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Ready, Set, Gold: Best Months Are Just Ahead

By Frank Holmes
CEO and Chief Investment Officer

Global economic conditions are now favorable for gold as a safe-haven investment. The U.S., Western Europe and Japan are close to buckling under the weight of their sovereign debt loads, government budget deficits remain large and persistent and, as a result, faith in major paper currencies is low.

On top of this, China – the world’s No. 1 gold producer and No. 2 gold consumer – is encouraging gold investing by its rapidly growing middle class, and will likely have to increase imports to meet this new demand.

If history is any guide, gold is about to get even more attractive because we are heading into the fall and winter gift-giving season. This is the time of year that gold jewelers typically do their biggest business. The kickoff is the Muslim holy month of Ramadan, which starts next week and ends with generous gift-giving in early September.

After Ramadan comes India’s post-monsoon wedding season, and in November there’s Diwali, one of India’s most important festivals. During the fall, jewelry makers in the U.S. and Europe stock up in advance of the Christmas shopping season. And in China, there are two big gold opportunities: the week-long National Day celebration starting October 1, and the Chinese New Year in early 2011.

Looking at more than four decades of seasonality, September has been the best month of the year for gold and gold stocks.

The clear trend can be seen on the seasonality chart for spot gold. In a typical year, the September price rises 2.5 percent above the August price. And to make the case even more compelling, the gold price has risen in 17 of the 21 Septembers since 1989, by far the best success ratio of any month of the year.

In September 2009, the gold price jumped nearly 6 percent, well above the long-term average.
 

September is historically an even better month for gold stocks as measured by the NYSE Arca Gold Miners Index (GDM).

After the typically weak months of June and July, the gold miners start moving up in August and make an 8.3 percent leap in September. In September 2009, the jump was 14.5 percent. Since 1993, the GDM has been up 12 times in September and down just five times.
 

The strong correlation between the gold price and gold-mining stocks explains much of the average September jump for gold stocks, which have historically offered leverage to the gold price. In up markets, earnings growth has tended to exceed the increase in gold price. In down markets, the leverage works in the opposite direction — gold stocks also tend to decline more when the price of bullion is falling.

This leverage is shown on the chart of how bullion and the miners have fared in late-summer and fall rallies during the gold bull market that began in 2001. These uptrends have generally occurred between mid-July and early October, though in 2004 it extended into late November.

The gold price has climbed an average of 12.4 percent during the 2001-09 seasonal rallies even as the price steadily moved into four digits. As good as that result was, the impact on gold stocks was even stronger – their annual jump averaged more than 26 percent.

In 2010 the trend could be shaping up right on schedule. From a recent bottom of $1,157 per ounce in late July, spot gold had risen more than 4 percent through mid-afternoon on August 6 and the TSX/S&P Global Gold Index had gained more than 6 percent.

Bank of America-Merrill Lynch recently called for $1,300 gold by October-November 2010 as a result of the seasonal demand, and the gold watchers at CIBC World Markets in Toronto see $1,400 gold next year due to strong investment demand and inadequate supply response.

Given the current economic weakness, CIBC pointed out that during the Great Recession, “gold was one of the only investment classes that provided positive returns. This fact will not be forgotten if the next recession materializes.”

Its analysts also say that gold equities look relatively cheap compared to bullion, adding that, for the first time ever, some of the big producers are trading at price-earnings ratios below the S&P 500 Index average.

Going back to 1971, when President Nixon ended dollar convertibility into gold and deregulated the price of gold, gold stocks have tended to outperform the S&P 500 when the federal government runs budget deficits. Through 2019, the annual federal deficit is projected to average around $1 trillion, creating the potential for gold stocks to remain an attractive investment relative to the broader market for years to come.

Based on the long-term record, this may be a good time for investors to consider establishing or adding to a gold or gold-stock position in advance of seasonal demand growth. Historical patterns may be a useful guide and improve the chances for investment success, but of course, there are no guarantees that the fall of 2010 will follow the well-established trend.

Index Summary

• The major market indices were mostly higher this week. The Dow Jones Industrial Index rose 1.79 percent. The S&P 500 Stock Index gained 1.82 percent, while the Nasdaq Composite finished 1.50 percent higher.
   
• Barra Growth outperformed Barra Value as Barra Value finished 1.56 percent higher while Barra Growth advanced 2.08 percent. The Russell 2000 closed the week with a loss of 0.03 percent.
   
• The Hang Seng Composite finished higher by 2.54 percent; Taiwan was higher by 2.61 percent and the Kospi advanced 1.39 percent.
   
• The 10-year Treasury bond yield closed at 2.82 percent, down 9 basis points for the week.

Domestic Equity Market

The figure shows the performance of each sector in the S&P 500 index for the week. All ten sectors gained. The best-performing sector was healthcare, up 4 percent. Other better-performing sectors included energy and consumer discretion. The three worst-performing sectors were financials, consumer staples, and technology.

Within the healthcare sector the best-performing stock was PerkinElmer Inc., up 15 percent. The other top-five performers were Cigna Corp., Davita Inc., UnitedHealth Group Inc., and Coventry Health Care Inc.

Strengths

• The internet retail group was the best-performing group for the week, up 13 percent, led by Priceline.com Inc. The company reported second quarter earnings and revenue above the consensus estimates.
   
• The agricultural products group outperformed, rising 10 percent, led by its single member, Archer Daniels Midland Co. The company reported fiscal fourth quarter earnings above the consensus estimates. Some analysts believe that Archer Daniels Midland is positioned to benefit from disruptions in global wheat supplies because of a damaged Russian wheat crop.
   
• The managed healthcare group was the third-best performer, rising 9 percent. Health insurers have been posting higher-than-expected earnings. This week both Humana Inc. and Health Net Inc. reported earnings in excess of the consensus estimates, and they raised their outlooks for the current year.
   

Weaknesses

• The education services group underperformed, losing 9 percent. A Congressional hearing Wednesday focused on a report by the Government Accountability Office that found misleading recruiting practices at 15 different schools. Some privately held companies also allegedly committed fraud related to falsified financial aid applications.
   
• The office services & supplies group lost 8 percent, led down by Pitney Bowes Inc. which reported earnings below the consensus estimate and lowered its full-year profit outlook.
   
• The construction materials group also declined 8 percent. The group’s single member, Vulcan Materials Co., reported second quarter earnings below the consensus estimate.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
   
• As governments around the world begin to wind-down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.

The Economy and Bond Market

Treasury bonds rallied again this week on generally negative economic news. Two year Treasuries hit all-time record lows, falling below 50 basis points as prospects for a Fed rate increase appear remote.

The two big pieces of economic news this week was the ISM Manufacturing Index and the unemployment report. ISM declined for the third month in a row but still remains at a healthy level. The unemployment report disappointed as nonfarm payrolls fell 131,000, as can be seen in the chart, and June’s payrolls were revised down by an additional 96,000 jobs. The media spin was that the report was neutral, citing an increase in manufacturing employment, a roll off of census workers and an uptick in average weekly hours worked. With the economy losing 227,000 jobs in the last two months right in the middle of an economic recovery you need rose-colored glasses to think that this is in any way positive.
 

Strengths

• Nonmanufacturing ISM unexpectedly rose last month.
   
• European Central Bank President Trichet predicted growth in the third quarter and surprisingly ruled out the possibility of a double dip recession.
   
• Mortgage rates continue to fall, hitting fresh lows again this week at 4.49 percent.
   

Weaknesses

• Nonfarm payrolls fell 131,000 in July.
   
• Retailers same store sales data for July generally disappointed, and car sales for July also disappointed.
   
• Factory orders fell 1.2 percent in June, this is on top of the 1.8 percent decline in May.

Opportunities

• Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.
   

Threats

• The risk of austerity measures going too far and significantly diminishing economic growth is a real risk.

August 6, 2010 Risk and Recovery in Russia	August 6, 2010 Home Prices on the Move	August 4, 2010 Making Deals in Gold and Energy

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

Gold Market

For the week, spot gold closed at $1,205.40 per ounce, up $24.40, or 2.07 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.40 percent. The U.S. Trade-Weighted Dollar Index decreased 1.51 percent.

Strengths

• China has moved to further develop its gold market, increasing the number of banks allowed to trade bullion internationally and announcing measures that will encourage development of gold linked products.
   
• Central banks gold sales under the Central Bank Gold Agreement continue to be miniscule with roughly just 6 of the 400 tonnes allowed coming to the market so far.
   
• Another big gold company acquisition was announced earlier in the week. While some have criticized the deal as being on rather lofty terms this is positive for the valuations of the junior and mid-tiered mining companies. In one year, the deal may be viewed as a real bargain considering that the fundamentals surrounding further price gains in gold are likely to get more intense.

Weaknesses

• Over the prior three weeks, gold back ETFs have seen net liquidations but appeared to have stabilized this week. Hallgartens’ mining analyst Christopher Ecclestone suggests gold ETFs have become a lobster trap for the mining industry and mining investors, particularly in reducing the availability of funds for project financing.
   
• Both gold and the dollar enjoyed a price rise when Europe’s sovereign credit issue came to a head in May but have subsequently traded down. Keep in mind, the faster money was long gold and the dollar as the euro tanked and credit spreads went to all time highs. When the market saw Europe was going to pull out the guaranteed-to-pass stress test, there simply was no easy money to be made after that point. After all, European bonds and an oversold euro offered the next best trade to capture alpha for investors. Fortunately, these distorted bond and currency prices have now run their course with the easy money pocketed again. The next trade to go long on again favors gold.
   
• South Africa’s Department of Mineral Resources faces a credibility issue over their granting of certain non-platinum mineral rights to a director of one their larger platinum miners who subsequently resigned and diverted the assets to his own black economic empowerment company.

Opportunities

• Research company Ipsos completed a survey across 24 countries representing 75 percent of global GDP and found Asian investors are more likely to buy gold to a much greater extent than Americans or Europeans. Of the 19,000 investors interviewed a quarter said they were “somewhat or very likely” to invest in gold in the next six months. Three quarters of the respondents in India and Indonesia and more than half of those in China said they would invest in gold. Only 10 percent of the respondents in America and Europe said gold would be a likely investment.
   
• John Embry, Sprott Asset Management’s chief investment strategist, said “I would expect the last few months of the year to be quite robust which in a seasonal sense is often the case, but this time I think its going to be more robust than usual…If it’s not between $1,500 and $2,000 in the neat 18 months, I’m dead wrong.”
   
• Media speculation surfaced that President Obama will direct Fannie Mae and Freddie Mac to reset mortgage rates for all distressed homebuyers or else forgive the underwater portion of their overextended mortgage debt as a way to boost popularity and buy votes in the fall elections. As the estate tax is set to go from 0 to 60 percent next year, Warren Buffet and Bill Gates announced a pledge campaign to sign up billionaires to give away half their wealth.

Threats

• For all the naysayers that espouse there is no chance of a double dip in the economy, David Rosenberg, of Gluskin Sheff Associates, has a few more sobering comments. Consumer prices in the U.S. have fallen three months in a row (as measured by the PCE price deflator) and the last time this occurred in beginning of 2009 there was a strong plummet in the economy.
   
• The new orders component is down 12.2 points in the last two months. The last time this happened was October 2008 and in fact is a 1-in-25 event. There is only a 4 percent chance this would occur at a time that is not in or near a recession.
   
• Household employment has contracted three months in a row and the chance of that happening without the U.S. either being in or heading into a recession is unlikely.
   

Energy and Natural Resources Market

Strengths

• Wheat prices continue to climb higher with the September futures price, trading up to $7.85 per bushel, the highest level in 23 months. The price of wheat has rallied as a heat wave in Russia, dry weather in Kazakhstan, Ukraine and the EU; and flooding in Canada has damaged crops.
   
• The price of crude oil closed above $80 a barrel this week for the first time since early May on improved sentiment for global growth.
   
• AK Steel announced they are raising prices for carbon steel products by $40/ton effective immediately. The company cited increased demand for carbon steel products and higher costs as the reason for the price increase.
   
• According to McCloskey, Colombia’s steam coal exports in the first half of 2010 hit 34.02m tons, up 3.04m tons from 30.98m tons in the same period last year.

Weaknesses

• Metal Bulletin reports that the China Iron & Steel Association (CISA) said that steel producers in China will have to cut production in the second half of this year on the back of an oversupply situation.
   
• China, the biggest driver for global commodity demand, said its manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investment in energy-intensive and polluting factories. The Purchasing Managers’ Index fell to 51.2 from 52.1 in June, according to the Federation of Logistics and Purchasing.

Opportunities

• Rio Tinto said Tuesday that it would invest a further $790 million to expand the annual capacity of its iron ore operations in the Pilbara region of Western Australia to 330 million metric tons by 2016 from the current capacity of less than 225 million metric tons.
   
• China’s equity rally over the last few weeks could be a positive leading indicator for global stock market; China has appeared to reach inflection points prior to other global markets going back several years, according to Bloomberg.

Threats

• According to Bloomberg, Codelco, the world’s biggest copper producer, suggested that copper demand in China is likely to decline in the second half of the year due to government actions to tighten lending and control inflation.
   

Emerging Markets

Strengths

• China’s official non-manufacturing Purchasing Managers’ Index (PMI) climbed to 60.1 in July from 57.4 in June, indicating a fifth consecutive month of expansionary activity in service industries.
   
• Macau’s casino revenue surged 70 percent year-over-year to $2 billion in July, representing 20 percent growth month over month, as bettors returned from gambling on the World Cup soccer games.
   
• South Korea’s exports continued to surprise on the upside, increasing 29.6 percent in July from a year earlier, as the global recovery remained resilient and contagion from the European debt crisis stayed limited.
   
• Indonesia’s GDP expanded 6.2 percent year-over-year in the second quarter, faster than expected and accelerating from 5.7 percent in the first quarter, thanks to strengthening investments and rising consumer spending.
   
• Domestic auto sales in Turkey rose 113 percent year-over-year in July, climbing to 339.6 units. Historically low rates have become a major driver of auto sales, according to Merrill Lynch, and this appears to be borne out month-after-month.
  

Weaknesses

• China’s official manufacturing Purchasing Managers’ Index (PMI) declined to a 17-month low of 51.2 in July, lower than expected, from 52.1 in June. The private HSBC China manufacturing PMI fell into contractive territory at 49.4 in July from 50.4 in June. The combined effect from the ongoing property tightening and energy-intensive plant closures contributed to the slowdown, apart from seasonal weakness.
   
• China’s total vehicles sales decreased 6.7 percent month over month to 1.06 million units in July, a third straight sequential decline, with inventories rose to 58 days from 55 days in June. Passenger car sales declined 3.4 percent month over month.
   
• Russia, crippled by drought, banned all exports of grain after millions of acres of Russian wheat withered in a severe drought. Pressure was also brought to bear by multinational grain trading companies, who, according to Bloomberg, have been lobbying for the ban so that they could declare force majeure, to escape their obligation to deliver.
   

Opportunities

• Despite Indonesia’s 21 percent rally since the beginning of the year, the top performance in Asia, the country’s stock market capitalization remains one of the smallest as a percentage of GDP among major emerging markets. With low indebtedness, rich natural resources, political stability, appreciating currency, and a less export-dependent domestic economy, Indonesia may continue to attract foreign investors.
  
• Exchange rate appreciation is the likely policy response should grain shortages drive food inflation higher in Russia. Forward contracts on the ruble were bid up to their highest level in three months, as central bank scaled back purchases of foreign currencies.
   

Threats

• Chinese authorities do not seem complacent about reining in property speculation, with recent news on bank stress testing under a worst case scenario of 60 percent decline in property prices, suspension of mortgages for third home purchases in first tier cities, and increase of down payments to 60 percent and mortgage rates to 1.5 times the benchmark rate in other cities.
   
• Grain export ban could negatively affect food producers in Russia, as well as the operators of export grain terminals. Distillers and brewers may also see their feedstock costs go higher.
   

Leaders and Laggards

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

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.

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 6/30/10:
AK Steel: 0%
Archer Daniels Midland Co.: 0%
Cigna Corp.: 0%
Codelco: 0%
Coventry Health Care Inc.: 0%
Davita Inc.: 0%
Health Net Inc.: 0%
Humana Inc.: 0%
PerkinElmer Inc.: 0%
Priceline.com Inc.: 0%
Pitney Bowes Inc.:0%
Rio Tinto: 0%
UnitedHealth Group Inc.:0%
Vulcan Materials Co.:0%

*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 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 index benchmark value was 500 at the close of trading on December 20, 2002.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Toronto Stock Exchange Gold and Precious Minerals Index is a capitalization-weighted index designed to measure the performance of the gold and precious minerals sector of the TSX 300 Index.
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 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 ISM Services Non-Manufacturing Index is a national non-manufacturing index based on a survey of roughly 370 purchasing executives in industries including finance, insurance and real estate (or FIRE), communications and utilities. This sister of the Purchasing Managers’ Index measures service-sector activity.
The Personal Consumption Expenditures (PCE) price deflator is a measure of inflation based on changes in personal consumption.
The ISM New Orders Index is prepared by the Institute of Supply Management and is an indicator of the levels of new orders from customers.
The China Purchasing Managers’ Index for non-manufacturing, a gauge of the construction, postal, software, aviation, railway, retailing and catering sectors, is issued by the China Federation of Logistics & Purchasing and co-compiled by the National Bureau of Statistics.