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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

(VIDEO) What Drives the Price of Gold?
March 9, 2017

In my more than 35 years of investing in hard assets, precious metals and mining, I’ve learned to manage my expectations of gold’s short-term price action. Sure, there have been surprises along the way, but generally, the yellow metal has behaved relatively predictably to two macro drivers, the Fear Trade and Love Trade.

Last year, gold had its best first half of the year in decades, all in response to Fear Trade factors such as low to negative global government bonds and geopolitical risks, specifically Brexit and the upcoming U.S. election.

But the Love Trade failed to lift gold in the fourth quarter mainly because Indian Prime Minister Narendra Modi’s demonetization efforts to combat dark money and tax evasion left many low and middle-income Indians without the cash to purchase gold jewelry for weddings and investment purposes.

Investing, like life, is all about managing expectations. But if you don’t know what to look for, this can be difficult to do. That’s why we put together this video to help educate investors like you on what we believe are the top five drivers of gold. I hope you find it helpful in informing your investment decisions. If you find any value in it, I invite you to pass it along to your friends and colleagues.

Happy investing!    

 

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

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Why Commodities Could Be on the Verge of a Massive Surge
March 8, 2017

After finishing 2016 up 25 percent, commodities are getting another boost from bullish investors. Investment bank Citigroup forecasts commodity prices will increase this year on strengthening demand in China and mounting inflation inspired by President Donald Trump’s “America First” policies. Commodity assets under management globally stood at $391 billion in January, up 50 percent from the same time the previous year, according to Citigroup.

Meanwhile, hedge fund managers significantly raised their bets that copper and oil prices have much further to climb, Bloomberg reported, with net-long positions in the Comex and Nymex markets surging to all-time highs.

Bets on Rising Crude Oil and Copper Prices Surged to Record Highs
click to enlarge

In addition, global manufacturing activity has expanded for the past six straight months, a good sign for commodities demand going forward. As I shared with you earlier in the week, the global purchasing managers’ index (PMI) advanced to a 69-month high of 52.9 in February, with strong showings from the U.S. and eurozone.

JP Morgan Global Manufacturing PMI at 69-Month High in February
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Asia Looking for $26 Trillion: Asian Development Bank

As for China and the rest of Asia, a recent special report from the Asian Development Bank (ADB) calculates the cost to modernize the region’s infrastructure at between $22.6 trillion and $26 trillion from 2016 to 2030. This comes out to about $1.7 trillion a year in global investment that’s required to maintain Asia’s growth momentum, deliver power and safe drinking water to millions, connect towns and cities, improve sanitation and more.

Asia and Pacific Region Needs $26 Trillion Through 2030 for InfrastructureAs you can see in the chart below, the bulk of the infrastructure need is in East Asia, which is seeking more than $16 trillion between now and 2030.

Governments have devoted funds to support only some of the projects. Currently, 25 economies in the region are spending a combined $881 billion annually on such projects, leaving a substantial spending gap for global investors to fill. This is an unprecedentedly huge opportunity for commodity and materials investors.

To make investment more attractive, however, regulatory and institutional reforms will need to be made in the region.

China, for instance, announced plans to curb aluminum, steel and coal production in an effort to combat air pollution. According to the Financial Times, as many as 30 northern Chinese cities are expected to cut aluminum capacity by more than 30 percent, a move that’s seen as very favorable to the rally that’s already helped the base metal gain over 11 percent so far in 2017.

Aluminum Could Benefit Even More from China Production Curb
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In the past five trading days, shares in leading aluminum producer Alcoa have surged on the news, jumping as much as 9.8 percent on March 1 alone. Since the November election, in fact, the company has gained more than 44 percent on optimism over President Trump’s pledge to spend $1 trillion on U.S. infrastructure.

China's aluminum capacity cuts should help support prices even more this year.

$3.9 Trillion Still Needed in the U.S.

One trillion dollars sounds like a lot, but it falls remarkably short of the $3.9 trillion the U.S. needs by 2025 to rebuild its own aging infrastructure. That’s the estimate of the American Society of Civil Engineers (ASCE), which gave the nation’s overall infrastructure a D+ in 2013, with “poor” scores given to levees, roads, inland waterways, drinking water and more.

One of the most urgent areas for investment is the nation’s crumbling dams. According to energy news outlet E&E, about 70 percent of America’s 90,000 dams will be at least 50 years old by 2025, putting them near the end of their engineering lifespans. An estimated 15,500 American dams are now considered “high hazard,” meaning their failure could cause fatalities.

An estimated 70% of American dams will be over 50 years old in 2025.

The cost of repairing and upgrading these structures is estimated to be around $54 billion.

According to E&E, 80 dams failed in South Carolina in the past two years alone, causing millions of dollars’ worth of property damage.  And just last month in a high-profile case, more than 188,000 Californians had to be evacuated to avoid the collapse of the Oroville Dam, the nation’s tallest dam.

Like the ADB’s Asian infrastructure estimate, this has massive market potential. More than 80 percent of U.S. infrastructure, from schools to streets to sanitation, is in either private or municipal ownership. This means commodity and municipal bond investors will need to pick up where federal dollars leave off.

Curious about investing opportunities in commodities and resources?

 

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

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2016.

 

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Disrupt... Or Get Disrupted
March 6, 2017

disrupt or get disrupted

Last week I was in Vancouver attending YPO EDGE, the annual summit for business executives from more than 130 countries. YPO, which stands for Young Presidents’ Organization, has roughly 24,000 members worldwide. Together, they employ 15 million people and generate a massive $6 trillion in revenue annually.

What I appreciate about YPO is that it stresses peer-to-peer learning. Those who think it’s all about networking and cutting deals are missing the point.

The theme this year was disruption—how innovative breakthroughs in technology, medicine, transportation, machine learning and more have transformed, and will continue to transform, the world we live and work in.

Moneyball movie poster

“Disrupt, or get disrupted,” John Chambers, executive chairman and former CEO of Cisco, said during his conversation with CNBC’s Tyler Mathisen.

Chambers was speaking specifically of what he calls the “digital era,” which will soon replace the information age. The internet of things is expanding very aggressively right now, but it’s still in its infancy. In 10 to 15 years, Chambers says, more than 500 billion devices worldwide will be connected to the internet. This will irrevocably change how we live our daily lives, conduct business, deploy health care, invest and more.

So what does this mean? For one thing, Chambers estimates that as much as 40 percent of companies now in operation around the world will not exist “in a meaningful way” sometime within the next two decades. To survive, companies will need to reinvent themselves by integrating digitization into the fabric of their business strategy. In the world Chambers imagines, every company will be, at its core, a technology company, and data will become the new oil.

After his presentation, I had the pleasure to share a few words with Chambers in private. I was amazed to hear that, during his tenure as CEO in the 1990s, Cisco had an unbelievable compound annual growth rate (CAGR) of 65 percent. I was even more amazed to hear that he managed to turn 10,000 of his employees into millionaires. I don’t know if that’s a record, but it wouldn’t surprise me if it was. He told me that he wouldn’t be able to do the same today because of our current tax laws. In any case, Chambers embodies all that makes America great—curious, innovative, forward-thinking and willing to share his share his success with his employees.

How to Pick Home Run Stocks, According to Moneyball

A lot of what Chambers talked about during his presentation reminded me of one such disruptor, Billy Beane, the former general manager of the Oakland A’s and subject of Michael Lewis’ 2003 bestseller Moneyball: The Art of Winning an Unfair Game, which was later turned into a 2011 film starring Brad Pitt. Despite being about baseball, it’s one of the best books on stock-picking ever written.

Moneyball movie poster

For those unfamiliar, Moneyball tells the story of the A’s’ famous 2002 season and Beane’s efforts to build a competitive team despite a lack of revenue and the recent loss of several key players, among other disadvantages. Making matters worse, conventional factors for selecting new players—long perpetuated by the “wisdom” of industry insiders—had grown stale, antiquated… and just plain wrong. Appearance, personality and other biased perceptions were still very much part of the selection process.

With little else left to lose, Beane focused on what he felt were better indicators of offensive performance, including on-base percentage and slugging percentage. This allowed him to cut through the biases and find overlooked, undervalued, inexpensive players. “An island of misfit toys,” as Jonah Hill’s character Peter Brand puts it in the movie.

Beane, in other words, became a value investor—one who depended not on emotion or “instinct” but empiricism and quantitative analysis. All of the picks who fell into his model were mathematically justified.

The strategy worked better than anyone expected. Although the A’s had one of the lowest combined salaries in Major League Baseball, they finished the year first in the American League West. Their winning streak of 20 consecutive wins that season remains the longest in American League history.

Longest Winning Streaks in American League Baseball History
Team Number of Wins Season
A’s 20 2002
White Sox (tie) 19 1906
Yankees (tie) 19 1947
Royals 16 1977
Mariners (tie) 15 2001
Red Sox (tie) 15 1946
Twins (tie) 15 1991
Source: MLB, U.S. Global Investors

Beane changed the game—literally. Today, nearly every club in the MLB relies on “sabermetrics,” or baseball statistics, to select players. This helps them develop a “portfolio” of constituents whose overlooked potential gives the club the greatest odds possible of outperforming the “market.”

Finding Frugal Miners

As active managers, we try to do the same. Like Beane, we use a host of quantitative, top-down and bottom-up factors to help us find the most undervalued precious metals and resource stocks.

One such factor, low SG&A-to-revenue, I shared with you back in September. “SG&A” stands for “selling, general and administrative expenses” and refers to the daily operational costs of running a company that are not related to making a product. It stands to reason that a company with lower-than-average expenses relative to its revenue might have wider margins than a company with oversized expenses, but few investors look at this metric outside of quants.

Using this factor, we found 10 names whose average returns in the first quarter of 2016 amounted to a phenomenal 88 percent—nearly double what the Market Vectors Gold Miners ETF (GDX) returned over the same three-month period.

Top 10 Gold Names Based on SG&A-to-Revenue
click to enlarge

Of course, a company must meet several other factors before it qualifies for our models, but this is just one example of the type of rigorous quantitative analysis we conduct.

Probability Is in the Pudding

In Moneyball, Lewis quotes Dick Cramer, cofounder of STATS, a sports statistics company: “Baseball is a soap opera that lends itself to probabilistic thinking.”

The world of investing is the same, and lately there’s been no better soap opera than watching the major indices hit near-daily all-time highs on hopes that President Donald Trump and the Republican-controlled Congress can lower taxes, slash regulations and find the money to invest in the military and infrastructure. On Monday last week, the Dow Jones Industrial Average posted its 12th straight day of gains, a winning streak we haven’t seen in 30 years. And on Wednesday, it tied a previous record, set in 1987, for the fastest 1,000-point move. It took only 24 trading days for the Dow to surge from 20,000 to 21,000. (Since then it’s fallen below that mark.)

Dow Jones Industrial Average Ties Record for Fastest 1,000-Point MOve
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But like baseball, investing lends itself to probability thinking, and here we have experience as well.

As I’ve said a number of times before, we closely monitor the monthly Global Manufacturing Purchasing Managers’ Index (PMI) because it’s forward-looking rather than backward-looking, like gross domestic product (GDP). As such, we’ve found a high correlation between the PMI reading and the performance of commodities and energy one, three and six months out. When a “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has historically signaled a possible uptrend in crude oil, copper and other commodities. Our research shows that between February 2007 and February 2017, the S&P 500 Energy Index rose 10.2 percent, 79 percent of the time after a “cross-above,” while the S&P 500 Materials Index rose 7.2 percent, 86 percent of the time. Knowing this helps us anticipate the opportunities ahead.

Commodities and Commodity Stocks Historically Rose Three Months After PMI Cross-Above
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In February, the global PMI rose to 52.9, a 69-month high. It was also the sixth straight month of manufacturing expansion, which bodes well for commodities, materials, miners and other key assets we invest in.

Individual PMI readings for the U.S., eurozone and China—which together make up about 60 percent of global GDP—all advanced in February. 

Manufacturing Activity Accelerates in U.S., Eurozone and China
click to enlarge

The eurozone’s reading of 55.4 was its highest since April 2011, with expansion being led by the Netherlands, Austria and Germany. The region is more optimistic about the future than at any time since the debt crisis, and the weakened euro has provided a welcome tailwind to help boost sales and exports.

China’s PMI held above 50.0, indicating industry expansion, for the seventh straight month in February on improved new order inflows, higher demand and greater optimism.

The U.S., meanwhile, ended the month with an impressive 57.7, its highest reading since August 2014. Of the 18 manufacturing industries that are tracked, 17 reported growth, including machinery, computer and electronic products, metals, chemical products and others. New orders rose significantly, from 60.4 in January to 65.1 in February, as did backlog of orders, which advanced a whopping 7.5 percent.

Mark Your Calendars!

Join me later this month in St. Petersburg, Florida, for the 19th Anniversary Investment U conference! I’ll be speaking on gold, airlines and infrastructure. Tickets are now available. I hope to see you there!

 

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: Harmony Gold Mining, Northern Star Resources, Regis Resources, Sibanye Gold.

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

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The Diversification Benefits of Gold
March 1, 2017

the diversification benefits of gold

Gold posted its second straight monthly gain in February, the first such time it has done so since the summer, when Brexit-fueled uncertainty shook world markets. In 2017, the yellow metal has now advanced close to 9 percent, cracking the $1,260 an ounce ceiling on Monday for the first time since soon after the November election. Compared to the same number of trading days last year, gold was up 15 percent.

Gold Posts Second Straight Monthly Gain Since Summer
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Lately we’ve seen money managers and hedge funds increase their net long position on gold. This is impressive considering that equities are still holding strong and regularly hitting new highs. As of February 27, the Dow Jones Industrial Average was up for 12 straight days, a winning streak we haven’t seen in 30 years.

Dow Jones Industrial Average Up 12 Straight Days
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Gains in the large-cap index have been led by plane-maker Boeing, which stands to benefit “big league” from President Donald Trump’s proposal to boost military spending 10 percent, or $54 billion, announced yesterday.

Boeing Climbing Higher on Trump's Military Build-Up Plan
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Money managers’ bullish bet on gold at this time shows that the precious metal continues to hold an important place in most investors’ portfolios. Over the past 10 years, gold has shown little to no correlation with blue-chip or small-cap stocks, making it an exceptional diversifier for investors who might fear stocks have risen too much, too fast, and are due for a pullback. In a note last week, UBS analyst Joni Teves said as much, writing that “gold interest on the back of diversification and hedging reasons are likely to be resilient as uncertainty and political risks linger.”

Gold has little to no correlation with stocks, big and small
click to enlarge

Worldwide, Gold Investment Is Encouraged

Gold’s well-known diversification benefits are among the reasons that prompted Islamic finance policymakers to develop the Shari’ah Standard on Gold, unveiled in December 2016, which finally opens up the precious metal as an investment tool in the global $1.88 trillion Islamic finance industry. Before now, there were no Shari’ah-compliant investments that could be considered “safe havens.” Permitting physical gold and gold-backed funds into the universe of allowable investments changes that.

More recently, the governor of Kyrgyzstan’s central bank, Tolkunbek Abdygulov, expressed his “dream” to see all 6 million citizens of the Central Asian country to own at least 100 grams, or 3.5 ounces, of physical gold.

Kyrgyzstan's central bank urges all 6 million citizens to own at least 3.5 ounces of gold.

Speaking to Bloomberg,  Abdygulov said that the metal “can be stored for a long time and, despite the price fluctuations on international markets, it doesn’t lose its value for the population as a means of savings... We are hopeful that our country’s population will learn to diversify its savings into assets that are more liquid and—more importantly—capable of retaining their value.”

Here in the U.S., some states are taking action to diversify into gold and silver, thereby “breaking the Federal Reserve’s monopoly on money,” as Zero Hedge writes. The Texas Bullion Depository—the first such depository in the U.S.—is in its final stages of construction, and in Utah, legislation was just introduced that would expand on the state’s 2011 Legal Tender Act, which allows citizens, businesses and organizations to pay off debt using gold and silver. The proposed legislation would “authorize the investment of public funds in specie legal tender held in a commercial specie depository,” according to Zero Hedge. “Specie” refers to gold and silver coins. Therefore, it looks as though Utah aims to follow Texas’ lead by building a bullion depository and diversifying a portion of public funds in gold and silver.

 

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

Diversification does not protect an investor from market risks and does not assure a profit.

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 Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: The Boeing Co. 

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This Natural Gas Opportunity Is Years in the Making
February 27, 2017

Last week I was in beautiful Argentina with a diverse team of investors and mining executives, including my good friend Frank Giustra; Ian Telfer, founder of Silver Wheaton and current Chairman of the Board of Goldcorp, which has sizeable investments in Argentina; and Serafino Iacono, Chairman of the Board of Pacific Exploration and Production (formerly Pacific Rubiales), which is active throughout South America. Together we toured various natural gas and crude oil mining projects in Tierra del Fuego, Mendoza and Santa Cruz, where we had the opportunity to speak with Governor Alicia Kirchner, elder sister to former Argentinian president Néstor Kirchner.

meeting with santa cruz governor alicia kirchner

One of the highlights of the trip was meeting with current president Mauricio Macri in Buenos Aires. Macri, as you might know, was elected in late 2015 on his credentials as a businessman and former mayor of Buenos Aires. His administration ends more than a decade of socialist rule by Kirchner and his wife Cristina Fernández, who was indicted this past December on corruption charges.

Even with Macri at the helm, corruption remains a problem in Argentina. The South American country currently ranks 95th in Transparency International’s 2016 Corruption Perceptions Index.

But economic conditions are improving. After contracting 1 percent in 2016, country GDP is expected to grow as much as 2.8 percent this year. Macri’s mission to make Argentina great again has already led him to abolish currency controls, return to world credit markets, attract foreign investors and set in motion a plan to reduce the fiscal deficit. After that, he hopes to get around to tax reform. In the meantime, there’s the energy sector.

A Plan to End Natural Gas Imports by 2022

Since 2008, Argentina has been a net importer of hydrocarbons, mainly natural gas, which represents more than half of the country’s energy matrix. Prices are low right now, so the economic impact is not detrimental. Should prices begin to rise substantially, however, it could destroy the economy. As such, my friends and colleagues were invited to help develop the fields and prevent further overreliance on imports. The government, in fact, wants to end them altogether by 2022.

Argentina Import Natural Gas Meet Demand
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Production declined mainly because of underinvestment during the two Kirchner administrations. Stringent regulations forced companies to sell product in the domestic market at a discount to international prices. Capital dried up to reinvest in the fields, and the natural decline of well production drove the overall output down. Making matters worse, companies lacked access to capital markets due to the Argentina sovereign debt default in 2001.

Goldcorp Chairman Ian Telfer me

As I said, the country is fabulously rich in hydrocarbons such as natural gas and petroleum. It’s estimated to have the world’s third-largest natural gas reserves and, according to the independent research Wilson Center, it “could possibly be the country with the most promising shale prospects outside of the United States.” Its most promising formation is Vaca Muerta (“Dead Cow”), located in the Neuquén basin, which has been compared to Texas’ prolific Eagle Ford play in terms of depth and thickness.

YPF, the government’s oil company, has already done exceptional exploration work, so there are numerous areas ready to be developed. This is the opportunity for us.

Having seen the projects firsthand and spoken to policymakers, I’m confident Macri can help open up Argentina’s energy sector and streamline production. Upon taking office, one of the president’s first acts was to slash the previous administration’s energy subsidies, which cost the government more than $51 billion over the past 13 years. Electricity bills in Buenos Aires rose a reported 500 percent as a result, but the move allowed the government to save a much-needed $4 billion in 2016 alone.

End Government Energy Argentinas Inflation Soaring
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Policy Change in the U.S. Has Also Had Amazing Consequences

As for the U.S. energy sector, crude exports have never been stronger. After Congress lifted the U.S. oil export ban in December 2015, exporters didn’t hesitate to turn on the spigots. Now, for the second week as of February 17, the U.S. sent more than 1 million barrels of crude onto world markets, filling the gap created by the Organization of Petroleum Exporting Countries (OPEC) in December when it agreed to trim production.


US Now Petroleum Exporting Country
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Producers are also ramping up activity. In the week ended February 17, companies pumped more than 9 million barrels a day for the first time since April 2016. The recent weekly record of 9.6 million barrels a day, set in July 2015, could be tested if producers continue their upward trend.

Daily US Oil Production 9 Million Barrels
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Even with increased output, prices continue to creep up. From its low of just over $30 a barrel last February, Brent crude has climbed 88 percent.

Brent Oil Above Mid Long Term Moving Averages
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Happy investing!

 

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.

The Corruption Perception Index was created in 1995 by Transparency International. It ranks almost 200 countries on a scale of zero to 10, with zero indicating high levels of corruption and 10 indicating low levels. Developed countries typically rank higher than developing nations due to stronger regulations.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: Silver Wheaton Corp.

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

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Net Asset Value
as of 08/18/2017

Global Resources Fund PSPFX $5.45 0.01 Gold and Precious Metals Fund USERX $7.39 0.03 World Precious Minerals Fund UNWPX $6.49 0.08 China Region Fund USCOX $10.12 0.05 Emerging Europe Fund EUROX $6.76 0.03 All American Equity Fund GBTFX $23.63 -0.22 Holmes Macro Trends Fund MEGAX $19.35 0.02 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change