Second Quarter 2021

The Global Resources Fund had a total return of 2.82% in the second quarter of 2021, underperforming its benchmark, the S&P Global Natural Resources Index, which returned 7.11%. See complete fund performance here. Performance data quoted represents past performance, which does not guarantee future results.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

Traditional oil and gas energy sectors performed better than clean energy stocks, with automobile driving on the rise as workers return to the office with the lifting of travel bans. Commodities like copper and nickel moved higher too with the outlook for a stronger economy.  To tap down the price strength, China announced they would start selling stockpiles they bought last year when prices collapsed.

Strengths

  • The three best performing commodities were natural gas, corn, and then coffee, up 32.39%, 30.06%, and 26.18%, respectively. Natural gas advanced faster than other energy prices in the quarter as the economy started to approach post-pandemic lockdowns. Corn also advanced, partly on energy demand for ethanol, but China also has been a huge buyer for replenishing their hog supply after African Swine Fever led major culling of animals. Coffee prices have been climbing on a forecasted deficit for 2021/22 and labor disruptions in Colombia and Brazil.
  • The fund’s best sector performance, relative to the benchmark, came from its overweight positions in precious metals, underweight in agriculture chemicals and underweight in pulp and paper. In precious metals our weighting was 24.36% vs the benchmark at 9.85% with our stock selection adding 224 bp to the fund’s performance. For agriculture chemicals our weighting was 5.86% vs the benchmark at 10.60% with our stock selection yielding 73 bp. Pulp and paper were weighted at 2.60% vs the benchmark at 7.39%, yet our stock selection yielded 60 bp of relative performance to the fund.
  • The fund’s biggest contributor to performance was Filo Mining, which was up 232.29% with an average fund weight of 3.23% and contributed 337 bp to the fund. Filo Mining released an 853-meter drill hole intersecting 1.8% copper equivalent; the last 163 meters graded 5.43% copper equivalent. Ivanhoe Mining was our second-best contributor with a gain of 40.40% yielding 127 bp of relative performance with commercial production of copper due to start eminently. The third largest contributor to fund performance was Chalice Mining, which gained 40.92%. With an average fund weighting of 2.06%, the company contributed 49 bp. Chalice made a significant new nickel-platinum-palladium-copper deposit under sedimentary cover, which was proven with the drill bit. Recent new geophysical work shows the deposit has further potential to grow.

Weaknesses

  • The worst performing commodities were lumber, platinum, and coal, negative 8.05%, 7.25%, and a positive 0.42%, respectively.  Homebuilders finally balked at how high prices in lumber had risen, effectively putting the brakes on prices. Platinum took the biggest hit during the quarter after June Fed meeting where they upped their inflation forecast, but signaled higher rates sooner. Coal was essentially flat for the quarter and continues to lose market share.
  • The worst sector performance, relative to the benchmark, came from our overweighting in electrical products, slight overweight agriculture commodities, and underweight steel. Clean energy companies continued to be sold in favor of fossil fuels where supplies were tighter, yielding higher prices but detracting 170 bp of relative performance. In the agriculture sector, Burcon NutroSscience slide 24.96%, despite achieving the first commercial production of canola protein over the course of the quarter.  Overall, our agriculture commodity stock selection ran a deficit of 105 bp. Steel did perform well but underweighting left 79 bp of relative performance unclaimed.
  • Talon Metals, Burcon NutroScience, and CopperBank Resources were the three worst detractors to fund performance, losing 113 basis points, 96 basis points, and 50 basis points, respectively. Talon continued to report new drill intercepts; thus, growing the size of the nickel resource. We took some profits in past quarter before the sell-off but remained invested in one of the few nickel deposits in the United States. For Burcon, we discussed the positive trend in fundamentals above. Copperbank Resources largely backed off in line with the pull back in copper prices as the economic momentum of the economy weakened near quarter-end.

Outlook

The world’s largest oil producing states are rejecting the International Energy Agency’s (IEA) road map to reach net-zero carbon emissions by 2050, which called for no new investments in new fields. The Russian Deputy Prime Minister and energy ministers of Qatar and Saudi Arabia voiced their concerns regarding the accelerated shift to green energy, stating that if investments are halted, oil and gas prices would skyrocket and cause significant disruptions in the markets. They also added that they plan on expanding their oil and gas facilities. These comments showcase the massive disconnect between the world’s current fossil fuel-heavy energy system and the changes needed to prevent destructive climate change. Moody’s Investor Services, which provides credit ratings for companies, noted that the events that transpired at big western oil companies this week could mean that the industry faces a higher credit risk. Referencing Exxon Mobil, Chevron Corp., and Royal Dutch Shell, Moody’s analysts believe that there could be a substantial shift in the landscape for oil companies, which had previously avoided shareholder votes on climate-related issues. Moody’s added that stricter regulations over emissions means that the oil industry must fast-track its transition from fossil fuels, which could reduce companies’ debt capacity at a time when they need to increase capital expenditures. Moreover, the companies that lag in their transition might face increased capital costs and restricted access to capital.

As President Joe Biden unveiled his $2.25 trillion infrastructure plan, analysts started paying attention to the commodities that the U.S. will be needing to meet the expectations of the plan and figured out one problem in the plan: China. As the rest of the world went into lockdown and commodity prices plunged in March and April 2020, Chinese manufacturers, traders, and the government went on a shopping spree. China imported 6.7 million tons of unwrought copper last year, a third more than the previous year, and the year-over-year increase alone is equivalent in scale to the entire annual copper consumption of the U.S. Copper is expected to be a cornerstone in the coming decade with its usage in electric vehicles and green energy grids, and U.S. will have to import a lot of it. China’s infrastructure investment in the last two decades means that it accounts for around half of the world’s demand for many metals. Additionally, it is the world’s largest producer of rare Earth metals and dominates the processing of raw materials needed to make lithium-ion batteries – lithium, cobalt, nickel, and graphite. If the U.S. wants to reach its infrastructure goals, it will have to rely on China for its commodity needs.

Price of solar panel modules has risen almost 15% this quarter, representing only the seventh quarter out of the past 45 when prices have failed to decline. The recent surge is being attributed to the increase in price of polysilicon, the semi-metallic substance used to make solar panels and computer chips, which has risen from $10.57 per kilogram, at the end of 2020, to $29.41 per kilogram now, marking a 178% increase. The United Nations (UN) Food and Agriculture Organization (FAO) index for staple commodities has reached its highest levels since September 2011, with May’s gain of 4.8% being the biggest in more than 10 years. They reported that its gauge of world food costs has climbed for a 12th straight month in May, recording its longest stretch in a decade. As a result, there are growing concerns regarding acceleration in broader inflation, which could complicate central banks’ efforts to provide stimulus to economies struggling to recover from the COVID-19 pandemic.

The International Energy Agency (IEA) is recommending western governments that they should consider stockpiling critical raw materials for batteries such as cobalt and lithium, warning that geopolitical risks could adversely affect the world’s green-energy transition. This recommendation comes on the back of commodities’ prices rallying to new highs, and production and processing of rare earth elements being highly concentrated, with the top three producers accounting for more than 75% of global supply. The U.S. Department of Energy reported earlier this year that the nation lacks sufficient domestic resources to meet projected demand for critical raw materials and recommended that the government should partner with allies to build supply chains and develop substitutes.

The S&P Global Natural Resources Index includes 90 of the largest publicly traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across 3 primary commodity-related sectors: Agribusiness, Energy, and Metals & Mining. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources Fund as a percentage of net assets as of 6/30/2021: Filo Mining Corp. 4.69%, Ivanhoe Mines Ltd. 5.10%, Chalice Mining Ltd. 1.96%, Burcon NutraScience Corp. 2.96%, Talon Metals Corp. 2.96%, CopperBank Resources Corp. 1.14%, Chevron Corp. 0.00%, Exxon Mobil Corp. 0.00%, Royal Dutch Shell plc 0.00%.

Standard Disclosure
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. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.  Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

 

Net Asset Value
as of 09/17/2021

Global Resources Fund PSPFX $6.25 -0.08 Gold and Precious Metals Fund USERX $11.49 -0.10 World Precious Minerals Fund UNWPX $4.44 -0.06 China Region Fund USCOX $8.76 0.11 Emerging Europe Fund EUROX $6.85 -0.09 Global Luxury Goods Fund USLUX $23.83 -0.14 Near-Term Tax Free Fund NEARX $2.25 0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change