http://www.usfunds.com/investor-resources/frank-talk/ A Blog by Frank Holmes, CEO and Chief Investment Officer for U.S. Global Investorsen-us Mon, 01 Jan 1900 06:00:00 GMTFri, 12 Mar 2010 20:31:33 GMT http://www.usfunds.com/investor-resources/frank-talk/?i=2523What would you do if someone offered you $1 million for the right to drill for natural gas under your land? That’s the sort of Jed Clampitt scenario playing out in the piney woods of north Louisiana, under which lies the Haynesville Shale, perhaps the largest natural gas field in North America. What happens when cash-poor landowners hit the natural resources lottery is a theme in the documentary Haynesville, which make its North American premiere as the main feature at next week’s South by Southwest (SXSW) Film Festival in Austin. Along with the social aspects, the film also discusses the environmental and financial impacts that the Haynesville and similar shale deposits may have while supplying the U.S. with desirable clean energy in the decades ahead. Haynesville may contain as much as 250 trillion cubic feet of gas. The documentary pegs its regional economic impact at $1.75 trillion over its lifetime – as one person says in the film, “Now that’s a gas field!” Shale fields (notably the Barnett in north Texas, the Eagle Ford in south Texas, the Marcellus in eastern Pennsylvania and the Haynesville) now account for 20 percent of U.S. natural gas supply. A study released this week by energy consultancy IHS CERA sees cleaner-burning gas becoming more important for electric power generation – 19 billion cubic feet per day now becoming 35 billion cubic feet daily by 2035 as plants burning coal and other fuels are replaced. The documentary’s director said he tried to reflect the many facets of a modern-day gold rush tale. “What I had to do was walk a very fine line. It’s the line of not being preachy and not being pro-industry,” Gregory Kallenberg told the Houston Chronicle. “This is a piece that shows in a very balanced way where energy comes from and what effect it has on the people at the ground level. We all use energy, and using energy, it’s important to know how we get it.” You can watch the trailer for Haynesville at www.haynesvillemovie.com. By clicking on the link, you will be redirected to the Haynesville movie website. U.S. Global Investors does not endorse all the information supplied by this website and is not responsible for its content. #10-179Fri, 12 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/HaynesvilleMovie%2D031210%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2523Energy & Natural Resources http://www.usfunds.com/investor-resources/frank-talk/?i=2515The private forecasting firm AccuWeather predicts an “extreme” Atlantic hurricane season in 2010, and if true, that could have a significant impact on energy prices this summer. In fact, AccuWeather says 2010 will be look a lot like 2008 in terms of hurricane activity. In 2008, there were 17 storms big enough to get a name – the biggest was Hurricane Ike, which killed nearly 200 people and did more than $6 billion in damage as it tore through Haiti and flattened Galveston Island, Texas.   By comparison, last year was the mellowest hurricane season since the late 1990s – only two storms reached land along the Gulf Coast. The Gulf Coast, of course, is an important energy region – it accounts for a quarter of U.S. oil production, 15 percent of domestic natural gas and 40 percent of the nation’s refining capacity. In 2008, dozens of offshore natural gas platforms were destroyed and production fell 98 percent during Ike – it took months to bring production back up. Many gas pipelines and processing plants were shut down altogether and others operated well below capacity. Oil prices spiked more than 15 percent and gasoline inventories slid to 40-year lows after refineries were halted due to lack of electricity. The prospect of a major hurricane season adds to other pressures on energy prices heading into the busy summer driving season. Gasoline prices in the U.S. are predicted to top $3 a gallon this summer, and that number came out before the hurricane forecast. The International Energy Agency (IEA) has raised its global oil demand forecast for 2010 as a result of strong economic activity in Asia – nearly half of the additional demand this year will be from China, IEA says. OPEC is also predicting a demand hike in 2010. In addition, demand has recovered to 2008 levels due to the improved economic conditions in North America, Europe and the former Soviet Union. We have often pointed out that the long-term oil supply response has been weak around the world, so if AccuWeather lives up to its name in 2010 (like it did last year), the short-term impact of reduced Gulf production and refining could be a significant price driver.Thu, 11 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/BrokenRig%2D031110%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2515Energy & Natural Resources http://www.usfunds.com/investor-resources/frank-talk/?i=2502The Winter 2010 issue of our award-winning Shareholder Report magazine is called “Journey to India,” and it includes my observations from a recent research trip to this dynamic nation. This issue also highlights trends and developments for all of our key investment sectors at U.S. Global. We make the case for commodities as an important part of your portfolio, and we describe how the developing world’s growing middle class will put the squeeze on the supply of many precious resources. We also take a look at how gold outperformed other asset classes over the past decade and provide updates to what’s been going on in China. Click on the link below to see the online version of Shareholder Report. To get a hard copy, send an email with your mailing address to webmaster@usfunds.com. Download the ReportWed, 10 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/shareholderReport%2Dwinter%2D031010%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2502Research Trips http://www.usfunds.com/investor-resources/frank-talk/?i=2493 Yesterday afternoon I sat down with Aaron Task from Yahoo! Finance’s Tech Ticker to discuss my outlook for gold and oil. Despite a recent run-up in gold prices, I explained to Aaron that I am still bullish on gold. I think there are many compelling factors both from a supply side and from the demand side that looks like gold will trade higher…The only supply coming to the market is from central banks. Supply from mines is contracting as it’s getting more difficult, more expensive to produce an ounce of gold and deliver it to the marketplace. Watch the Discussion on Gold Aaron and I also discussed how each commodity has its own DNA of volatility and investors need to be mindful of that. Specifically, we discussed price volatility for oil. Based on historical patterns, oil could easily jump to $100 or fall twenty dollars to $60. That’d be normal volatility…It’s not just supply and demand around the world, it’s also because oil is priced in dollars and these swings in the dollar exaggerate the supply demand factors. Watch the Discussion on Oil Lastly, I explained to Aaron why the rise of a middle class in emerging markets is a catalyst for a long-term shift in consumption patterns for goods and services. What’s really significant is the rise of the middle class…What happens when you get 30 million out of 1.3 billion people making $50,000 a year? These big changes in consumption patterns take place. That’s why we’re seeing Cartier and Louis Vuitton and all these [luxury stores] opening up throughout China. Watch the Discussion on Emerging Markets Diversification does not protect an investor from market risks and does not assure a profit. The interview references the investment theory of an investment as insurance against a separate market event that could negatively affect performance of an investment. The reference does not guarantee performance or a safeguard from loss of principal by investing in that asset. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Holdings in the Global Resources Fund, Gold & Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of December 31, 2009: Chevron (Global Resources Fund 3.69%), Conoco-Phillips 0.00%, Exxon 0.00%, San Juan Basin Royalty Trust 0.00%, Randgold Resources (Gold and Precious Metals Fund 8.30%, World Precious Minerals Fund 8.14%, Global Resources Fund 1.92%), Royal Gold (Gold and Precious Metals Fund 3.52%, World Precious Minerals Fund 1.14%), Franco Nevada (Gold and Precious Metals Fund 0.34%, World Precious Minerals Fund 0.16%, Global Resources Fund 0.04%), LVMH Moët Hennessy Louis Vuitton SA 0% #10-180Tue, 09 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/FrankTechTickerTV%2D031010%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2493Media Appearances http://www.usfunds.com/investor-resources/frank-talk/?i=2464Asia’s rapid growth hogs the emerging-markets spotlight, but Russia and the other countries of Emerging Europe (EE) also deserve some attention. For starters, EE economies have tight fiscal policies and are carrying far less debt than many developed economies, both positives for sustained economic growth. In the chart above, the best place to be is in the southeast quadrant, and that’s where EE nations are clumped. Russia’s debt position is minimal and there is ample strength in the consumer sector going forward. In January 2010, wages were up 11 percent from a year ago to 19,000 rubles per month. This has kept domestic consumption levels around 65 percent—on par with Brazil and above both China (30 percent) and India (57 percent). In addition, Russia’s oil production—the country’s main profit center—came through the crisis more robust than many expected, even surpassing Saudi Arabia in terms of production. But Russia is looking beyond oil and gas. In February, Time magazine reported that President Dmitri Medvedev has ambitious plans to create a high-tech haven where geniuses can think up world-changing inventions. The intellectual capital is there. Despite years of exodus of scientists and engineers from the Soviet bloc during the 1990s, the chart above from Dr. Marc Faber shows the combined number of researchers in Russia and its former satellite states in Emerging Europe is not far behind the United States and China and is many times ahead of Brazil and India.Fri, 05 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/EmergingEurope%2D030510.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2464Eastern Europe http://www.usfunds.com/investor-resources/frank-talk/?i=2458Dubai has created islands shaped like palm fronds, the world’s tallest building and even indoor snow skiing in the desert. Neighboring Abu Dhabi is taking the spirit of innovation even higher by building the world’s first carbon-neutral, zero-waste metropolis. The eco-friendly city of Masdar is scheduled to be completed in 2016. When finished, the city will have a working capacity of 110,000 people—50,000 residents and 60,000 commuters. The idea is to create an incubator for renewable energy and sustainable technology—a “Silicon Valley for clean, green and alternative energy.” There will be no cars, buses or other transportation reliant on fossil fuels. Energy to power the 6-square-kilometer city will come from a mixture of solar panels, wind turbines and the largest hydrogen power station in the world. All together, these will amount to about 130 megawatts of power, about 20 percent less than a conventional city of the same size, according to a report in ENI’s Oil magazine. Abu Dhabi’s government has already contributed $22 billion to the project and it hopes to attract investment from foreign governments and multinational firms as well. Last August, Masdar signed a deal with German chemical company BASF to provide construction materials, and just this week the head of the Abu Dhabi Future Energy Co. announced plans for a “Korean Cluster” within Masdar that will be home to South Korean companies, universities and facilities. Building a fossil-fuel-free city in Abu Dhabi, the world’s fifth largest oil and gas producer, may seem counterintuitive, but it makes a lot of sense. Masdar is a key part of the emirate’s long-term strategy to diversify its economy – that’s the same path Dubai started down several decades ago when it became clear that its oil wasn’t going to last forever. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2009. #10-150Wed, 03 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/Masdar%2D030310%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2458Emerging Markets http://www.usfunds.com/investor-resources/frank-talk/?i=2453From the latest edition of U.S. Global’s Weekly Investor Alert If there is any doubt about China’s role in the global growth story, the chart above should clear things up. Going back a decade, China has consistently been a major source of growth in infrastructure and other construction. The gap between the green line and the red line in the chart from Macquarie represents how much China has added to global construction. Ex-China, the year-over-year drop in world construction was nearly 30 percent at the 2009 bottom – since then, China has been the heavy lifter in getting the trend back into positive territory. This second chart also focuses on the China growth story, this time showing the breadth of wealth creation within its dynamic economy. It’s not a surprise to know that luxury products from Cartier, Gucci, Louis Vuitton and Hermes are available in Shanghai, Beijing, Guangzhou and Shenzhen, all key financial, political and manufacturing centers in the eastern part of the country. But the demand for these types of high-end goods extends deep to second- and third-tier cities in the Chinese hinterlands – as far west as Urumqi in the oil-producing Xinjiang region, south to industrial Kunming in Yunnan province and up to the trading center of Harbin in the northeast corner. The government in Beijing has been working to spread the nation’s economic prosperity westward, and if this is any indicator, it is having some success. To get more insights and perspective from the U.S. Global Investors investment team, subscribe to the Weekly Investor Alert. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2009.Tue, 02 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/ChinaChart%2D030210%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2453Energy & Natural Resources http://www.usfunds.com/investor-resources/frank-talk/?i=2442I had the chance to listen to a prominent MIT finance professor talk about how market participants make their decisions, and I came away thinking that his big-brain ideas validate the approach that we’ve been using for years. Andrew Lo, the MIT professor, has developed what he calls the “adaptive markets hypothesis” (AMH) as a more sophisticated framework than the long-standing “efficient markets hypothesis” (EMH). I won’t go into a lot of detail, but the EMH assumes that all market participants act rationally at all times, and that all available information is immediately reflected in market prices. In Lo’s AMH, market participants are not always perfectly rational, he says – they often make bad decisions. They learn from those bad decisions and, driven by competition, the survivors constantly innovate. Those who don’t adapt don’t last. At U.S. Global, we have long viewed markets as “complex adaptive systems”—they are made up of many moving parts that are interconnected across a global network, and they learn from experiences and change accordingly. In our case, we use a matrix of top-down macro models and bottom-up micro stock selection models to determine weighting in countries, sectors and individual securities. We believe government policies are a precursor to change, and as a result, we keep tabs on the fiscal and monetary policies of the G-7 and what we call the “E-7” -- the world’s developing nations by population. We also focus on historical and socioeconomic cycles, and we apply both statistical and fundamental models to identify companies with superior growth and value metrics. We overlay these explicit knowledge models with the tacit knowledge obtained by domestic and global travel for first-hand observation of local and geopolitical conditions, as well as specific companies and projects. During his San Antonio visit, Lo contrasted “fear and greed” with “rational thinking” – the former being reactive and emotional, while the latter is measured and opportunistic. We use oscillators, like the one above showing gold and the dollar, to help us determine when fear or greed may be taking hold in a market. I’m a big believer in globalization, urbanization and major technological breakthroughs as key drivers of change in the world. These factors have an enormous impact on infrastructure creation around the world, which in turn greatly affects commodities demand. Back in the early 1970s, when gold resumed free-trading status in the U.S., China and India were both inward-looking and had very small economic footprints – now their economic engines are lifting tens of millions of people into middle-class prosperity each year. “I'd be a bum on the street with a tin cup if the markets were always efficient,” Warren Buffett once said. In other words, opportunities come to those (like us) who are able to navigate increasingly complex markets.   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.Mon, 01 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/GoldvDollarOscillator022610%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2442Our Commentaries http://www.usfunds.com/investor-resources/frank-talk/?i=2448I was lucky enough to be at yesterday’s Olympic hockey final between Canada and the U.S., and I’ve never seen better. The 2014 Games in Sochi, Russia, have a high mark to shoot for. As a “TexCan” – grew up in Toronto, live in Texas – I was particularly proud to see both Canada and the United States turn in such outstanding performances in Vancouver. The U.S. finished first in overall medals, and Canada won the most gold medals ever at a single Winter Olympics. The Games sent a message of peace and decency around the globe. The athletes competed with sportsmanship and class, and the combination of hard work (all of them) and good fortune (some more than others) made for a glorious experience. In appreciation, NBC news anchor Brian Williams wrote a thank you note to Canada. Among other words of praise, he mentioned that he felt secure without seeing any armed guards, and that it reminded him of times past, when “we used to be a more civil society.” Read thank you note to Canada Sports can be a powerful vehicle to bring nations together, and as a global citizen, I hope the spirit of togetherness and kindness toward others is carried home from Vancouver by both visitors and athletes. By clicking on the link, you will be redirected to ctvolympics.com. U.S. Global Investors does not endorse all the information supplied by this website and is not responsible for its content.Mon, 01 Mar 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/OlympicsCanadaGold%2D030110.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2448Odds & Ends http://www.usfunds.com/investor-resources/frank-talk/?i=2424The U.S. economy grew nearly 6 percent in the fourth quarter of 2009, the Commerce Department reported Friday. This higher-than-expected number, however, was not due to more commerce, but rather to increased manufacturing to replenish depleted inventories. The U.S. isn’t alone with good economic news this week. China announced that its economy grew 8.7 percent in 2009 and Britain raised its growth forecast for 2010. Not to be outdone, India’s finance ministry is forecasting 8.75 percent growth for the coming fiscal year. Globally, the World Bank anticipates 2.7 percent growth in real GDP in 2010 and 3.2 percent growth in 2011. As it has in recent years, the emerging world should lead this growth trend. The graphic from Visual Economics supports the emerging markets growth story. The World Bank forecasts that real GDP growth in the developing world will grow 5.2 percent and 5.8 percent in 2010 and 2011, respectively. This is double the expected growth rate for the U.S. and three to four times the pace foreseen for the eurozone. Visit the Visual Economics website By clicking on the link, you will be redirected to the Visual Economics Web site. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. #10-140Fri, 26 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/World%2DMap%2D022610.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2424Economy & Markets http://www.usfunds.com/investor-resources/frank-talk/?i=2419The world may be running low on its most precious commodity—water. This map shows water scarcity projections for the world in 2025. Large chunks of Australia, Asia, Africa and North America are expected to have severe water issues. Credit Suisse estimates that, by 2020, 37 percent of the global population will face severe water stress. The problem is unrelenting demand for a finite resource. Since the 1940s, the global population has tripled to more than 6 billion people worldwide. Over the same period, global water use has quadrupled. Water infrastructure has been slow to attract money from investors. The chart below from Credit Suisse shows that private sector investment in water infrastructure in emerging markets—where it is most desperately needed—is at pretty much the same level it was 20 years ago. Over the same period, investment in telecommunications has increased roughly 1400 percent and energy 5000 percent. Even now there’s only a handful of investible companies that offer exposure to water infrastructure. Credit Suisse thinks investment growth “should pick up substantially over the next 5-10 years,” with the bulk of this investment likely going to desalination and recycling opportunities.Thu, 25 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/river%2Dwater%2D022510.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2419Energy & Natural Resources http://www.usfunds.com/investor-resources/frank-talk/?i=2414New Yorkers looking to catch a glimpse of the world’s hottest car have until late April to visit the Cooper-Hewitt National Design Museum, which is displaying the $2,200 Tata Nano as an achievement in efficient design. I was fortunate enough to drive “the people’s car” on a recent trip to India (that’s me in the photo). The Nano is at the forefront of a new trend: affordable cars designed specifically for the developing world. How much has the emerging world embraced the car culture? The chart below shows the dramatic rise in vehicle sales in China, India and Brazil since the beginning of 2009. China’s vehicles sales were up 104 percent year-over-year in January and up 75 percent from two years ago, according to data from PIRA. India’s car sales grew by 50 percent year-over-year in January and were up 25 percent from a year ago. The sales pace is a bit slower in Brazil but the country just set a new record in 2009 with 3.1 million sold. The world’s automakers are scrambling to carve out shares of this promising market. Volkswagen’s Gol is already the best-selling vehicle in Brazil and this week VW debuted the Polo, which will soon go on sale in India. In January, Tata reported that 17,357 Nanos were sold from July to December. The company will soon be rolling out additional production in other areas of the country. As we’ve mentioned before, vehicle sales are a good proxy for economic activity because of the amount of energy, labor and materials it takes to produce a vehicle. They are yet another indicator of how rapidly the middle class is expanding in key emerging markets – this group’s consumption patterns stand to have a profound impact on global commodities demand going forward. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2009. #10-49Wed, 24 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/nano%2Dcar%2DFrank%2D022410.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2414Emerging Markets http://www.usfunds.com/investor-resources/frank-talk/?i=2404We are entering a time of year that in recent decades has been good for energy prices and energy equities. Combine that with new estimates that domestic and global energy demand will rise in 2010, and we have the makings of a promising period for investors. March tends to be one of the best months of the year for both crude oil and natural gas. As you can see on the charts below, which cover roughly the past 20 years, the price of oil at the end of March is on average nearly 4 percent higher than the closing price in February. For natural gas, the increase is even more eye-catching – gas on average climbs more than 7 percent in March. The main reason for the oil price rise in March relates to the demand pull created by refiners ramping up in advance of the summer driving season. Crude price increases fall off through the early summer before picking up again in the late summer. From September to October, there is typically a big price drop that continues through year-end. For the refiners, March marks the end of a five-month stretch in which monthly crack spreads (value of refined products minus the price of the crude oil feedstock) tends to increase. If next month follows the pattern, spreads would be 4 percent wider than February. So far in 2010, however, the results have lagged the longer term trend – January saw spreads narrow by about 3.5 percent and for February to date, spreads are up about 2 percent. For natural gas, which is always extremely volatile, March is a strong month in large part due to late winter snowstorms that move across the country. When you couple that weather variable with the fact that inventory levels for natural gas have usually been drawn down substantially during the winter heating season, the result can be some dramatic spikes for gas. A cold January lifted spot natural gas prices about 6 percent higher than the December forecast, and in early February gas for April delivery was on average trading 16 percent higher than the same period in 2009. For energy equities, the typical rally period is February through May. So far, 2010 is not straying too far from that long-term trend: from a peak of 1,122 in early January, the Amex Oil Index (XOI) fell 12 percent by February 9 before heading back up 5 percent over the next six trading sessions. Of course, seasonality is not a perfect barometer because each year brings its own distinct market conditions. In 2010, the extent of global economic recovery will be a factor, as will economic growth rates in the large emerging nations. In the U.S., petroleum consumption fell by 820,000 barrels per day (4 percent) last year. Federal officials predict daily oil demand will increase about 1 percent this year, while natural gas demand is expected to increase nearly a half-percent. Gasoline prices may top $3 per gallon this spring, according to the federal outlook. In its latest monthly report, the International Energy Agency raised its forecast for global oil demand growth to about 1.6 million barrels per day this year, with all of that incremental demand coming from the emerging markets. China accounts for a quarter of the new global demand for oil. That incremental growth could be revised upward again if it looks like global GDP growth – led by the large emerging economies – will be stronger than the anticipated 4 percent. And if the supply response to additional demand is weak, higher oil prices could result. The AMEX Oil Index (XOI) is a price weighted index designed to measure the performance of the oil industry through changes in the prices of a cross section of widely-held corporations involved in the exploration, production, and development of petroleum.Mon, 22 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/MarchEnergy022210%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2404Our Commentaries http://www.usfunds.com/investor-resources/frank-talk/?i=2388Massive sovereign debt loads, yawning budget deficits and high unemployment in the developed world raise the chances of deflation in 2010. If deflation were to occur, it could be good for gold. I have written about deflation in the past, but it’s such an important theme that it warrants a revisit. I see it as a key risk to the global economy — a far greater risk than inflation in the near term. Deflation is especially risky because, once under way, it’s a cycle that’s hard to break. In the U.S., for example, slow economic activity and high joblessness (currently around 10 percent) can drive down prices, which leads people to delay spending because they think prices will keep falling. This further slows economic activity, which leads to more joblessness, and around and around it goes. The competitive effects of globalization add to the deflation risk. Labor is getting ever cheaper in a worldwide jobs market, and excess global capacity continues to lower production costs. An article from the Federal Reserve Bank of San Francisco offers an excellent discussion of deflation risk based on studies of the Great Depression and the late 1990s in Japan. According to an analysis detailed in that article, there’s an 85 percent chance of deflation in the U.S. this year. Read Article* Governments are keeping capital cheap — interest rates are near zero and will be for a long time. U.S. banks have a lot of money to lend, but we don’t see that happening based on measures of money velocity. And given the enormity of government debt loads, future fiscal and monetary options are limited — not that the White House and Congress won’t be tempted to provide desperation stimulus as the 2010 midterm elections draw closer. In the face of low or no domestic growth, the U.S. and other countries can be expected to engage in a competitive spiral of currency devaluation to increase exports. This race to the bottom stands to lift gold as investors seek to store their wealth in an asset with tangible value. *By clicking the link, you will be redirected to FRBSF.org. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. #10-118Fri, 19 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/DeflationRisk%2D021910%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2388Gold http://www.usfunds.com/investor-resources/frank-talk/?i=2371A financial crisis and a polarizing debate on social and political issues may have Americans down, but they are not out. A new Gallup/USA Today poll shows that most Americans expect good things are coming — when asked how they feel about the next 20 years, nearly two-thirds of survey respondents said they were optimistic. Asked why, 35 percent answered the “strength/will of the American people.” In addition, more than six in 10 respondents said they believe today’s children will have a better life than their parents. This positive outlook on the future is consistent with the response to a question that the Gallup Poll has asked periodically for the past 50 years. Americans now rate their country’s standing as a 5 on a scale of 1 to 10, with 10 being the best. The bad news is that this result was just above the all-time low of 4.8 during the Watergate scandal. Better news — the forecast is that the U.S. will climb to 5.7 by 2015. One thing many people may have to look forward to is an improving job market. More jobs are still being lost than created, but the chart below shows that the trend is better than we’ve seen since the beginning of 2008. I’ve said many times that the government’s main focus should be on creating jobs. Once people get back to work and feel confident they can fulfill the needs of their family, economic activity will pick up. With their resilience, Americans are setting a great example for the emerging world. In India, China, Brazil and dozens of other countries, ambitious people are creating better lives for themselves and their children. These children will go on to provide new opportunities for their own children—just like what happened in the United States in decades past. The Chinese and the Indians and the Brazilians will get knocked down along the way, but their strong belief in what we call “the American Dream” will help them get up and continue to prosper. #10-115Thu, 18 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/AmericanFlag%2D021810%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2371Economy & Markets http://www.usfunds.com/investor-resources/frank-talk/?i=2367I was catching up on my reading backlog and came across a Forbes.com article from a while back titled “The World’s Most Powerful People.” Of course, you see a list like that and you just have to open it. The political leaders of the United States, China and Russia occupy the top three slots — hard to argue too much with that, though if the list came out today, the order might be different. Batting cleanup is Federal Reserve chief Ben Bernanke — his considerable influence over the global economic recovery effort didn’t keep him from being raked over the coals by Congress during his reappointment hearing. Next comes a run of businessmen — the co-founders of Google, Mexican multibillionaire Carlos Slim, media magnate Rupert Murdoch and then the CEO of Wal-Mart. Rounding out the top 10 are the king of Saudi Arabia and the king of Microsoft. Further down you find the pope (#11), Warren Buffett (#14), the Dalai Lama (#39), Russian president Dmitry Medvedev (#43 — 40 slots below Mr. Putin), Steve Jobs (#57) and International Olympic Committee head Jacques Rogge (#60). Not all on the list are using their power for good — North Korea’s dictator Kim Jung Il (#24), terror leader-in-hiding Osama bin Laden (#37), and Venezuela president and global agitator Hugo Chavez (#67). Who makes these lists and their order is highly subjective and thus open to debate, so let the debate begin. Find Out Who Else Made the List By clicking on the link, you will be directed to Forbes.com. 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 article were held by one or more of U.S. Global Investors family of funds as of 12/31/09:  Google, Wal-Mart. #10-112Wed, 17 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/HuJintao%2D021710%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2367Odds & Ends http://www.usfunds.com/investor-resources/frank-talk/?i=2365Analysts at UBS have identified a challenge for a rapidly urbanizing China, and within that challenge, they see an opportunity for investors. The challenge: more Chinese are moving to cities in search of work and they are making better money than they could in the countryside. But as incomes have risen, so have inflation and household spending. Savings by financially stretched urbanites have declined dramatically, and this means they may have trouble taking care of aging relatives and at the same time providing for their future retirement. The chart shows how citified China has become over the past three decades – 20 percent urban households in 1980 has increased to 45 percent this year. The opportunity: UBS has urged China to create a mandatory retirement program funded by payroll deduction as the best way to ensure that workers can eventually retire and not end up destitute in old age. If such a program were created, it could mean tens of billions of dollars worth of pension-fund investments going into the Chinese stock market. The U.S. faced a similar senior-citizen situation in the early 20th century, when this country was going through a period of rapid industrial growth and urbanization. In the 1930s, the poverty rate among U.S. seniors was about 50 percent. The solution then was the Social Security system, which is still today the primary source of income for millions of American retirees and their dependents. How the Beijing government chooses to address this issue remains to be seen, but there’s little time to waste — the number of Chinese age 65 and above is expected to double in the next two decades and it will take many years to build a pension system with sufficient scale to provide adequate benefits to a growing number of people with need. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2009. #10-107Tue, 16 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/UrbanChina%2D021610.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2365Chindia http://www.usfunds.com/investor-resources/frank-talk/?i=2350China sees a bubble ahead and is trying to avoid it – is that such a bad thing? Isn’t this what we expect Ben Bernanke and the Federal Reserve to do here at home – take clear and decisive action to drain off excess liquidity in the economy before inflation takes hold? The People’s Bank of China did just that after it saw that 1.4 trillion yuan ($204 billion) worth of bank loans were issued in January, more than the total loaned in the three previous months combined. For all of 2010, the target loan amount is 7.5 trillion yuan, so it’s easy to see why the government might want to slow the pace a bit. Forbes’ online headline was “China Tightens the Screws,” but let’s have a little perspective. Barclays Capital predicts that the 0.5 percent increase in bank reserve rates (from 16.5 percent of deposits to 17 percent) will remove 300 billion yuan from the Chinese economy. That’s only 20 percent or so of the amount loaned in January. And it’s not like cash is going to dry up – the People’s Bank plans to increase the nation’s M2 money supply by 17 percent this year. January’s M1 money supply report showed a 39 percent increase (chart above). Not exactly a screw-tightening. China’s CPI rose 1.5 percent in January, which is not extreme, and the chart above from BCA Research shows that real estate prices in terms of per-capita income had not entered a bubble phase as of year-end. But perhaps the more telling number was wholesale prices – up 4.3 percent year over year and more than double the increase seen in December. This signals that higher inflation at the consumer level could be around the corner. Markets are taking a hit based on this news – this shows how important China has become to the world economy. It surpassed Germany as the top exporting country by value at $1.2 trillion, and in January its exports were up 20 percent compared to a year earlier. Even better, its imports were up 85 percent year over year. What we may actually have is a classic bull market in the making – one that climbs the proverbial wall of worry, which suggests that investors buy on corrections. The table below shows the standard deviation (sigma) over 10 years for the main stock markets in mainland China and Hong Kong. The weekly sigma for the Shanghai A-share market is plus or minus 5 percent, while its normal quarterly swings can be nearly 25 percent up or down. It’s nearly impossible to pick exact tops and bottoms – adding to core positions after any correction greater than one sigma is a safer and more prudent way to invest. Beijing is tending to its economy so it performs over the long term. This is central to its goal of social stability through economic prosperity, and it seems to be working – millions of households join China’s middle class every year. We all know what can happen when an asset bubble grows huge and then bursts – we’re still recovering from 2007-08. China is a long-term growth story, and how well it manages that growth will have an impact on all of us. A little caution now should be seen as preventative maintenance, and we all know that when we’re talking about cars or economies, that’s a good thing. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related desposits, savings deposits, and non-institutional money-market funds. M1 Money Supply includes funds that are readily accessible for spending. 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 CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of 300 A-share stocks traded in the Shanghai and Shenzhen stock exchanges. The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong. The Shanghai B-Share Stock Price Index is a capitalization-weighted index that tracks the daily price performance of all shares listed on the Shanghai Stock Exchange available for investment by foreign investors. The index is priced in US dollars. The Shenzhen B-Share Stock Price Index is a capitalization-weighted index that tracks the daily price performance of all shares listed on the Shenzhen Stock Exchange available for investment by foreign investors.Fri, 12 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/yuan%2D021210.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2350Chindia http://www.usfunds.com/investor-resources/frank-talk/?i=2339The International Energy Agency (IEA) raised its 2010 world oil demand forecast to 86.5 million barrels a day—up 170,000 from its January report and 1.8 percent higher than oil demand in 2009. The upward revision comes on the heels of increased economic activity in Asia—which has led the global recovery so far. Oil industry consultant PIRA estimates that Asia has accounted for half of global economic growth over the past decade as Asia’s share of world GDP has jumped from 18 to 26 percent. Nearly half—44 percent—of the 170,000 barrels per day increase from last month came from China. While Asia has been the driving force, the effects of an economic recovery affecting energy demand are being seen across the globe. North America, Asia, Europe and the former Soviet Union (FSU) countries are all back to where demand was in 2008, when the oil price approached $150 per barrel. PIRA is forecasting world oil demand to increase by 2 percent in 2010—more than half of that growth coming from “less developed” countries. They see demand growth in all areas of the world besides Japan—which is expected to remain flat. And we’ve pointed out on many occasions that, while demand is growing, the long-term supply response has been weak. The low-hanging fruit has been harvested and now it is increasingly difficult, costly and sometimes dangerous to find and develop large new oil fields. This growing imbalance between demand and supply raises the chances of shortages that could drive prices significantly higher in coming years.Thu, 11 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/DeepWaterDrilling011410%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2339Energy & Natural Resources http://www.usfunds.com/investor-resources/frank-talk/?i=2325The U.S. dollar was up last week against the euro out of fear of how debt problems in Greece and elsewhere in Europe will be resolved, and as a result gold had a tough week. The dollar’s rally appears to be a short-term safe haven move, rather than a response to improving economic conditions in the U.S. In fact, Friday’s report of a net loss of 20,000 jobs in December (the expectation was for a net gain in employment) and that many thousands more would-be workers have given up looking for jobs is evidence that the economy remains somewhat weak. This weakness makes it less likely that the Federal Reserve will play it safe by not raising interest rates, and more likely that Congress and the Obama administration will pump more financial stimulus money into the system. Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again. The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the TARP money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections. Our gold-dollar oscillator (above) shows that the dollar is approaching being overbought over the past 60 trading days, while gold is showing signs of being oversold. The magnitude of the current spread between gold and the dollar typically means that both could be close to a price reversal—the dollar heading back downward and gold back up toward the mean. In the 1990s, a strong dollar was associated with a strong U.S. economy, but the current one-month dollar rally has been accompanied by a drop in the S&P 500. With most of the world’s economic growth coming in emerging markets, many U.S. companies are relying on overseas sales to drive revenue and profit growth. A stronger dollar hurts U.S. companies trying to thrive in the global marketplace. This is clearly evident in the illustration below. Here you can see that the world has changed and a strong stock market is aided by a weaker dollar. 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.Mon, 08 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/Gold%2Dand%2DDollar%2D02%2D08%2D10%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2325Our Commentaries http://www.usfunds.com/investor-resources/frank-talk/?i=2309While many market forecasters are expecting a slowdown in commodity demand due to a reduction in stimulus around the globe, coal is one commodity that’s expected to stand strong. The reason coal prices are expected to remain buoyant is unprecedented demand from China. As the chart shows, China moved from a net exporter to a net importer of coal last year and a big jump in the amount of coal imported is expected. The amount of coal imported into China is forecasted to balloon to more than 15 million tonnes in 2010—up from less than 5 million tonnes in 2008. A recent report from Deutsche Bank says it expects an increase in Chinese demand due to economic growth and a reduction of coal production in the Shanxi province because of safety and environmental issues. Environmental concerns are important to keep in mind because of the high amount of carbon involved in coal power plants. China is the world’s largest consumer of coal—which provides nearly 70 percent of China’s power—and demand for power has been skyrocketing. Any global legislation regarding carbon emissions could certainly have a big focus on China. According to CLSA, China has accounted for 40 percent of global power and heat generation since 2002. Over this time, China’s power demand has more than doubled while the rest of the world had declined around 25 percent as of 2007. This increase has put China in second place—just behind the United States—in terms of electricity demand.  More telling of what the future may hold is the fact that China consumes four times as much electricity per dollar of gross domestic product (GDP) than the U.S. does, according to a story from BusinessWeek citing International Energy Agency (IEA) estimates. China has bold plans to diversify its power—including big plans for nuclear we wrote about recently—but coal will be the major beneficiary of increased power demand until these additional sources are brought online. #10-96Fri, 05 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/diamonds%2D020510%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2309Chindia http://www.usfunds.com/investor-resources/frank-talk/?i=2297Tim Steinle, co-manager of the Eastern European Fund (EUROX), braved the frigid Moscow winter this week to attend a conference sponsored by the investment bank Troika Dialog. These are some of the observations he sent back to the U.S. Global investment team. Many think of the Russian consumer sector as a defensive play, but it outperformed the MICEX stock market in 2009. The transformation of the retail food industry has been one of the biggest drivers of this advance. What was once a state-owned enterprise with empty shelves and shriveled potatoes is now on par with what you would see in the United States. A group of us from the conference visited stores and distribution centers of several chains in Moscow and in Podolsk, about 20 miles or so away. One of the biggest and most successful of these chains is X5. You can see the strong corporate culture and pride employees have in their work by how spic and span their stores are. The company combines a clever store format with strong execution to move into more affluent areas. Some new legislation will affect this space. As of February 1, market share per company is capped at 20 percent, and the maximum discount that retailers can receive from suppliers is 10 percent. After many decades of state-run grocery chains, the intent of these laws is to encourage competition. In part because of these changes, we believe the consumer sector of Russia possesses good growth potential. The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises the 30 most liquid stocks of Russia's largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, with a base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange. Holdings in the Eastern European Fund as a percentage of net assets as of December 31, 2009: X5 1.68%, Troika Dialog 0.00% #10-92Thu, 04 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/RussianRetail%2D020410%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2297Eastern Europe http://www.usfunds.com/investor-resources/frank-talk/?i=2288While in Toronto yesterday, I stopped by the Business News Network studios to discuss commodities and emerging markets with hosts Frances Horodelski and Marty Cej. We discussed why I believe the supercycle for commodities is intact and how Colombia has benefited from pro-business government policies. I met with President (Alvaro) Uribe and it was fascinating to observe his policies for social stability and job creation. Five years ago he changed the rules of engagement for companies to come in and develop their oil fields…He has [then] taken those petrodollars and he’s reinvested them back in the country’s infrastructure and created jobs. That is in complete contrast to what (President Hugo) Chavez is doing in Venezuela, or even Mexico and their energy policy. They are seeing reserves deplete, but there’s no policy to bring in intellectual capital like they’re doing in Western Canada and in the U.S. to develop those [depleting] fields. Watch the Interview By clicking the link you will redirected to BNN.ca. 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 family of funds as of December 31, 2009:  Pacific Rubiales #10-86Wed, 03 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/FrankBNN020310%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2288Media Appearances http://www.usfunds.com/investor-resources/frank-talk/?i=2273One more measure of China’s growing global clout – so much Saudi oil is flowing China’s way that it may soon replace the U.S. as the leading market for the world’s largest oil exporter. A report from oil-industry consultant PIRA says Saudi Arabia accounted for 11 percent of total U.S. oil imports last year, down from 18 percent in 2003. Over the same period, China’s shipments of Saudi crude increased from 16 percent of total imports to 20 percent. In just the past two years, Saudi oil imports to China have increased 60 percent, reflecting the rocketing demand for energy to fuel economic growth. Xinhua, China’s official news agency, says crude oil imports could surge more than 40 percent in the next three months after hitting an all-time high of 5 million barrels per day in December. Oil demand in the U.S. fell about 4 percent in 2009 as a result of the economic slowdown, and imports from Canada are playing a bigger role. The Saudi-China linkup appears to be growing on several fronts. Partnerships are being formed between the respective national oil companies, and Chinese companies are also doing more work in the Saudi oil patch. In addition to the $20+ billion in cross-border deals China made last year, the country has increased its refining capacity and energy infrastructure for better transports from places like Russia, Latin American and the Middle East. Just today, the Venezuelan oil minister arrived in Beijing to discuss refining and trade agreements with China. Venezuela is the fourth-largest importer of oil to the U.S.—about 11 percent of total imports. In contrast, the U.S. continues to rollback its refining capacity while neglecting to invest in new infrastructure. China’s ever-increasing appetite for oil will continue to play a major role in the country’s foreign relations with both partners and allies. Any disruption could cause volatility for oil prices.Tue, 02 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/SaudiOil020210%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2273Energy & Natural Resources http://www.usfunds.com/investor-resources/frank-talk/?i=2265From the latest Weekly Investor Alert, a publication of U.S. Global Investors: Research from Cormark Securities shows that global gold production peaked in 2001 at 2,600 metric tons (chart below). World output has been steadily declining from that point because of lower grades and higher capital costs that are making it uneconomic for producers to bring new gold onto the market. The China Gold Association said China’s gold output jumped 11.3 percent to a record of 314 metric tons in 2009 (a little over 10 million troy ounces), securing its position as the world’s largest gold producer for the third straight year. Investment demand for gold continued to be robust in late 2009. The World Gold Council said investors bought 30 metric tons via exchange-traded funds in the fourth quarter of 2009, contributing to an overall total of 1,762 metric tons (56.6 million troy ounces) of ETF holdings for the year. India started the year on a positive note by importing 35 to 40 metric tons of gold during the first 27 days of January, up from 9.8 metric tons last January. Stable prices have given 2010 a good start to gold demand, the Bombay Bullion Association said. The Weekly Investor Alert, compiled by the Investment team at U.S. Global Investors, provides timely and insightful coverage of gold, commodities and emerging markets. Click here to sign up for this valuable investing resource.Mon, 01 Feb 2010 06:00:00 GMThttp://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/thumbs/GoldProduction020110%2Dth.jpghttp://www.usfunds.com/investor-resources/frank-talk/?i=2265Gold