’s survey with more expensive public transportation than the U.S. is in Canada (Toronto’s minimum fare is $2.62), the U.K. ($2.90), and Australia, where Melbourne residents pay a whopping $3.63!

2. Government policies also affect the use of global resources. When a country implements infrastructure plans devoted to the building of highways or high-speed rail, these projects translate to a future consumption of global resources. GE highlighted how numerous emerging markets are pulling out their checkbooks to spend $4 trillion over the next 2 to 20 years on infrastructure projects dedicated to increasing standards of living and reducing wealth disparity.

3. You can’t underestimate the pursuit of the American Dream. Compared to the U.S., in China, incomes are lower, public transportation is cheaper and gasoline is more expensive. Still, Chinese consumers consider automobiles as status symbols. We’ve seen the car culture in China grow considerably over the past decade, and ISI has projected that growth to continue.

I believe the key to investing in global resources is the ability to translate a gas station sign on a street corner to knowing where to find companies that stand to gain from rising or falling gas prices, changing government policies, and growing consumer demand.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following security mentioned was held by one or more of U.S. Global Investors Funds as of 3/31/12: Exxon Mobil.

When it comes to investing, wise managers are like good drivers, constantly evaluating the environment, looking for signs to step on the gas or slow down. A positive signal received recently came from Goldman Sachs, when the firm recommended “stepping back into the markets” in its latest Commodity Watch. Goldman is anticipating a 29 percent return for the S&P GSCI Enhanced Commodity Index over the next 12 months and suggests investors might want to increase their position in commodities.

Cautious investors might note that this is a significant change compared to the storm we’ve been driving through over the past several months. Goldman bases its view on a number of compelling factors that reveal improved conditions:

1. Prices have been pushed below fair value. Commodities have underperformed all other assets, says Goldman. The U.S. Global investment team tracks numerous resources subsectors’ daily movements, and looking over the past 60 days, the Morgan Stanley Commodity Related Equity Index, as well as oil and gas, fertilizers, construction and engineering subsectors have experience double-digit declines, triggering a -1 sigma move. This is a sign that several commodities indices may be oversold; historically, these dips provided buying opportunities.

2. China and the U.S. have been posting improved data. Forward-looking data for U.S. survey data is more positive and China’s activity measures have been “in line with expectations,” says Goldman.

3. Policymakers are taking accommodative action. Recently, we’ve seen China cut interest rates for the first time since 2008. Australia and Brazil also cut rates, and Indonesia just introduced a stimulus plan to boost consumption and infrastructure spending, using $2.5 billion from the budget surplus to fund building projects as well as lift the tax-free annual income level, reports Bloomberg Businessweek. Some speculate that the U.S. might be next in making an easing move.

Central banks will do their best to provide liquidity to the banking system, says BCA Research. Recently, the Bank of England’s central bank has “taken the lead,” with total assets significantly accelerating after coming out with its own long-term refinancing operation (LTRO) program. England will provide six-month loans, as well as loans that are below market rates to banks for many years, to help drive lending to households and businesses.

Don’t Miss the Entrance Ramp
Many institutional managers have exited the commodities superhighway in favor of cash—currently at the third highest level on record—or technology stocks. In its global fund manager survey this month, Bank of America-Merrill Lynch found that advisors’ allocation to commodities reached its lowest level since February 2009.

Instead of commodities, global managers are favoring technology. BofA-ML calls tech “the most loved sector by far,” with managers’ overweighting the sector an average of more than 40 percent. On the opposite side of the scale are basic materials and utilities sectors.

We’ve discussed this discrepancy in the market: While tech companies, such as Apple, cater to our wants, materials and utilities companies supply our needs. Global resources are needed to power the world: Utilities recharge Apple’s iPhone, iPod and iPad, basic materials are needed to build the devices, and telecom companies keep us connected to loved ones.

Rather than veering in and out of sectors, there may be a better course for investors. Roger Gibson, one of the nation’s most influential voices on asset allocation, charted a hypothetical investment of a dollar from 1971 through 2011 in three different portfolios: one in U.S. stocks, represented by the S&P 500 Index, one in commodity-linked securities which is the S&P GSCI Commodity Index and one for a 50 percent allocation in each, rebalancing every year.

His math shows that a hypothetical $1 in U.S. stocks over 40 years would be worth $42.60. The dollar invested over that same time in commodity-linked securities would be worth $34.56. However, a 50 percent allocation in each investment would yield the most, making $58.31 after four decades.

Another way to take advantage of a potential upturn in commodities is by choosing dividend-paying global resources equities. Like I told Pimm Fox from Bloomberg recently, I love income with growth—the combination is an important factor in our stock selection process. In the S&P 500 Index, nearly all of the materials and utilities stocks and more than half of energy companies pay a dividend that is higher than the 10-year Treasury. Materials and utilities companies yield an average of 2.3 percent and 4.1 percent, respectively, while energy stocks pay an average yield of 2.2 percent.

Driving on side roads at 25 miles per hour is an arduous way to reach a cross-country destination. In today’s challenging economic environment, it’s wise for investors to stay the commodities course, recognize the difference between what’s in the windshield and the rear view mirror, and keep an eye on the road for unexpected obstacles.

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

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 S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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. None of U.S. Global Investors Funds held any security mentioned as of 3/31/12. Diversification does not protect an investor from market risks and does not assure a profit.