The region has long carried an emotional attachment to gold. In fact, gold was one of China’s earliest forms of currency way back in 1091 B.C. With rising average incomes and wealth levels leading a new of age of prosperity in China, citizens are snatching up gold at an unbelievable rate. According to the Beijing Municipal Commission of Commerce, sales of precious metals jumped nearly 50 percent from the same time last year during China’s week-long New Year’s holiday in January.

This type of momentum is a catalyst for gold prices to remain strong in 2012.

This is one aspect of the American Dream Trade I discuss in my letter for the Report. There’s also an informative Q&A with China analyst Xian Liang who talks about the dramatic transformation his hometown of Shanghai has undergone over the past 20 years.

Check out the Shareholder Report page to view the full contents of the report. If you would like to request your own copy, send your name and address to editor@usfunds.com.

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

Take a look at the small-cap Russell 2000 Index which was decimated in July, days before the 50-day moving average fell below the 200-day moving average. I discussed how traders buy or sell off of these short-term and long-term moving averages when I wrote about the “golden cross” a few weeks ago.

This year is off to such a great start that if small caps continue this momentum, we should see the 50-day moving average for the Russell 2000 cross above the 200-day soon. This would likely drive new investor interest in this space.

Copper also took a few major blows last year, first in July and then in September as a result of the carry trade. To gain a yield advantage, large investors use the carry trade to advantageously borrow in yen (because interest rates are low), convert it to a stronger currency and invest in higher-return, higher-risk assets, specifically commodities and dividend-paying emerging markets stocks.

When the yen began to strengthen against the dollar in August and again in October, Japan intervened to weaken its currency. The yen quickly reversed, causing the higher-return assets to decline.

As our commodities table shows, copper was among the worst-performing commodities that we track, declining more than 20 percent last year. This lagging performance came despite supply/demand fundamentals that argued for higher prices.

We expected copper to eventually revert to its long-term mean and it only took a few positive drivers to drive prices higher. One of these drivers was the JP Morgan Global Manufacturing Purchasing Managers’ Index crossing above the three-month moving average, which occurred at the end of December. Ninety percent of the time, when this has happened, copper was positive over the next three months, with a median return of 10 percent over the following three months.

Additional drivers that have provided the impetus for higher prices include a significant increase in money supply, interest rate cuts around the world, and central banks dropping their reserve rate for banks.

Look for this trend to continue.

Also Read:

• Anticipating the Golden Cross
• Junior Resources Companies Set to Outperform?
• Have Winds Shifted to Provide Relief to Investors?
• The Periodic Table of Commodity Returns

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

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 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.

It summarizes the significant milestones reached over the last decade or so, reminding us how far China has come. One significant milestone marking the road of economic growth began when China became the largest consumer of steel, then shortly after, copper and energy, as the government focused on its massive buildout of infrastructure projects to support expected urbanization growth and rising incomes.

By 2001, China was buying more mobile phones than the U.S. as Chinese consumers spent rising discretionary income on the latest technology. Spending in mobile computing has also continued, as China also has the largest number of Internet users, the biggest personal-computer market and the largest smartphone market.

Looking into the next decade, The Economist also plots an estimation of when China’s GDP will be larger than that of the U.S. Using the assumptions of an average real GDP growth of 7.75 percent in China and 2.5 percent in America, inflation averaging 4 percent and 1.5 percent in China and the U.S., respectively, and yuan appreciation of 3 percent per year, China stands to be the largest economy by 2018.

However, if China grows faster with all the other factors remaining the same, the country’s GDP could be larger than the U.S.’s GDP by 2017. The magazine lets you change these assumptions for yourself so you can see when China will be the world’s largest economy. Go there now.

By clicking the link above, you will be directed to a third-party website. 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.

Critical thinking is vital to our investment process as a means to ensure that we question assumptions. One way our portfolio management team practices a critical-thinking process is through a weekly S.W.O.T. (Strengths-Weaknesses-Opportunities-Threats) analysis of key factors influencing global markets. By hammering out the positives and negatives, we can paint an accurate picture of the realities we face. The S.W.O.T. model allows us to avoid pitfalls by weighing the evidence.

Lack of critical thinking sometimes leads to bubbles, such as the one taking place in the parabolic rise in the number of articles foretelling China will experience a “hard landing.” Last fall, more than 1,000 articles questioned the possibility of a “China crash,” according to data from BCA Research. This is twice as high as the number in 2004, when fear articles reached 500. Gordon’s bearish pronouncements only added to the extreme negativity groupthink surrounding China’s economy.

Investment strategist Keith Fitz-Gerald, a long-time friend of mine, wrote an excellent article comparing today’s doomsday sentiment of China to the naysayers who forecasted the demise of the U.S. during the market bottom of March 2009.

Throughout the past century, U.S. stocks went through many secular bear markets. Keith points to the 1929–1932 period when the Dow Jones Industrial Average declined by nearly 90 percent, along with pointing out the Dow’s loss of more than 52 percent from 1937 to 1942. Also, beginning in 1901, 1906, 1916 and 1973, there were four “40+ percent declines,” says Keith.

Americans have also endured two world wars, the Great Depression, presidential assassinations and the deadliest terrorist attack ever seen on U.S. soil. What’s important for investors to remember was that each significant market decline presented a “great buying opportunity” with U.S. stocks rising double-, or in some cases, triple-digits, writes Keith.

And, over the past 100 years, the Dow gained an outstanding 24,000 percent.

So despite setbacks including inflation, Tiananmen Square protests, the Asian financial crisis of 1997, and the SARS scare, over the last 30 years, China’s average annual real GDP has grown 10 percent.

With rising incomes and increasing urbanization, we believe China is pursuing the American Dream, and the government has shown great determination to build the necessary infrastructure along with a robust urban labor market. On a purchasing power parity basis, China’s share of world GDP has risen significantly, from around 3 percent in 1985 to a current world share of nearly 16 percent.

Yet, China is only in the middle of its supercycle with several stages to come. Supercycles, or what we call S-curves, are long, continuous waves of boom and bust inherent in human history. While the overall trend is up, periods of volatility are an intrinsic part of this supergrowth. Not every down period is a sign of demise—even a broken clock is right twice a day. It’s the wise active manager who learns to manage expectations by understanding the difference between short-term corrections and secular long-term bear markets.

While “risks certainly cannot be taken lightly,” BCA Research believes that the risk of a China crash is “exaggerated.” For example, bears often point to “shadow” banking practices to support their case.

Keith believes Beijing was “deliberately tapping on the brakes,” in 2009, when the central bank increased the reserve required ratio for commercial banks, effectively reducing the amount of money banks could loan. This resulted in a sharp decrease in the amount of credit available and significantly increased rates from 4.78 percent to 8.06 percent, according to BCA.

One negative consequence of China’s quantitative tightening was that it forced some private firms unable to gain loans from state-controlled banks to seek credit from “loan sharks at sometimes deathly high borrowing costs,” says BCA.

We sent our research analyst to his home country of China to find out how prevalent this problem was. The Shanghai-native Xian Liang joined an investigative tour led by research firm China International Capital Corporation (CICC) to the Zhejiang Province. His group had access to executives from banks, private lenders and local government agencies, many of which he found knowledgeable and shrewd.

During his research trip, he learned about an extensive survey done by Alibaba of 2,800 smaller and medium enterprises, which showed that half of the enterprises needed external financing, and the companies that currently borrow from banks—only 13 percent of Alibaba’s sample—faced pretty stringent risk management practices.

For example, one commercial bank that lends primarily to smaller companies checks the electric and water meters of the businesses to make sure they are actually using energy. They delve into the personal habits of the private entrepreneurs to gauge if the executives are creditworthy and financially sound, as it is believed that character has a lot to do with one’s willingness and ability to repay.

Overall, Xian understood the alleged systemic credit risks in the banking system to be manageable at this point. The government had been prudent to not only raise interest rates six times, but it also increased the reserve limit banks must set aside against loans.

BCA identified an additional unintended consequence of the tightening. Some banks tried to bypass tight regulatory controls so they could extend credit, leading to an “increase in off-balance-sheet activities,” according to BCA. This activity was recognized by the government, and the central bank has “increased its oversight of off-balance-sheet items.”

BCA says that in a way, “‘shadow’ banking activity can be viewed as an attempt by market participants to create more market-driven interest rates.”

In a report of Asian banks, CLSA Asia-Pacific Markets found that non-performing loans (NPL)—those assets not yet delinquent but that have fallen behind schedule—remain near a 12-year low in China, and the NPL-to-loan ratio is under 1 percent. This default rate is extremely low compared to the 1999–2002 timeframe, and it is believed that no large debt defaults are expected due to China’s ability to create liquidity.

Keith Fitz-Gerald says the government has an abundance of liquidity. It has set aside $3.2 trillion in reserves, amounting to half of the country’s entire GDP. Keith says this could potentially be spent on recapitalizing its banking sector, with “plenty of money to spare.”

Besides the reserves, China has more fiscal and monetary firepower than several emerging markets. The Economist analyzed 27 emerging markets and ranked the country’s ability to ease monetary policy, taking into consideration inflation, excess credit, real interest rates, currency movements and current-account balances. Then it created a “fiscal-flexibility index” which included government debt and the budget deficit. A score of 100 means a country has no flexibility to ease policies; a score near zero means a greater ability to “let out the throttle.”

This chart “suggests that China, Indonesia and Saudi Arabia have the greatest capacity to use monetary and fiscal policies to support growth,” compared to other listed emerging markets, says The Economist.

Many bearish articles that appeared last fall relied on generalities taken out of context. They offer anecdotes of ghost cities, empty shopping malls, robber barons, worker suicides and citizen protests as reasons the country as a whole is headed for a crash. These efforts to highlight China’s economic imperfections are akin to saying the U.S. is a poor nation because impoverished areas still exist. As analysts, it is our job to research and make a rational determination whether the facts are material or superfluous.

“China is merely going through the first uncomfortable growing pains of its adolescence,” Keith says, and he does not believe it’s the end of the world if China goes through a market correction. What he’ll be doing instead is investing.

As our team continuously weighs the evidence of China’s economy, I agree with my friend. Moments such as these offer buying opportunities for global investors.

We believe China is a buying opportunity.

I’ve covered this topic often in recent weeks. Take a moment to read my other positive observations on China:

• Filling an Energy Order with Chinese Takeouts
• It May Take a Dragon to Breathe Fire into Markets
• The Great Urban Migration of China
• Have Winds Shifted to Provide Relief to Investors?

Past performance does not guarantee future results. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

None of U.S. Global Investors Funds held any of the securities mentioned as of 12/31/11.

In 2011, junior miners were shunned, but Global Resources Fund (PSPFX) co-portfolio managers Evan Smith and Brian Hicks pointed out to me this week that we’re beginning to see signs of small-cap strength.

This chart compares the performance of the S&P TSX Venture Index (TSX), which holds a basket of junior resources stocks, to the returns of the Morgan Stanley Commodity Related Index (CRX). You can see that the junior stocks began to outperform around July 2010 and carried that momentum over a period of six months, reaching a high in March 2011. That’s when investor took a turn for the worse and volatility began picking up, sending the TSX tumbling compared to the CRX.

The TSX versus the CRX measure hit a low on December 14, well below the historical average. In technical terms, the December 14 level was 1.37 standard deviations below the two-year mean. Small-caps have only received this level of punishment a little more than 10 percent of the time over the past two years.

If we assume a reversion to the mean—which means these junior stocks would return to the two-year normal range—small-caps could outperform large caps by 20 percent. This bounce back could have a big impact on the Global Resources Fund because of its junior resources holdings.

Recent events have driven the outperformance of riskier investments—we’ve discussed two of the three recently. Emerging market countries including Brazil, India and China have switched from a tightening mode to an easing cycle, which generally has had a positive effect on the markets. For example, when China lowered its required reserve ratio, there was a record increase in M-2 money supply shortly after.

Also, the JPMorgan Global Manufacturing Purchasing Managers’ Index crossed above the three-month moving average. Going back to 1998, there have only been 20 times this event has occurred, and each time, it has been associated with higher prices for oil, copper, materials and energy.

In December, the European Central Bank began its Long Term Refinancing Operation (LTRO) program, offering banks three-year loans at a discount. LTRO has helped to reassure markets and boost equities.

From a technical perspective, the TSX is now above its 50-day moving average, which may be self-fulfilling and could help attract money flows to this area of the market.

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.

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. The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index. 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.

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.

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.

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

We told you about one merger and acquisition (M&A) deal out of China. Last year, Sinopec acquired Canadian energy company Daylight Energy for $2.1 billion in cash, a whopping 120 percent premium to Daylight’s share price prior to the announcement. With this purchase, Sinopec gains access to more than 300,000 acres rich with oil and natural gas.

It’s no secret that China has been increasingly relying on imports of crude oil, natural gas and coal, but the country has been actively seeking other means to acquire these commodities. A growing grab for global resources has encouraged “Chinese domestic entities to acquire overseas resource assets, especially in geopolitically more stable regions” says BCA Research.

This Chinese takeout development has been on the rise over the past decade, according to BCA. The number of overseas acquisitions—most of which have been in commodity-related sectors—has climbed from only a few in 2000 to more than 300 in 2011. Total deal value per year has also grown substantially, from about $1 billion in 2000 to almost $60 billion last year.

Years ago, China did not have a global footprint, but over the last few decades the country has transformed itself into a dynamic global power. It boasts the largest automobile market and the largest consumer of steel, copper, mobile phones, and energy. It has built 18,000 miles of high speed rail connecting 250 cities with 5,500 skyscrapers. This tremendous infrastructure growth has amplified and globalized M&A activity, which has a positive effect on commodity-related stocks.

For commodity equity investors, BCA says to “expect Chinese firms to play an increasingly important role in global capital markets,” as the Asian giant looks for cost-effective ways to power buildings, fuel vehicles and keep lights burning.

Also read:

• It May Take a Dragon to Breathe Fire into Markets
• Are the Stars Aligned for a Year-End Rally?
• Case Study: Buyouts Crystallize Value in the Market

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

The global population is expected to reach a staggering 9 billion over the same period, but it isn’t population growth that will drive the increase in energy demand. Instead, rising affluence and higher living standards in regions such as Africa, Latin America, the Middle East and India will be the biggest factors. ExxonMobil says this is due to “the human desire to sustain and improve the well-being of ourselves, our families and our communities.”

This new affluent class of people is expected to fuel a dramatic increase in the number of households around the world—rising 50 percent to 2.8 billion by 2040. ExxonMobil says growth will be particularly strong in Africa, China, India and Latin America. These areas will account for about 60 percent of all households in the world by the end of the forecast. Additionally, the number of personal vehicles is expected to double to 1.6 billion vehicles worldwide.

Today, roughly 1.3 billion people, one-fifth of the world’s population, lacks access to electricity and these new households will need energy for lighting, heating, cooking, hot water, air conditioning and refrigeration, ExxonMobil says. Filling this gap will lead electricity generation to be the fastest-growing source of energy demand through 2040, up around 80 percent. Other main sources of demand growth for electricity will come from industrial and commercial sectors.

While China is forecasted to remain the world’s largest user of industrial energy, ExxonMobil says the country will see a peak in energy demand around 2030. Meanwhile, Africa and India will become the two main drivers of new demand over this time period as the number of households, retail stores and other commercial activities in those regions increases dramatically. Industrial demand for energy in India is expected to triple by 2040.

The total amount consumed isn’t the only area of the energy sector set to experience changes in the coming decades. ExxonMobil also says “investments and new technologies, applied over many years and across multiple regions, will enable energy supplies to grow and diversify.” While oil will remain the world’s top energy source, natural gas will be the fastest-growing major energy source, with combined global demand rising about 60 percent from 2010 to 2040.

After peaking around 2025, demand for coal will experience its first long-term decline since the start of the Industrial Revolution as OECD countries and China shift toward lower-emitting sources of energy. However, oil, natural gas and coal will still account for about 80 percent of the world’s energy demand in 2040.

These are extended projections, and in today’s rapidly developing world, there will certainly be temporary setbacks and unforeseen events that could affect whether ExxonMobil’s forecast holds true. However, when the world’s largest energy company offers you a glimpse into where they believe the market is headed, you should definitely take notice.

Read ExxonMobil’s Outlook for Energy

The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of December 31, 2011: ExxonMobil.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

I recently spoke with Matt Nesto, host of Breakout at Yahoo! Finance, about the current climate for commodities and what I expect to see during the first half of 2012. We kicked off our discussion talking about oil’s surge above $100 per barrel and what price implications rising tensions with Iran could have if the situation boils over.

I explained that I don’t think a European Union (EU) ban on Iranian oil imports would have a significant long-term effect on oil prices. The real long-term catalyst is increasing demand for oil from the developing world. Regions such as Africa don’t have debt problems like the U.S. and the EU, and the GDP growth rates for many of these economies is around 7 percent.

Watch the Interview

Matt and I then transitioned our discussion to gold where I explained how the Fear Trade and the Love Trade are driving gold prices. I highlighted the staggering amount of debt that needs to be rolled over by the world’s developed economies: $2 trillion in Europe, $3 trillion in Japan, and $3 trillion in the U.S. That’s a combined $8 trillion!

To participate in the growth in gold, I discussed how gold miners are attractively priced today with historically low book values and offering abundant cash flows and rising dividends. Watch the interview to hear my picks.

Watch the interview

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 following securities mentioned in the interview were held by one or more of U.S. Global Investors Fund as of December 31, 2011:  Yamana Gold, Randgold Resources, Freeport-MacMoRan, Franco Nevada, Market Vectors Gold Miners ETF.

The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

By clicking the links above, you will be directed to a third-party websites. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

At the Cambridge House’s Vancouver Resource Investment Conference this week, I am part of a special debate on whether China will boom or bust with bestselling author Gordon G. Chang. The title of Chang’s book, The Coming Collapse of China, states his position quite clearly and I look forward to the intellectual challenge of convincing him otherwise.

I’ve found many people are particularly energized about predicting a hard landing for China’s economy, but I believe the country is no sinking ship. China isn’t fast-approaching an iceberg in the dark of the night like the Titanic. Beijing has long been anticipating the ice chunks and subtly adjusting the rudder around inflation without steering the economic ship too far off course.

China’s government angled its vessel away from inflation by increasing the required reserve ratio (RRR) every month for the first six months of 2011 and raising interest rates three times. Once inflation was sufficiently under control, the country began to steer in a direction of growth again.

Recent results show how positive this easing has been. In its latest research this week, BCA Research reported that despite the policy tightening of 2011, the “most recent economic data out of China has all but confirmed that the economy remained incredibly resilient.”

One significant data point is the sharp increase in money supply. After the country hit a low level of monthly money supply growth, the three-month change in M-2 money supply climbed to record levels during the final month of the year, says Greg Weldon of Weldon Financial. He says that money supply “pegged at +6.419 trillion, easily exceeding the previous record 3-month increase, seen at the peak of the global crisis, in March of 2009.

Easing in China is expected to continue through 2012, with ISI Group anticipating a potential RRR cut after Chinese New Year celebrations in February, then possibly again in April, June and August. Also, loans “have become more readily available in recent weeks,” says ISI. This should all be bullish for commodities, such as copper, oil and gold, and also trickle down to boost share prices of natural resources equities.

Chinese Copper Inventories Increase
Base metals were the laggards among commodities last year, with copper one of the worst performers, losing 21 percent. (Download our Periodic Table of Commodities now.)

Global consumption of copper increased only 4 percent in 2011, which is lower than the 10 percent growth in 2010, but higher than the decade-average of around 3 percent, says Macquarie Research. China’s consumption of copper—which makes up 40 percent of the global demand—was a primary reason for decreased consumption, as the country was drawing down on its own supply throughout the year.

This can’t continue forever, Macquarie says, adding that “demand made on new supply direct from producers would need to rise, with positive implications for prices.” Europe’s largest copper fabricator agrees with that sentiment, indicating that it anticipated China’s copper demand would be strong in 2012, according to Barclays.

A recent rise in copper imports is likely the result of restocking China’s depleted copper inventories. As is typical for China, after the metal fell in price last fall, the world’s largest buyer of the metal advantageously scooped up copper to replenish its cupboard, says Barclays Capital. As shown below, copper inventories into China reached a record low in 2011, but have sharply reversed recently.

An increase in copper demand places pressure on the supply side, which continues to experience shortfalls in mine output versus forecasts. These are caused by a variety of factors, such as weather, labor strikes, or simply a poor grade deposit. While Macquarie says there’s a possibility the world’s two largest copper mines, the Los Bronces mine in Indonesia and Peru’s Escondida mine, could deliver year-over-year increases in production, it concludes “it is highly unlikely that miners will succeed in delivering this level of additional output in total.”

While Chinese demand growth for commodities is not expected to be as robust as it has been historically, demand is expected to pick up throughout 2012. As confidence returns, Macquarie says there should be “a slow gradient of recovery in the near term before gathering pace into the mid-year.”

Increasing Reliance on Energy Imports
China’s rapid growth and increasing reliance on other countries for key resources has made a powerful case for commodities over the past several years. These three charts from BCA Research illustrate that once the country shifted from exporting to importing a commodity, there was no looking back.

You can see in all three how dramatically the energy balance has shifted to an ever-increasing dependence on imports. In each major commodity, after China began importing, growth took off.

China became a net importer of crude oil in 1994, and today, is the second-largest oil importer in the world. BCA forecasts the country is expected to surpass the U.S. as the largest oil importer in only a few years.

To obtain more natural gas, China spent years building massive pipelines to transport the commodity from Russia and other western Asian counties, and since 2006, natural gas imports have “gone vertical,” says BCA.

Coal, which accounts for the majority of total energy consumption in China has also been imported since 2008, and since that time, imports rose substantially.

Even with these imports, energy consumption is only a fraction of developed countries. The China story is just getting started: Urbanization just surpassed the 50-percent mark, hitting what I believe to be the pivotal moment that dramatically shifts buying patterns, driving an enormous demand for housing, consumer staples and durable goods. You ain’t seen nothing yet!

Happy Chinese New Year!

This weekend, the world’s largest annual migration takes place. Millions of people in China head home to celebrate Chinese New Year and welcome in the Year of the Dragon. U.S. Global Investors’ research analyst and Shanghai native Xian Liang recently talked about the significance of the dragon in Chinese culture:

“Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well.”

After bounding through a tough Year of the Rabbit, we anticipate the Year of the Dragon will breathe fire back into Chinese markets in 2012. Kung hei fat choy!

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

Many investors tend to focus on how one country performed over any given year, but a year of results is less relevant than what this chart highlights: the concept of mean reversion. This means that over a long period of time, even as returns fluctuate dramatically, performance eventually reverts back toward a mean or average.

Take Turkey for example, which underperformed the other 18 emerging countries in 2002. That year, stocks in Turkey declined nearly 25 percent. Yet, in six of the 10 years shown, Turkey was a top-half performer among emerging nations. Although Turkish companies decreased 20 percent in 2011, we believe that this year Turkey will revert to its long-term average.

We’ve already seen many of the countries, including Turkey, that were hit the hardest in 2011, bounce back in the early stages of 2012. Brazil, which declined 18 percent in 2011, has already made up some ground in the first two weeks of 2012, with an increase of 15 percent as of January 18. Hungarian stocks declined 20 percent in 2011, and have risen 9 percent so far in 2012.

Because emerging countries’ performance can vary due to their currency, inflation, liquidity or government policies, we believe professional active money managers such as U.S. Global Investors are essential for globally minded investors. We follow these interrelated factors and travel to the far corners of capitalism to “kick the tires” to uncover the world’s best investment opportunities.

Download and print a copy of your own here.

Past performance does not guarantee future results.

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

When I visited places such as Shanghai and Beijing this fall, China’s development and escalating use of global resources was evident, as was the fact that the country’s population has become more urban than rural, which has been reported by Bloomberg.

In our 2012 Outlook Webcast, we talked about two charts from BCA Research’s December report when the firm discovered this “historic moment.” BCA compares China’s urbanization process to South Korea’s. In the 1960s, the urbanization rate in South Korea grew from around 30 percent to a mature 80 percent rate by 2000.

If China follows this path, another 30 percent of the population is expected to move to the cities by the year 2030… less than 20 years from now, says BCA. This movement means there will be more than a half-billion city dwellers in the next 20 years or about 200 million new urban households.

I believe this urbanization trend just hit the pivotal moment that dramatically shifts certain buying patterns into a higher gear, driving an enormous demand for housing, consumer staples and durable goods.

By clicking the link above, you will be directed to a third-party website. 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.

The following securities mentioned were held by one or more of U.S. Global Investors Fund as of 12/31/11: Apple, BHP Billiton, Caterpillar.

A precious metal was the best performer but it’s probably not the one you were thinking of. With an impressive 20 percent annualized return, silver is king of the commodity space over the past decade with gold (19 percent annualized) and copper (18 percent annualized) following closely behind.
Notably, all commodities except natural gas outperformed the S&P 500 Index 10-year annualized return of 2.92 percent.

Last year did not seem reflective of the decade-long clamor for commodities. In 2011, only four commodities we track increased: gold (10 percent), oil (8 percent), coal (nearly 6 percent), and corn (nearly 3 percent). The remaining listed on our popular Periodic Table of Commodity Returns fell, with losses ranging from nearly 10 percent for silver to 32 percent for natural gas.

Download a pdf of the commodity table here.

I think this chart is a “must-have” for investors and advisors because you can visually see how commodities have fluctuated from year to year. Take natural gas, for example, which posted outstanding increases in 2002 and 2005, but has been a cellar-dweller for the last four years as a result of overabundant supply and softening demand. The industry is also still trying to digest breakthrough technology that opened the door to vast shale deposits at a much lower cost.

On the other hand, oil finished in the top half of the commodity basket six out of the past 10 years. No stranger to volatile price swings, oil possesses much more attractive fundamentals as we continually see restricted supply coupled with rising demand.

After 11 consecutive years of gains, some are questioning whether gold can keep its winning streak alive in 2012. One of those skeptics is CNBC’s “Street Signs” co-host Brian Sullivan. In an appearance last Thursday, I explained how I believe the Fear Trade and Love Trade will continue to fortify gold prices at historically high levels.

I explained that one of the reasons the Fear Trade will persist in purchasing gold is the ever-rising government debt across numerous developed countries. During our Outlook 2012 webcast, John Mauldin kidded that the Mayans were not astrologers predicting the end of the world, but economists predicting the end of Europe. Whereas John believes the U.S. has wiggle room to decide on how to deal with deficits and debt, Europe and Japan are running out of time.

The situation is quite somber when you consider how much debt Europe, Japan and the U.S. owes this year alone, says global macro research provider Greg Weldon. In his preview of 2012, Weldon says that the maturing principal and interest on U.S. Treasury debt due this year totals just under $3 trillion. Austria, Belgium, France, Germany, Italy, Portugal and Spain together face nearly $2 trillion in principal and interest payments. Japan is the leader in the clubhouse, owing just over $3 trillion in 2012. With the combined debt for these developed countries totaling nearly $8 trillion, the interest payments alone dwarf the total GDP of many countries in the world.

This week, Germany sold a five-year government note for less than 1 percent, the lowest interest rate on record. Bids for the low-yielding debt were three times more than the amount sold, even as the consumer price index stands at more than 2 percent year-over-year. This means that investors have so few acceptable safe havens they are willing to accept negative real rates of return.

This is good news for gold as a safe haven alternative against depreciating currencies such as the euro, the yen and the U.S. dollar.

The overwhelming debt burden in developed countries translates to an expected slowdown in imports from the emerging world. However, the grandest of those countries, China, likely won’t be affected as much as some people assume. This is “the biggest misconception” about the country’s economy, says CLSA’s Andy Rothman. Exports only play a supporting role for the Chinese economy. The world’s second-largest economy is actually largely driven by domestic consumption from a population more than 1 billion strong with more padding in their wallets.

Andy says 10 years of tremendous income growth and little household debt, make China the “world’s best consumption story, for everything from instant noodles to luxury cars” in 2012.

According to December Chinese trade figures, month-over-month and year-over-year imports of aluminum and copper increased significantly. This may be a result of China restocking ahead of Chinese New Year, but M2 money supply growth rapidly rose in recent months, a sign the government is attempting to reaccelerate the economy. Also, the urban labor market has been robust over the past two years, with an annual change just below 5 percent—a record high over the past 15 years.

Along with rising urban employment, income growth has been tremendous as well. CLSA says that last year was “the eleventh consecutive year of 7 percent-plus real urban income growth,” with disposable incomes rising 152 percent over the past decade.

Investors shouldn’t expect China’s growth to be as robust as it’s been, as the country’s fixed asset investment growth drops below the 25 percent year-over-year pace of the last nine years, says CLSA. China’s 12th Five-Year Plan has less infrastructure spending compared to the 11th Five-Year Plan. Transport and rail spending is also expected to drop, with only water and environmental protection spending growth rising.

As shown in the BCA chart above, GDP growth has declined below 10 percent, but the growth is currently not the lowest we’ve seen in recent years. CLSA believes that China will prevent GDP growth from slipping below 8.5 percent for the full year, as “Beijing has the fiscal resources and political will to quickly implement a much larger stimulus.”

Judging by the record number of articles mentioning a hard landing in China in late 2011, investor sentiment has swung from euphoria to excessive pessimism, according to BCA Research. Last fall, more than 1,000 articles discussed the risk of a “China Crash.”

As I’ve mentioned before, contrarians view extremely bearish sentiment as a potential attractive entry point. BCA believes the pessimism has been priced in, as technical indicators as well as valuations for domestic and investable markets appear “deeply depressed.”

What will happen over the next 10 years? I believe the supercycle of growth across emerging markets will continue with rising urbanization and income rates. This bodes well for commodities, especially copper, coal, oil and gold, and we’ll continue to focus on companies that will benefit the most from these much-needed resources.

By clicking the link above, you will be directed to a third-party website. 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. The following securities mentioned in the interview were held by one or more of U.S. Global Investors family of funds as of December 31, 2011: Goldcorp, Franco Nevada, Randgold Resources.

The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. 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 U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. 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.

Milken’s index measures U.S. cities’ economic performance based on job creation, retention and quality as well as where businesses are growing and thriving.

San Antonio has experienced widespread growth from many different areas, most notably, military expansion, biomedicine and cybersecurity. Education and health services jobs in San Antonio have been steadily increasing over the 2007-2010 timeframe, whereas job growth in the same areas across the U.S. has decreased.

The growth in jobs fueled a net gain of nearly 30,000 new residents in 2010, roughly 2 percent of total population, and as a result, the city’s residential sector weathered the recession better than the overall U.S., and consumer spending continued to expand.

The Alamo City’s “attractive business climate and less onerous regulatory environment attracted expansions from firms headquartered elsewhere and retained homegrown entrepreneurs,” says the Milken Institute.

San Antonio wasn’t the only Texas city receiving accolades. Overall, four out of the top five and nine of the top 25 best-performing cities are located in the Lone Star State. In fact, during the 12 months ending June 2011, the entire state of Texas accounted for one of every five jobs created in the U.S., according to the Milken Institute.

The energy sector has provided the spark for much of the job growth in South Texas. Giants such as Schlumberger and Halliburton have set up offices in San Antonio as exploration and drilling activity of the Eagle Ford Shale formation ramps up. The Milken Institute says natural resource mining increased nearly 8 percent from June 2010 to June 2011, supporting thousands of oil and gas field service jobs.

These aren’t minimum wage jobs, either. Similar to oil sands production in Alberta, Canada, a person with a high school diploma can make a six-figure income. Also, after moving to San Antonio from Canada when I purchased the company more than 20 years ago, I can assure you the weather in South Texas is much more pleasant.

Growth seems set to continue for San Antonio, as Boeing recently announced it was moving its aircraft maintenance and modification work to San Antonio. About 300 to 400 jobs will be created over the next few years.

The Alamo City’s top ranking is one pocket of strength we recognize among the mire of pessimism. I’m proud to see U.S. Global Investors located right in the middle of that pocket.

By clicking the link above, you will be directed to a third-party website. 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.

The following securities mentioned were held by one or more of U.S. Global Investors Fund as of 12/31/11: Halliburton.

Like sprinkler systems, some traders have automatic triggers that initiate the buying or selling of blocks of stocks. One trigger where we generally see money move in and out of the market is based on the “golden cross,” which identifies when the 50-day short-term average crosses above the 200-day long-term average of a stock or index. You’ll find that many charts on Yahoo, Google, Bloomberg or other financial websites default to show this information along with the performance.

There’s a good historical reason traders use this mechanical trigger. Over the past 20 years, the 50-day line crossing above the 200-day average of the S&P 500 Index resulted in surprisingly bullish data. Of the nine times this event has occurred in those 20 years, the S&P 500 averaged a 23 percent increase before the market reversed.

One extraordinary example is the golden cross that occurred in September 1994, which resulted in a whopping 120 percent by the time the trend reversed in September 1998!

The lone exception to this trend was the unusual and very volatile market in 2010-2011. Even then, the S&P 500 only lost a third of a percent.

Today, the S&P 500 is only about one and a half percentage points away from the golden cross. With the index already above the 200-day moving average, the 50-day is on a path to continue rising. Perhaps this might encourage investors to “cross the street” now and anticipate the automatic trigger before traders act.

During our 2012 Outlook webcast, we discussed many market indicators to give you an idea of what to expect this year. If you missed the discussion, click here to listen to the webcast replay now.

The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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

After 11 years of positive returns, can gold continue to shine? That’s the question put to me last week by my friend and Bloomberg TV host Pimm Fox.

My answer? Yes, because the Fear Trade and Love Trade remain firmly in place.

Regarding gold stocks, I explained that we look for miners who can demonstrate high margins and possess an exceptional growth profile. From a bottom-up perspective, we look at cash flow (essential for funding growth, capital expenditure and dividends), production growth (percentage change from previous quarter/year), and reserves per share (how much proven reserves does the company have?).

I highlighted Randgold Resources and two gold royalty companies, Royal Gold and Franco Nevada, as examples of companies which compare favorably on these metrics.

Watch the Interview

The show’s other guest, Tom Russo from Gardner, Russo & Gardner, made some interesting points regarding the agility of gold as an investment. Russo said, “What I find so amazing about gold over the past three years is how flexible [gold] has been as an asset class. It answers every investor’s question. If someone looks for a political risk investment, it’s gold because you can carry it with you, you can flee with it. If someone wants protection against inflation, it’s gold because it will hold value against inflation.”

It’s this agility that should continue to attract attention from gold investors around the world.

Important Update: The 2012 edition of our popular Periodic Table of Commodities is now available. Click here to download the pdf. We’ll dive into further detail on the table next week.

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% to 10% of your portfolio in these sectors.

The following securities mentioned in the interview were held by one or more of U.S. Global Investors Fund as of December 31, 2011: Randgold Resources, Franco Nevada, Royal Gold.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

Wind currents between the ocean and atmosphere affect climates around the world; likewise, government policy shifts and economic data have a similar ripple effect on markets.

During our Outlook 2012 webcast, our listeners heard a very passionate John Mauldin assess the debt situation in Europe, Japan and the U.S. and the need for immediate policy change. If you listened in, you may have wondered what economics and politics have to do with investments.

Listen to a replay of the Outlook 2012 Webcast now.

That’s a valid thought, as many investors hear predictions of which way the market will go or what stocks will outperform. As I often remind my readers, it’s not about political parties, it’s about the policies. And history says that government policy shifts can have a tremendous affect on the economy and the markets. While no one can predict the future, you can use probability in your favor.

For example, Chinese stocks have historically moved with money supply. In the webcast, Analyst Xian Liang showed the chart below plotting the year-over-year money supply in China against domestic B-shares (represented by the MSCI China Index) since the end of 2000.

The Chinese government is known for acting decisively in making policy changes to steer its economy in the right direction. In 2009, the growth in money supply was at an 11-year high of 30 percent after the government lowered the required reserve ratio (RRR) for major banks. Adjusting the reserve requirement is important inflation-fighting tool in China’s monetary policy. The lower the reserve requirement, the more money banks are able to lend out.

Throughout 2011, due to concerns about inflation, China had been raising the reserve requirement for banks and interest rates. This action reduced money supply to the low we see in the chart. This December, China shifted its stance as slow growth became a risk and inflation slowed. This action should increase money supply, and encourage markets, going forward.

China also recently announced an earlier-than-expected windfall profit tax cut for its oil companies. This special oil income levy raises the level at which a barrel of oil is taxed, going from $40 to $55. This $15 difference essentially translates to a substantial tax break for oil companies and extra money in their coffers.

Research firm Jefferies expected the tax adjustment, but thought that it would happen at the end of 2012. With this tax cut, it appears the government acknowledges the need for Chinese upstream oil companies to increase their cash flow so that they can increase domestic production, says Jefferies.

This tax cut was closely followed by analysts, and was seen as a “big positive” for China’s oil companies, specifically CNOOC, PetroChina and Sinopec, says Citigroup Global Markets. The market promptly responded positively, with each stock rising on the news.

Another economic measure that has a ripple effect on global markets is the Purchasing Managers’ Index (PMI), an indicator of manufacturing strength. We follow this index closely, as it is considered a leading indicator, meaning the markets react over the following three months after the PMI data is released.

As of December 31, the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI) crossed above the three-month moving average. Going back to the inception of the index in 1998, there have been 20 occurrences when the one-month number crosses above the three-month. When this has happened, it’s signaled higher prices for many commodities, especially oil, copper, and to less of a degree, materials and energy.

For copper, historically, 90 percent of the time, the price was positive over the next three months, with a median return of 10 percent over the following three months.

During the same three months, 85 percent of the time, West Texas Intermediate oil has also gone up. 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.

We believe the winds are shifting to bring needed relief to global investors. We’ve seen improving economic data from the U.S. lately, and this positive news from the world’s largest economy, along with an improving China—the world’s most populated country—offsets the negativity in Europe.

What’s the probability of the U.S. market heading higher in the year of a presidential election? Register today for our webcast on Tuesday, January 10 to hear from Jeffrey Hirsch of the Stock Trader’s Almanac, the annual resource that countless money managers, traders and investors have come to rely on. We’ll discuss Jeffrey’s nearly 50 years of market research, along with the many other historical indicators such as the January Barometer and the Santa Claus Rally.

Sign up now.

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 MSCI China Free Index is a capitalization weighted index that monitors the performance of stocks from the country of China. 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 following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of December 31, 2011: CNOOC, PetroChina Co Ltd.

The New York Times reports that the European Union (EU) will agree to ban Iranian oil imports by the end of January. Iran is OPEC’s second-largest oil producer behind Saudi Arabia, according to the U.S. Energy Information Administration (EIA), and the third-largest crude oil exporter in the world. Iran is estimated to hold 137 billion barrels of proven oil reserves, nearly 10 percent of the world’s total.

Revenue from oil exports is a key pillar of Iran’s economy. The EIA says the country’s net oil export revenues totaled $73 billion in 2010 and accounted for 80 percent of the country’s total exports.

Europe is one of the main destinations for those imports. This visual from Reuters shows Italy, Spain, Greece and France were top-10 importers of crude oil during the second quarter of 2011.

The EIA says sanctions recently adopted by the EU have already decreased export volumes to Italy and the U.K.

Diplomatic relations between Iran and the West regarding the country’s determination to enrich uranium have been contentious for some time. However, the current rhetoric and new policies such as the banning of Iranian oil imports have upped the ante.

This intense political chess match is one development that could significantly drive oil prices higher in 2012.

By clicking the links above, you will be directed to a third-party website. 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.

In a recent blog post, the Wall Street Journal asked its MarketBeat readers if a share of McDonald’s stock or a barrel of oil made a better $100 investment. The share price of the fast-food restaurant topped $100 for the first time ever in late December and rose 30 percent over 2011, substantially beating the overall market. Crude oil prices had less sizzle, only moderately increasing over the year.

The three-year picture is a little different, with crude oil more than tripling since its bottom in late 2008. Over the same time, McDonald’s increased about 66 percent, says the Journal.

This is an interesting question because it pits a classic U.S. company that has expanded from one drive-in restaurant in 1940 to the world’s largest restaurant chain today against a commodity in limited supply but growing demand from emerging markets.

McDonald’s embodies many of the qualities we like in a company. During a challenging global environment during the third quarter of this year, the company reported higher revenues, operating income and earnings per share compared with the prior year. Global comparable sales grew a modest 5 percent, diluted earnings per share increased 6 percent in constant currencies, and $1.5 billion was returned to shareholders through share repurchases and dividends.

The company also boasts the fact that it has been able to increase its dividend since the program began in 1976. The latest quarterly dividend rose to $0.70 per share—nearly a 3 percent yield on an annualized basis at the January 4 closing price.

And even with 33,000 restaurants in 119 countries today, McDonald’s is expected to continue growing, especially in emerging markets such as China.

A survey of farmers in rural villages across China by CLSA Asia-Pacific Markets found half of rural families expect their meat and meat product consumption growth to outpace vegetables, dairy and fruit over the next 5-10 years. With its established footprint in the country, McDonald’s is positioned to feed these rising rural carnivores. According to a Bloomberg article last summer, the restaurant chain expects to open a store in China “every day in the next three to four years.”

However, I recently highlighted that China also has an insatiable appetite for oil. In addition, oil has been a victim of declining supply in major oil fields in the Persian Gulf. Oil prices were also affected by civil war and turmoil in the Middle East throughout 2011, and we don’t see this ending soon.
There’s also a developing demand story for oil. In its World Energy Outlook, the Paris-based International Energy Agency says crude oil consumption will be driven by developing countries over the next 20 years. These countries will account for 90 percent of the world’s population growth, 70 percent of the increase in economic output and 90 percent of global energy demand growth over the period from 2010 to 2035.

Each power play has its strengths, but both, to a certain degree, depend on the growth of emerging markets.

So, how would you invest that $100 bill? Let me know at editor@usfunds.com.

Recent Oil Posts:
Case for Sustained $100 Oil
Things Get “Heavy” for Saudi Arabia

None of U.S. Global Investors Funds held any of the securities mentioned in this article as of September 30, 2011. By clicking the links above, you will be directed to a third-party website. 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.

Last year’s unrest demonstrated how major oil-producing regions can significantly affect oil prices. As I’ve previously stated, according to PIRA, the Middle East accounts for over 70 percent of OPEC oil production and, along with North Africa, more than 95 percent of the cartel’s capacity growth.

A disruption of the supply chain can also influence oil prices. One of the largest chokepoints along the global oil supply chain is the Strait of Hormuz, which roughly 90 percent of all Persian Gulf oil tankers—some 18 million barrels per day—pass through, according to Barclays. With Iran controlling the entire northern border of the strait, there is a significant chance for disruptions should the country fall into conflict or war.

The story will likely continue into the new year, as “sanctions against Iran, including a possible European Union oil embargo, and fear of an Israeli attack on Iran’s nuclear facilities led 2011 to close on a bullish note” for oil, said PIRA Energy Group in their new report today. Additionally, there’s new political uncertainty in Iraq that may keep oil elevated.

The chart below sums it up: With more than 40 percent of the world’s oil controlled under autocratic rule, oil supply in democratic nations likely depends on the state of autocratic nations.

Read The Many Factors Fueling a Return to $100 Oil

China Rises to Top of Energy Pyramid
Another significant development in 2011 was that China surpassed the U.S. to become the world’s largest energy consumer. BP’s Statistical Review of World Energy report calculated that China’s energy consumption rate grew 11 percent over the previous year, with the country consuming 20 percent of global energy.

Read China is World’s Largest Energy Consumer

While coal accounts for a significant portion of China’s total energy use, the country’s need for oil should continue to rise. Its rising income levels, the government’s social housing plan, and an aggressive transportation effort to link 700 million people across more than 250 cities should continue drive this growth. Bank of America-Merrill Lynch agrees, suggesting that “China’s oil dependency will rise as U.S. imports fall.”  In the chart below, it’s projected that China’s imports of crude oil and petroleum products will surpass the U.S. in 2014. BofA-ML thinks that on a volume basis, China oil imports “will grow quite rapidly on the back of rapid per capita income growth.”

China’s demand is what makes today’s oil situation different from the end of 2007. At that time, a lack of supply increased oil prices even though the U.S. was in a recession. What’s different is that “China is likely to re-accelerate” in 2012, according to Goldman Sachs.

China, along with other emerging markets, and the European Central Bank are in the early stages of a global easing cycle, primarily by cutting interest rates to spur growth. Also, the Federal Reserve should remain stimulative. These government actions set the stage for sustained, or perhaps higher, demand for oil. As stated earlier, geopolitical threats remain on the horizon, and could also be a positive catalyst for oil.

As always, our team will closely follow these events, as well as the monetary and fiscal policies, to find global investment opportunities in 2012.

We wish you and your family a very happy and prosperous new year!

John Derrick contributed to this commentary.

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

As I explained to Charles, gold’s bull market is still on course with plenty of room for growth. I consider it a non-event for gold to drop 15 percent. This type of correction reflects the normal volatility inherent in bullion’s DNA. This volatility also brings a tremendous buying opportunity for investors to purchase gold at substantially cheaper prices.

Gold’s short-term and long-term drivers remain intact. Money supply in the world’s largest countries is expanding by roughly 18 percent. Countries like the U.S. and Europe are continuing to print paper, while holding interest rates near zero, as they grapple with debt issues.

Furthermore, nearly 50 percent of the world’s population believes in giving gold for holidays, birthdays and anniversaries. With rising GDP per capita in emerging markets such as China and India, these countries have burgeoning middle classes with a cultural affinity for gold. These fundamentals are all indicators for higher bullion prices.

Watch here as I discuss the Fear Trade and Love Trade.

Also Read:

• Striking Portfolio Balance with Gold Stocks
• You Can’t Print More Gold
• The Gold Triple Play—Volatility, Currencies and Europe

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

The following securities mentioned in the interview were held by one or more of U.S. Global Investors Fund as of 09/30/11: Barrick Gold Corp, Freeport-McMoRan Copper & Gold Inc, Goldcorp Inc, Newmont Mining Corp, Randgold Resources Ltd and Yamana Gold Inc.

“As the S&P 500 goes in January, so goes the year”

—The Stock Trader’s Almanac 2011

Whereas the “January Effect” I wrote about a few weeks ago provides precedence of small caps outperforming larger counterparts during the last two weeks of December, the quote above succinctly describes another annual effect among stocks.

Using annual figures going back to 1950, the “January Barometer” says the performance of the S&P 500 Index in the first month of the year dictates where stock prices will head for the year. Jeffrey and Yale Hirsch of The Stock Trader’s Almanac find that the barometer has a surprisingly high accuracy ratio of nearly 90 percent.

However, in the last two years, the market defied this trend. In January 2009, the market declined 8.6 percent, but ended the year increasing 23.5 percent. In 2010, the S&P 500 declined about 3.5 percent in January, but rose 15.1 percent for the year. But before these recent events, there were only five major errors in 60 years when the market was affected by the Vietnam War (1966 and 1968), the start of a mid-year bull run (1982), January rate cuts combined with 9/11 (2001), and military action in Iraq (2003).

Even with these disruptions in the long-term trend, the writers at Almanac Newsletter said last February that they “don’t know of many indicators with such a strong track record.” The barometer’s accuracy appears to be due to political actions that set the annual course for the U.S. In each odd numbered year, a new Congress convenes. Also, every year, the State of the Union address is delivered in January with the president and Congress setting the political agenda for the year.

What’s in store for 2012? Hear from Jeffrey Hirsch and me on January 10 for a special webcast where we’ll discuss barometers such as this one. Sign up now so you can catch it live or on demand shortly after the presentation.

Sign up today.

Past performance is no guarantee of future results.

The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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

This week I thought we’d take a moment to reflect on the eventful year it’s been for gold, natural resources and emerging markets by highlighting this year’s most popular commentaries and entries from my Frank Talk blog.

Here’s a list of what mattered most to readers in 2011.

1) BRIC Self Sufficiency Index – February 10

Sometimes a chart can tell the whole story. This interesting chart from Bank of America-Merrill Lynch showing the supply/demand fundamentals of several key industrial metals and basic materials attracted the most attention on my blog this year.

The dotted line in the chart represents a key tipping point. The resources to the left of the line are those the BRIC countries must obtain outside of their own borders to meet domestic demand. The BRICs produce an excess amount of the two metals to the right of the line and export the remaining amount to other countries.

These materials are the necessary elements needed for emerging nations to take the next steps in their development. You can see that the BRICs must rely on imports in order to meet demand for metallurgical coal, copper concentrate, thermal coal, iron ore, refined copper and uranium—implying higher prices for several years to come.

Click here to read full article

2) Understanding the Rise of China – February 3

Curiosity about China and the insightful words of Martin Jacques, author of When China Rules the World, led this post to the #2 spot.

Jacques says China is going to change the world in two fundamental respects. First, never before in the modern era has the largest economy in the world been that of a developing country. Second, for the first time in the modern era, the dominant country in the world will not be from the West.

Click here to watch Jacques’ full speech

3) Which Gold Miners Have Largest Upside – October 13

For much of the year, a prominent story in the gold sector was the performance gap between gold miners and climbing prices of the yellow metal (see #6), leading us to ask our readers which miners had the largest upside? My investment case for exploration and development miners, or juniors, was the subset’s near-record low price-to-NAV level.

Click here to read full article

4) Is Gold About to Have Its Status Upgraded? – June 17

With the global banking system set to approve the Basel III banking provisions, I explored the possible ramifications if the Basel Committee on Banking Supervision (BCBS) decided to upgrade gold to a Tier 1 asset.

Click here to read full article

5) Don’t Fear a Pullback in Prices – April 25

The last week of April we received our first glimpse of the volatility that would grip markets and investors throughout 2011. After S&P warned of a downgrade to U.S. debt, gold and oil rocketed higher. I cautioned you to be aware of the inevitable snapback that comes with these types of moves but said investors could use these pullbacks as an opportunity to “back up the truck.”

Sure enough, gold prices pulled back before beginning their climb toward $1,900 an ounce. However, it proved to be the high for oil prices, which fell below $80 a barrel in early October and currently sit just below $100 per barrel.

Click here to read full article

6) Will Gold Equity Investors Strike Gold? – June 20

As I referenced before, the story of the year for gold investors has been the underperformance of gold mining stocks compared with bullion. However, this wasn’t the case for all of 2011. The NYSE Arca Gold BUGS Index (HUI) had outperformed gold bullion through April, but the relative performance quickly reversed and the HUI trailed bullion by nearly 30 percent by mid-August.

This isn’t the first time gold bullion and gold equity prices have diverged. Gold equities underperformed gold bullion in 2000 and 2008 during times of extreme market negativity and uncertainty. These previous instances have been merely temporary setbacks and markets generally reverted back to their long-term trends.

Click here to read full article

7) How to Find Opportunities from Blood, Debt & Fears – September 6

This piece from September is one of my favorites of the year because it pops the notion the gold is in a bubble. Despite gold’s dramatic bull run over the last 10 years, the yellow metal is only twice as high as its 1980 price. In comparison to other economic yardsticks since 1980, this is miniscule. Ian McAvity, editor of Deliberations on World Markets, says that federal debt, the S&P 500 Index and even GDP has grown much faster than gold over that same timeframe.

The gross U.S. federal debt of $14.3 trillion is 17 times its 1980 level. In 1980, the S&P 500 was at 105; today, it trades around 1,100. A gold price of $1,808 seems paltry as it is only 2.5 times the 1980 high of $738.

McAvity extrapolates the relative growth rate of the yellow metal, indicating that if gold doubled from its current high, it “would nearly ‘catch up’ to GDP, while it might take a quadruple to match the S&P, or even a six-fold gain from here to catch the growth of debt.” Multiplying the largest of these figures by the current price of gold means prices could theoretically go to $10,800. By these standards, gold is hardly a bubble.

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8) The 2011 Gold Season is Just Around the Corner – August 1

The gold season kicked off a month earlier this year as shenanigans on Capitol Hill and cultural buying pushed gold prices up a staggering 12 percent during the month of August.

September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewelers are the busiest. The season for gold began with the Muslim holy month of Ramadan in August. Then came Diwali, known as “the festival of lights” in India, and we’re in the midst of Christmas here in the U.S.. Next will come Chinese New Year.

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9) Debunking Gaddafi’s Gold – March 23

 When word got out the deposed dictator had a large pot of gold, many wondered whether that gold would be used to finance Gaddafi’s troops in a civil war. Our director of research John Derrick spoke with then CNBC host Erin Burnett about the unlikelihood of that happening.

Click to watch the interview

10) The Bedrock of the Gold Bull Rally – April 4

Naysayers started calling gold a bubble back when prices hit $250 an ounce and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder as prices broke through $1,000, $1,200, $1,500 and even hit $1,900 an ounce.

In this extensive piece, we dove into gold’s relatively small role in global asset allocation. In 1968, gold represented nearly 5 percent of financial assets. In 1980, the level had fallen below 3 percent. That figure had shrunk to less than 1 percent by 1990 and has remained there since. Eric Sprott wrote that “it is surprising to note how trivial gold ownership is when compared to the size of global financial assets.”

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Don’t Forget About the Interactive Ways We Help You Explore the World

Some of our most popular pieces this year haven’t been commentaries at all. From slideshows, to interactive maps, to videos, to games and quizzes, we’ve rewarded your curiosity to learn and explore in dozens of ways.

Slideshows

Each year, bigger, taller and more technologically advanced projects dot the skylines, country sides and coast lines of cities across the globe. Cities around the world take turns owning the title for the tallest skyscraper, the longest bridge or the deepest mine. Covering nearly every continent of the world, explore our current list of the grandest of all things infrastructure in the world.

Click here to browse the slideshow

Coal, hydroelectric and oil are increasingly in high demand to meet the world’s growing appetite for power. In fact, global energy consumption grew 5.6 percent in 2010, the highest rate since 1973. In addition, rising emerging markets are changing the landscape of global energy. Tour our list of ten reasons why global energy will never be the same.

Click here to browse the slideshow

Interactive

Where Does the Gold Come From? Gold-producing countries are found on nearly all continents, and represent the gamut of economies from developed super-powers to small, emerging market countries. With gold’s spectacular rise in price and related demand, it’s worth your time to know a little bit about where all the gold comes from.

Click to explore the map

As long as there have been people, there’s been an attraction to gold. From pharaohs to hedge funds, gold has been an important tool of building and protecting wealth. This interactive gold timeline carries you through gold's enduring path as a universal symbol of wealth.

Click to travel through gold’s ancient history

Games/Quizzes

Paper money was first used by the Chinese during the Tang Dynasty in 806 AD–500 years before Europe began printing money in the 17th century. It would be another 100 years before America started circulating a national paper currency. And few Americans were more involved in the national paper money history than Benjamin Franklin, who wrote about, designed and printed paper money prior to the national currency. His face on the $100 bill today is our reminder of his contributions as a printer, scientist, scholar, writer and politician.

Click here to test your knowledge of global currencies

You know it’s shiny, it’s rare and it’s the standard against which all good things are measured. But how much do you really know about gold? Take the 2.0 edition of our interactive quiz to test your knowledge of gold history, geography and politics. We’ve also dug up some obscure trivia just to make it a little bit more challenging.

Click here to test your gold knowledge

Happy Holidays

I’d like to thank all of our content partners that help thousands of additional investors take advantage of our weekly insights. Most importantly, I want to thank you for tuning in each week. Our investment team works diligently each week to illuminate the most important drivers of different markets around the world and we hope the information has helped guide you during this year's tumultuous market.

I’m sure many of you have family members, friends and colleagues who are searching for answers to today’s puzzling markets. Please be sure to share these free weekly alerts with them, or they cansign up here.

In his story on Charles Dickens, Alex Green says the author's "goal was not just to entertain but enlighten." We at U.S. Global couldn't agree more. One of the greatest gifts you can give is the gift of knowledge and it’s free.

Happy Holidays!

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

The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

The sky-high leverage ratios of Morgan Stanley, Bear Stearns, Lehman Brothers and Goldman Sachs caused part of the economic weakness, but Nomura points to the “policy mistake” which forced Lehman Brothers to declare bankruptcy as the reason GDP plunged so significantly. The dashed line represents the likely decline of GDP had the event not occurred.

Nomura draws two possible economic paths for the future: 1) weaker demand because the private sector may focus on lowering its debt levels; or 2) stronger demand due to the stimulus from the government.

Looking back over the past 400 years, there has been a major currency or credit crisis every decade, and historically, it takes approximately four years to heal from the contraction. Will history repeat itself? What should investors expect?

We’ll ask two very special guests those exact questions during two separate webcasts in January 2012.

On January 5, our guest will be the award-winning author and renowned financial expert John Mauldin. I am among the 1 million people who receive his weekly e-newsletter, Thoughts from the Frontline. I like his publication because he has a knack for interweaving his thoughts on today’s global markets with economic history.

During the webcast, John will join our investment team for a lively discussion on what to expect from global markets in 2012. We’ll be answering other questions including the following: will global markets retreat or rebound, will the eurozone crisis continue, will gold reach new record highs and will demand for natural resources be resilient? You’ll have the benefit of our combined extensive knowledge to become an informed investor.

Click here to register for the Outlook 2012 webcast.

Did you know stocks tend to perform better on certain days, or that data suggests the stock market historically outperforms during six specific months? To discuss such data, Jeffrey Hirsch, editor-in-chief of The Stock Trader’s Almanac and Almanac Investor will join me on January 10, to discuss market cycles and historical trends.

Jeffrey has compiled nearly 40 years of market research and data begun by Yale Hirsch to help identify cyclical trends and patterns. His latest book makes a very bullish statement, Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It, and provides historical context for why he believes this will happen. He discusses other panics during the twentieth century, as well as housing, consumer confidence and inflation data to state his claim.

During our webcast, Jeffrey will discuss how to condense a mountain of market data to spot trends in today’s marketplace.

Click here to register for the webcast with Jeffrey Hirsch.

I encourage everyone to register for these webcasts to listen in to the live event. If you can’t attend during these times, you can still register and you’ll be the first to know when the replay is available.

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

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

But you don’t have to rely on guesses; Yale and Jeffrey Hirsch from The Stock Trader’s Almanac have scrutinized the performance of the Dow Jones Industrial Average over 177 years of presidential cycles. Beginning with Andrew Jackson in 1829, election years have averaged a 5.8 percent gain in stocks. In fact, 29 out of those 44 election years have resulted in gains for the Dow.*

The Dow’s long history going back to 1833 paints a clear historical trend: “Wars, recessions, and bear markets tend to start or occur in the first half of the term; prosperous times and bull markets, in the latter half,” The Stock Trader’s Almanac says.

We looked into the performance of the S&P 500 Index since Dwight Eisenhower took over the Oval Office in 1953. We discovered that the S&P 500 has historically remained flat over the first two years of a presidential cycle as new administrations take shape and second-term leaders reshuffle their team and set priorities. Over the next two years, the market turned markedly higher.

As the blue line shows below, the government’s massive stimulus effort to revive a struggling U.S. economy has steered the S&P 500 away from the long-term trend during President Obama’s term. The market sold off as America was introduced to President Obama before reversing course in grand fashion in March 2009. While it’s certainly been a roller coaster ride for investors over the past three years, the S&P rose significantly higher at the same time as the long-term historical trend.

What will happen to the market if the GOP is able to oust the incumbent? Nearly out of stimulus ammo, will we see a similar pattern if President Obama is re-elected?

Tune in to our January 10 webcast with Jeffrey Hirsch to find out. We’ll discuss historical market cycles like these as well as what’s in store for investors this election year.

Make sure to register today. If you can’t make the live presentation, it will be made available for you to watch on demand shortly after the webcast ends.

Register Today

Past performance is no guarantee of future results.

*Based on annual close; prior to 1886, the data is based on Cowles and other indices: 12 mixed stocks, 10 rails, 2 inds 1886-1889; 20 mixed stocks, 18 rails, 2 inds 1890-1896; Railroad average 1897. First industrial average was published 5/26/1896.

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 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

Macquarie says, “Global copper mine output has continually disappointed forecasts and, more importantly, market needs over a number of years now, despite the strong financial incentive not only from high copper prices but also high by-product prices.”

Chile, the world’s largest copper-producing country, has had a series of struggles that has curtailed production gains. Macquarie says the country’s output has fallen by 730,000 tons over the last decade and a lack of new mining investment has been insufficient to offset fledgling production. Furthermore, a three-month strike at the world’s second-largest copper mine, Freeport MacMoRan’s Grasberg mine in Indonesia, has also limited copper production.

The first chart illustrates how correlated copper mine production has been with the operational cash flows of mining companies over the past 10 years. Escalating costs to develop and operate new mines are one of the main constraints to copper supply. HSBC estimates investing in new copper mines is 50 percent more expensive today than it was in 1985 due to higher energy costs, better wages and equipment shortages.

To reach untapped deposits, companies must finance new technologies and equipment to develop deeper mines with often lower ore deposits in sometimes politically unstable parts of the world, research firm Credit Agricole says. This is why copper supply has remained relatively flat despite companies’ willingness to spend near record amounts of money to find additional ore deposits.

Despite bullish sentiment heading into 2011, copper’s price has largely underperformed this year as China scaled back on large purchases. However, recent trade data suggests the world’s largest consumer of natural resources is restocking its depleted inventories.

Chinese copper imports totaled nearly 452,000 tons in November, the highest monthly total in nearly 20 months, according to data from Macquarie. By 2012, Bank of America-Merrill Lynch analysts suggest China will continue its copper shopping spree. BofA-ML is predicting a 6 percent year-over-year increase in Chinese copper imports next year.

Sluggish copper mine production and increasing demand from China should help boost copper’s price moving forward. BofA-ML says, “Supply problems will remain a constituent part of the copper market” before additional copper supplies become available in 2013.

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 securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of 09/3011: Freeport-McMoRan Copper & Gold Inc.