Commodities 2013 Halftime Report: A Time to Mine for Opportunity?

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

click to enlarge

It was a challenging first half of the year for most commodities, with only two resources we track on our Periodic Table of Commodities Returns rising in value. Natural gas and oil rose 6.5 percent and 5 percent, respectively, while silver lost a third of its value and gold lost a quarter of its price from the beginning of the year.

At first glance, this correction seems to support naysayers who believe the supercycle in commodities has ended, such as Credit Suisse analysts, who had declared that the “era is over,” in its digital magazine, The Financialist.
We disagree. Instead, we see severe price declines as possible buying opportunities during this ongoing commodity supercycle.

Consider the extreme pessimism on gold. As one measure of how bears have ganged up against the yellow metal, take a look at the spike in the level of short positions on the precious metal since the beginning of the year. As of the beginning of July, the number of outstanding gold short contracts was close to 140,000!

click to enlarge

In June, while I was on CNBC’s Squawk Box, Howard Ward, the chief investment officer of GAMCO Investors, made a bullish call based on the severity of the speculative short position:

“It was off the charts, just like it was a week ago for the short position and the yen, the pound and euro. Well, we’ve seen what happened to that. You wanted to be on the other side of that trade. I’ll take the other side of the gold trade as well. Whenever so many people are on one side, I will take the other side. I think gold probably rallies between here and the end of the year.”

There is certainly a pervasive sense of doom and gloom not only for gold, but for the entire resources space. BCA Research’s Commodity & Energy Strategy report points to a recent Bank of America-Merrill Lynch fund manager survey, which shows that exposure to commodities is as low as it was at the end of 2008. The firm’s first-hand experience reveals a similar investor reaction to resources: “Recent client visits to Europe, Australia and Asia confirm widespread pessimism towards the outlook for ‘anything outside the U.S.,’” says BCA.

This is all music to a contrarian’s ears because it’s another sign of a bottom, but BCA advises taking a “patient approach to front-running the eventual cyclical rally in commodities.” It’s all about your time horizon, says the firm.

Supercycles are not short-term; rather, they are long, continuous waves of boom and bust that can last several decades. While the overall trend is up, there are often short-term bursts of volatility. And looking over the next decade or so, the trends driving the current commodity supercycle remain in place.

I recently read an insightful report on this subject that was put together by ETF Securities. In it, analysts highlight two primary long-term drivers.

One entails the urbanization and industrialization trends that are “resource-intensive,” specifically, those found in emerging markets with large populations. Take their energy use, for example, which is “only a fraction of the developed world equivalent,” says ETF Securities. Developed markets, including Australia, France, Germany, Japan and the U.S., all have a higher GDP per capita as well as greater energy use than the emerging markets of Brazil, India, Mexico and China. These countries have significantly large populations, and “a relatively modest rise in per capita energy use will transform into a large absolute increase in global energy use.”

click to enlarge

According to ExxonMobil’s 2013 “Outlook for Energy” report, the energy demand in developing nations “will rise 65 percent by 2040 compared to 2010, reflecting growing prosperity and expanding economies.”

The second driver of the supercycle is the rising cost to produce many commodities, says ETF Securities. I’ve discussed on numerous occasions the difficulties facing gold miners, which have seen lower grades and a lack of discoveries. This has made mining the yellow metal more expensive. And, as I indicated in a recent post, with a lower gold price, miners are rethinking projects that are too costly.

With many other commodities, resources companies are increasingly facing labor strikes, increased taxes and a backlog of projects that ultimately drive up the cost to mine and produce.

We agree with ETF Securities that the supercycle in commodities is alive and well. We are also in agreement with Credit Suisse when the firm explains that “the prices of individual commodities will no longer rise and fall together as they have for the last five years.” Instead, investors “are going to have to focus on the specific supply and demand dynamics for individual commodities.”

In this environment, an active manager with a wealth of experience can thrive. In our experience, commodity prices can move quickly and an active manager is able to tactically shift assets into areas of opportunity.

So, instead of trying to guess which commodity will outshine all others, we suggest diversifying across all commodities to try to smooth out the inherent volatility. See the approach that the Global Resources Fund (PSPFX) takes here.

And when it comes to gold, my position remains: Maintain a 5 percent weighting in gold bullion and a 5 percent weighting in gold stocks, selling when the price moves up significantly and buying when the opportunity presents itself.

Index Summary

• Major market indices finished higher this week. The Dow Jones Industrial Average rose 2.17 percent. The S&P 500 Stock Index moved higher by 2.96 percent, while the Nasdaq Composite gained 3.47 percent. The Russell 2000 small capitalization index rose 3.10 percent this week.
• The Hang Seng Composite appreciated 2.12 percent; Taiwan rose 2.73 percent while the KOSPI gained 2.00 percent.
• The 10-year Treasury bond yield fell 16 basis points this week to 2.58 percent.

Domestic Equity Market

The S&P 500 posted a strong 2.96 percent gain this week. Treasury yields fell sharply after a big run-up last week and the defensive sectors responded with utilities, consumer staples and healthcare leading the way this week. Federal Reserve Chairman Ben Bernanke appeared to soften his tone a little this week, giving the market hope that the Fed’s QE program won’t be reduced in September, as many currently expect.

click to enlarge

Strengths

• The utility sector posted strong across-the-board returns, primarily driven by a changing interest rate outlook.
• The consumer staples sector was also a strong performer this week on broad-based strength as Walgreen, Molson Coors and Avon were particularly strong. All three names had underperformed in recent weeks and rebounded strongly this week.
• Alexion Pharmaceuticals was the best performer in the S&P 500 again this week, up 18.47 percent, as Roche Holding was rumored to be arranging financing to acquire Alexion.

Weaknesses

• Telecom services suffered the only loss on the week as Verizon Communications fell 1.73 percent. Verizon Wireless may end up owing Apple as much as $14 billion for purchase commitments on iPhones that the company hasn’t sold.
• In an otherwise strong week for most stocks, regional banks took a breather this week with the S&P 500 regional bank index falling 0.72 percent. This has been a leader in the market for the past two weeks.
• Intuitive Surgical was the worst performer in the S&P 500 for the week, falling 14.87 percent. The company preannounced significantly lower-than-expected revenue and earnings.

Opportunity

• The current macro environment remains positive as economic data remains robust enough to give investors confidence in an economic recovery, but not too strong as to force the Fed to change course in the near term.
• Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets, which should help the market find a floor.

Threat

• A market consolidation could continue in the near term, as macro concerns could dominate for the next couple of weeks while the market waits for earnings.
• Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the likelihood for policy error is potentially large.

The Economy and Bond Market

The treasury market bounced back this week after Fed Chairman Ben Bernanke indicated the Fed would “push back” if financial conditions became too tight. This signaled to the market that the expected reduction in the Fed’s QE program may be delayed. This caused treasuries to rally across the board with 5-year treasury yields falling 19 basis points and 10-year yields falling 15 basis points.

click to enlarge

Strengths

• The biggest market mover in recent weeks has been commentary from various Fed officials and the minutes from the recent meeting. This week we saw some softening in the rhetoric regarding QE “tapering,” and the market responded.
• Initial readings for retailers June same-store sales data was better than expected, as sales rose 4.3 percent.
• The U.S. reported a $116.5 billion budget surplus in June, which is the biggest monthly budget surplus since April 2008.

Weaknesses

• Higher interest rates are already taking a toll on the housing market as home loan applications fell to a two-year low. Mortgage loan application demand has fallen 44 percent since early May.
• China’s exports unexpectedly fell 3.1 percent, while imports fell 0.7 percent.
• June’s Producer Price Index (PPI) rose by 0.8 percent, and on a year-over-year basis is up 2.5 percent. The higher-than-expected increase was driven primarily by energy prices. Crude oil and gasoline prices continue to move higher so far in July.

Opportunity

• Despite recent commentary, the Fed continues to remain committed to an accommodative policy.
• Key global central bankers, such as the European Central Bank (ECB), Bank of England and the Bank of Japan, are still in easing mode.
• The recent sell-off in bonds is likely an opportunity as higher yields will act as a brake on the economy and potentially become self-fulfilling, thus postponing Fed tapering.

Threat

• Inflation in some corners of the globe is getting the attention of policy makers and may be an early indicator for the rest of the world.
• Trade and/or currency “wars” cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
• The recent bond market sell-off may be a “shot across the bow” as the markets reassess the changing macro dynamics.

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

Gold Market

For the week, spot gold closed at $1,285.70, up $62.50 per ounce, or 5.11 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 4.27 percent. The U.S. Trade-Weighted Dollar Index lost 1.79 percent for the week.

Strengths

• In keeping up with the physical demand trend, we have reports that U.S. Mint gold coin sales have risen 20,000 ounces in the first week of July, compared to 34,500 ounces for the full month of July 2012. So far in 2013, U.S. gold coin sales have reached 810,500 ounces, just shy of the entire 2012 level. Similarly, Chow Tai Fook Jewellery, the world’s biggest jewellery chain, said its first-quarter same-store sales rose 48 percent as Chinese shoppers rushed to buy gold products after the price of the precious metal dropped.
• Chinese inflation accelerated 2.7 percent over a year ago in June, boding well for gold as it remains the most widely held hedge against risky assets and inflation in many parts of Asia. Coincidentally, trading volumes surged during the inauguration of an after-hours trading session on the Shanghai Futures Exchange. Volumes reached 224,320 in the five-and-a-half hour session from 9 pm local time on July 7, compared with an average of 87,129 in June during the regular four-hour trading day.
• Klondex Mines announced further results of its ongoing 2013 exploration and development program on the Joyce structure of its Fire Creek project in Nevada. The weighted average grade of samples from the Joyce structure is 132.8 grams per ton along a 473 ft strike. Previous drilling demonstrates that the mineralization extends beyond the current boundaries, both along strike and at depth. On the same note, Pretium Resources’ CEO Robert Quartermain gave an interview this week in which he highlighted the conditions necessary to be successful in the current cycle. His opinion is that two essential elements have to be present: a high grade gold deposit and keen focus on cost and cash deployment. Based on these metrics, both Pretium and Klondex have great potential to become the next niche North American producers.

Weaknesses

• Allied Nevada Gold announced that Randy Buffington has been appointed President and CEO, while Bob Buchan will remain active as Executive Chairman. The appointment of Mr. Buffington is by no means negative, as he has been steering Allied Nevada through the mill expansion since he was hired as COO last year, according to BMO. However, his appointment highlights a trend that has yet to prove beneficial for the gold sector. BMO restates that out of 71 gold companies in its research coverage universe, this is the nineteenth CEO change in 18 months; all 19 have been replaced by executives internal to the company at the time of promotion.
• Detour Gold released preliminary second-quarter production results, missing its production target as well as under-delivering in terms of grade. Most sell-side analyst coverage appeared too forgiving. Thankfully, George Topping at Stifel Nicolaus provided some color. According to Topping, CEO Panneton said guidance is maintained but can always be changed, leaving room for speculation on a downward revision for guidance in the future. Furthermore, operating costs at $90 million yield cash costs of $2,000 per ounce of gold poured. The company is certainly ramping up, but you can expect more hiccups along the way, concludes Topping.
• Commodities guru Jim Rogers, who successfully predicted gold’s decline to $1,200, gave an interview earlier in the week in which he updated his gold forecast. In his opinion, gold could certainly have a longer correction for the same reason it corrected to $1,200; it had gone up for 12 years in a row. Given this background, gold is likely in the process of making a correction, one which could continue to bring it lower. One thing is certain, according to Rogers; the bull market is not over. Gold is going to eventually make new highs. But first, gold may decline to $960, a point where it will shake even some of the faithful, some of the mystics, as he describes them.

Opportunities

• Bloomberg reports that gold traders have turned the most bullish in five weeks following Fed Reserve Chairman Ben Bernanke’s speech on Wednesday. Nineteen analysts surveyed by Bloomberg expect prices to rise next week, while nine were bearish and three were neutral. Ross Norman, chief executive officer of Sharps Pixley highlighted, “With the Fed comments, with the increased cost of funding a short position and some recalibration in peoples’ thinking about the end of quantitative easing, the onus is really on the bears now.”
• Alamos Gold announced the acquisition of two projects from Esperanza Resources, in a transaction that was well received by the markets. Scotia Research shows Alamos paid approximately $21.50 per ounce of gold compared to a list of recent acquisitions which average $123 per ounce. An 84 percent discount! Not only did Alamos get a bargain price, it also purchased very high quality assets. Alamos is the first company to take advantage of the cheap valuations to acquire valuable assets.
• Despite expectations for the Chinese economy to grow in excess of 7 percent in 2013 and 2014, the Li Keqiang-led government is focusing on three key pillars: no stimulus, deleveraging and structural reform. This policy, which its economists have dubbed “Likonomics,” appears to be the best policy for the long term. However, it comes with further downside risks for both Chinese economic growth and asset prices. According to Barclays, “a steep fall in China’s growth could be the trigger for acceleration in structural changes in the country’s gold demand. A hard landing could shake faith in the government and lead to a big fall in CNY-denominated assets which could mean gold becomes important for domestic investors to hedge what we think they will view as a greater set of risks than previously.”

Threats

• Macquarie’s U.S. Economic research this week highlighted the common error of focusing solely on the unemployment rate to gauge the current status of the labor market, which is in essence what the market anticipates the Fed is doing based on its releases to the press. However, it appears both the Fed and the market are missing the likelihood of a rebound in labor force participation, which is at record lows. According to Macquarie’s research, a conservative timeline for the first Fed rate hike looks more like fourth quarter 2016, a full 24 months later than market consensus of fourth quarter 2014. In fact, Macquarie cites a paper written by the Boston Fed which comes to the same conclusion: the labor participation rate is depressed. In our opinion, the participation rate will pick up faster as we approach the 6.5 percent unemployment rate, ensuring a postponement of any planned rate hikes.
• Scotiabank precious metals analyst Tanya Jakusconek provided an interesting review of financial covenants among senior gold producers. Tanya recommends companies with strong balance sheets and low risks of covenant stress at lower gold prices. According to Tanya, the majority of the debt facilities in place are revolving credit facilities and senior secured/unsecured loans. Financial covenants associated with these facilities are calculated on a four-quarter trailing basis and therefore most are not likely to be triggered in the near future. However, companies expected to have write-downs or those with elevated debt levels, such as Barrick Gold and Goldfield, do not have a lot of room for gold prices to decline before triggering a covenant.
• Upon revisiting its gold supply assumptions, the analysts at Stifel concluded that unlike the copper market, gold miners have historically been reluctant to shut down supply. It can be incredibly expensive to shut mines in terms of severance, crystallizing environmental liabilities and costs of decommissioning. Gold companies prefer shuttering mines as they retain an option on their gold reserves. Miners also resort to high-grading, slashing sustaining capital expenditures, and downsizing before forcing a final closure. With 5 percent of production amongst the senior producers already at uneconomic levels, there is a significant risk of owning loss-making gold producers for prolonged periods of time. This is the main reason why we emphasize the importance of active management and careful stock selection, rather than reliance on indexed exchange traded funds.

July 10, 2013 Bond Yields Gone Wild?	July 8, 2013 The Asian Giant Stampeding into Gold	July 5, 2013 Accessing Myanmar’s Growth

Energy and Natural Resources Market

click to enlarge

Strengths

• The price of West Texas Intermediate (WTI) crude oil gained nearly 3 percent this week to $106 a barrel on expectations of an improving economy and tightening inventories.
• Nucor hiked steel plate prices by a minimum of $30 per ton (around 4 percent), and this move was followed by ArcelorMittal USA and SSAB Americas in separate announcements.
• China’s daily crude steel output for the last 10 days of June rose approximately 1 percent to 2.181m tons per day. This latest figure annualizes to 796 million tons per annum versus output of roughly 709 million tons in 2012.
• China’s copper imports climbed to a nine-month high in June. Imports of the refined metal, alloy and products were 379,951 metric tons last month, according to the General Administration of Customs. This is the highest level since September and 5.9 percent higher from May, according to data compiled by Bloomberg.

click to enlarge

Weaknesses

• A tragic accident occurred over the weekend in Quebec, with a crude train derailing and causing an explosion resulting in five deaths. This will almost certainly draw attention to the safety of shifting enormous amounts of crude oil by rail as opposed to pipeline.
• According to Macquarie, strength in the U.S. construction and auto markets has thus far failed to translate into improved metals demand, and in the case of aluminium, first-half orders for mill products are markedly down on the same period of last year. Latest data from The Aluminium Association shows that net new orders for mill products were down 2.4 percent sequentially and 0.6 percent from the prior year in June.
• Chile’s Codelco mill is selling noncore assets to finance its investment plans: $27 billion to expand annual capacity to more than 2 million tons per year from the current 1.7 million tons per year. This is after the government allocated less money (a mere $1 billion) than it wanted to, according to Reuters.

Opportunities

• World Nuclear News reports that four Japanese utilities have so far submitted restart requests for 10 nuclear reactors (of 48 non-operating reactors in Japan), with two more submissions expected before next week. TEPCO had been planning on submitting restart applications for two high-capacity reactors that were unaffected by the 2011 Tohuku earthquake and tsunami.
• The new Chinese Administration’s desire to increase urbanization rates was demonstrated by the acceleration of a $6.4 trillion program to bring 400 million people into cities over the coming ten years. This is down 20 years under the original plan, which would increase the demand for resource-intensive investment.
• The world economy will grow by 3.1 percent in 2013 and 3.8 percent in 2014, according to the latest IMF forecasts published this week.

Threats

• China’s government has continued to reset expectations for the country’s economy. Finance Minister Lou Jiwei forecasts that GDP will rise 7 percent this year, below official targets of 7.5 percent. Lou also said that growth of 6.5 percent wouldn’t be a problem and that he doesn’t expect the economy to suffer a hard landing.

China Region Fund – USCOX  •  Emerging Europe Fund – EUROX
Global Emerging Markets Fund – GEMFX

Emerging Markets

Strengths

• Sentiment in China is improving as the People’s Bank of China (PBOC) and government officials have softened their stance on monetary policy. After Premier Li Keqiang pledged policy support to stabilize growth during an economic meeting in Guanxi province with several local governors, the market also believes there is a “Li Keqing Put” on the downside. With that optimism, the market should be reminded that reforms are equally important to restructure the economy for long-term sustainable growth.
• China’s new bank loans were Rmb 860.5 billion in June, exceeding the market consensus of Rmb 800 billion. However, total social financing (TSF) was Rmb 1.04 trillion, lower than the market expectation of Rmb 1.275 trillion, showing the tightening policy effect on off-balance sheet financing. The market speculated that China will be easing on mortgage loans for first-time homebuyers, so property and construction stocks rebounded this week.
• China’s June inflation was 2.7 percent, higher than the market expectation of 2.5 percent, but down 0.6 percent month-over-month. The higher number was due to a low base effect. The Producer Price Index (PPI) was down 2.7 percent. This is lower than the market estimate of a 2.5 percent drop, but better than the drop of 2.9 percent in May. The down trend in PPI indicates a continuing de-stocking process and is a negative indication of profitability for up- and mid-stream companies.
• China’s June auto sales were in line with expectations, up 12.3 percent year-over-year.
• After adding Shanghai as a free trade zone, Tianjing city submitted its plan to become one itself. Shenzhen Qianhai is already a free trade zone where the economic and legal system will fashion a common law system.
• The Bank of Korea, the central bank, kept the policy rate unchanged at 2.5 percent in its July Monetary Policy Committee (MPC) meeting. The rate is in line with the market expectation, while it revised up its 2013 and 2014 GDP growth forecasts by 20 basis points to 2.8 percent and 4.0 percent, respectively. Korea’s jobless rate remained at 3.2 percent, but steady job growth is expected for the second half of this year.
• Taiwan exports went up 8 percent in June on robust growth in the export of electronics, mineral and optical equipment products. ASEAN was Taiwan’s fastest growing export market, up 7.1 percent year-to-date at the end of June. Trades with Japan and China were up 5.5 and 3.8 percent, respectively in the same period.
• Manufacturing production in the Philippines soared by 20.4 percent in May after an 8.7 percent gain in April.
• Moody’s Investors Service is opening a new office in Warsaw that reflects Poland’s increasing role as Central Europe’s largest financial market. The credit agency cited Poland’s significant expansion of its corporate bond market to around $37 billion, as Polish investors are increasingly looking toward capital markets to meet their growing financing. Similarly, it was reported earlier this year that Warsaw’s stock exchange consolidated as Central Europe’s dominant trading hub attracted 41 initial public offerings, lured by Poland’s cash-rich pension and mutual funds, while Vienna and Prague had one public offering each.
• Colombia’s foreign debt rating outlook was raised to positive by Moody’s Investors on expectations that the Andean country’s shrinking budget deficits will drive down its debt levels. According to Moody’s, there is evidence of Colombia’s budget deficit trending lower in recent years, as expectations of continued improvements in the main debt metrics will support further upgrades. In addition, ongoing peace talks of the Revolutionary Armed Forces of Colombia (FARC) have shown positive developments, which could prove as a positive catalyst.

Weaknesses

• The last 30 days have been tough for equity markets in Latin America. Overall flows remain weak in Colombia with pension funds as main sellers, divesting $116 million from Colombian local equities. Individual investors kept very low levels of investments at $15 million. The positive note is pension funds have more than $2.8 billion to increase exposure to Latin American and Colombian equities, and they might start buying as valuations have corrected significantly. Despite flow weakness, Colombia took only half of the MSCI emerging market decline hit, posting a 6.3 percent drop during the period.
• Despite an inflation deceleration to 6.6 percent from 6.9 percent in Russia, consumer-price growth would need to slow further before Bank Rossii will cut its main policy rates. Even after the economy ministry said today that price growth may slow to 6.5 percent this month, it would still hang significantly above the bank’s inflation target range of 5 percent to 6 percent. Consequently, Russia’s central bank left its main interest rates unchanged this week, which also marked Putin-favored Elvira Nabiullina’s first policy meeting as chairman. The refinancing rate will remain at 8.25 percent, despite global economic conditions undermining economic growth and fueling social unrest in parts of the world.
• China’s exports were down 3.1 percent in June versus the expectation for a 3.7 percent gain. Imports dropped 0.7 percent versus the expectation for a 6 percent gain.
• China’s money supply (M2) went up 14 percent in June versus the market consensus of 15.2 percent and 15.8 in May.
• Bloomberg reported the Chinese Finance Minister Lou Jiwei signaled that China may tolerate a 6.5 percent GDP growth rate in the future.
• Indonesia’s central bank, Bank Indonesia (BI), raised the policy benchmark rate by 50 basis points to 6.5 percent in expectation of rising inflation due to the recent increase of the subsidized fuel price. BI indicated that a 75 basis point rate increase should be enough to dampen the effect of the fuel price rise, which also means BI may keep this rate on hold in the next policy meeting.
• Bank Indonesia’s reserve fell $7 billion to $98.1 billion in June. Since the beginning of the year, there were $47.7 billion net fund inflows to Indonesia. However, 90 percent of the money had left in the recent two months in global sell-offs after the Fed indicated its intention to reduce QE3 by the end of the year. The good news may be that all the hot money has drained out and the sell-off will stop soon.

Opportunities

• HSBC has increased the weight of Colombia in its Latin America portfolio as the country reflects better domestic growth dynamics and lower exposure to China than its South American peers. Colombia’s economy has a higher correlation to the U.S. and its exports and equity markets are more related to oil, while its peers are more associated with China and metals. Economists estimate economic growth will reaccelerate to 4.5 percent in the second half of the year, given the government’s timely counter-cyclical policies and strong monetary stimulus. The next catalyst will come as the government makes efforts to increase the effectiveness of public spending, with policies that are supportive of the cement and construction sector.

click to enlarge

• As shown in the graph below, the Philippines has seen improving asset quality, with non-performing loans (NPL) trending down over the years. Growing GDP has driven up corporate profits, and increasing income and remittance has also helped improve the household balance sheet. This lower default rate is beneficial to banks and property developers.

click to enlarge

• Despite numerous reports of violent protests in Egypt taking many lives during a confrontation between Mursi supporters and the military, progress on the policy side is becoming evident. Already on Monday, Hazem El-Beblaw was appointed as prime minister; El-Beblawi is widely recognized as a technocrat, and a non-political figure able to move forward the process of national reconciliation. A timeline for amending the constitution and holding legislative and parliamentary elections was also adopted. As a result, the United Arab Emirates, pledged $3 billion, while Saudi Arabia put up $5 billion, including a $2 billion deposit with the central bank in financial aid to Egypt.

Threats

click to enlarge

• Foreign capital inflows to Turkey, that helped the local market rise earlier this year, continued to flee causing the Turkish lira to depreciate nearly 9 percent since May. Turkey’s central bank sold around $2.5 billion earlier this week to prop up the lira. With Turkey’s total net reserves below $40 billion, it is becoming harder for the European nation to afford to spend its reserves in defense of the currency. Markets are beginning to price-in a hike in interest rates toward the upper end of the corridor as the only remaining viable alternative. A rate hike could add headwinds to the local market, which, as evidenced in the chart above, has been supported by central bank rate cuts.
• Brazil’s central bank raised the benchmark interest rate a third consecutive time. The bank gave the impression that the world’s biggest tightening cycle is set to continue until year-end, as inflation threatens to create chaos within the BRIC country. The bank’s board raised the benchmark rate by 50 basis points to 8.50 percent. The move, which aims to ensure long-term economic growth, presents a risk as it may serve to undermine economic growth in the short term and to fuel social unrest.
• Weak exports and consistent negative PPI reflect weak global and domestic demands for China. It is generally believed to be weak in the short- to medium-term. This may be the reason the Chinese government changed its tone recently. In particular, Premier Li Keqiang talked about “stabilizing growth” and supporting shanty projects, existing infrastructure, and environment protections as means to sustain a targeted GDP growth rate.

Leaders and Laggards

The tables show the weekly, monthly and quarterly performance statistics of major equity and commodity market benchmarks of our family of funds.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Emerging Europe Fund invests more than 25 percent of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors. Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise.
The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

Past performance does not guarantee future results.

These market comments were compiled using Bloomberg and Reuters financial news.

Holdings as a percentage of net assets as of 6/30/13:

Walgreen Co.: 0.0%
Molson Coors Brewing Co.: 0.0%
Avon Products, Inc.: 0.0%
Alexion Pharmaceuticals, Inc.: 0.0%
Roche Holding AG: 0.0%
Verizon Communications, Inc.: All American Equity Fund, 1.15%
Intuitive Surgical, Inc.: 0.0%
Chow Tai Fook Jewellery Group: 0.0%
Klondex Mines Ltd: World Precious Minerals Fund, 3.48%
Pretium Resources, Inc.: World Precious Minerals Fund, 1.58%
Allied Nevada Gold Corp.: 0.0%
Detour Gold Corp.: 0.0%
Alamos Gold, Inc.: Global Resources Fund, 0.20%; Gold and Precious Metals Fund, 1.55%; World Precious Minerals Fund, 1.62%
Esperanza Resources Corp.: 0.0%
Barrick Gold Corp.: Gold and Precious Metals Fund, 2.18%; World Precious Minerals Fund, 0.12%
Goldfield Corp.: 0.0%
Nucor Corp.: 0.0%
ArcelorMittal: 0.0%
SSAB: 0.0%

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The S&P BARRA Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios.
The S&P BARRA Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The MSCI Russia Index is a free-float weighted equity index developed in 1994 to track major equities traded in the Russian market.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The Bloomberg Gold Bear/Bull Sentiment Indicator charts the percent of respondents in a weekly Bloomberg News survey of traders, investors, and analysts predicting gold prices will rise the following week. The number of participants in the survey, which is completed every Friday, may vary.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
The S&P/TSX Global Gold Index is an international benchmark tracking the world’s leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.
The 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 HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.
The Producer Price Index (PPI) measures prices received by producers at the first commercial sale. The index measures goods at three stages of production: finished, intermediate and crude.