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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.

Solar Shines on Silver Demand
November 24, 2014

Back in the olden days, before the advent of digital cameras, photographers used a curious thing called film. Surely you remember having to feed a roll of the stuff into your analog camera. Then you’d take the roll to your local drug store and wait a week for it to be developed, only to discover that you had the lens cap on during the entirety of Cousin Ted’s birthday party.

What some people don’t know about film is that it’s coated with a thin layer of silver chloride, silver bromide or silver iodide. Not only is silver essential for the production of film but it was also once necessary for the viewing of motion pictures. Movie screens were covered in paint embedded with the reflective white metal, which is how the term “silver screen” came to be.

Since 1999, photography has increasingly gone digital, and as a result, silver demand in the film industry has contracted about 70 percent. But there to pick up the slack in volume is a technology that also requires silver: photovoltaic (PV) installation, otherwise known as solar energy.

For the first time, in fact, silver demand in the fabrication of solar panels is set to outpace photography, if it hasn’t already done so.   

Silver-Fabrication-Demand-Has-Shifted-Toward-Electronics
click to enlarge

Every solar panel contains between 15 and 20 grams of silver. At today’s prices, that’s about $20 per panel. When silver was hanging out in the mid-$30s range a couple of years ago, it was double that.

Other industrial uses of silver can be found in cell phones, computers, automobiles and water-purification systems. Because the metal also has remarkable antibacterial properties, it’s used in the manufacturing of surgical instruments, stethoscopes and other health care tools. Explore and discover more about the metal’s many industrial uses in our “Brief History of Silver Production and Application” slideshow.

Going Mainstream

Solar energy was once generally considered an overambitious pie-in-the-sky idea, incapable of competing with and prohibitively more expensive than conventional forms of energy. Today, that attitude is changing. Year-over-year, the price of residential PV installation declined 9 percent to settle at $2.73 per watt in the second quarter of this year. In some parts of the world, solar is near parity, watt-for-watt, to the cost of conventional electricity.

According to a new report from Environment America Research & Policy Center:

The United States has the potential to produce more than 100 times as much electricity from solar PV and concentrating solar power (CSP) installations as the nation consumes each year.

Additionally, president and CEO of solar panel-maker SunPower Tom Werner says solar could be a $5 trillion industry sometime within the next 20 years, calling it “one of the greatest ever opportunities in the history of markets.”

This investment opportunity will likely expand in light of the climate agreement that was recently reached between the U.S. and China. Back in April I discussed how China, in an effort to combat its worsening air pollution, is already a global leader in solar energy, accounting for 30 percent of the market.

Commenting on how government policy can strengthen investment in renewable energies, Ken Johnson, vice president of communications for the Solar Energy Industries Association (SEIA), notes: “If governments are smart and forward-looking and send ‘clear, credible and consistent’ signals as called for by the International Energy Agency (IEA)… solar could be the world’s largest source of electricity by 2050.”

These comments might seem hyperbolic, but as you can see in the chart below, installed capacity has been increasing rapidly every year. According to the SEIA, a new PV system was installed every 3.2 minutes during the first half of 2014.

US-Solar-Installation-Forecast
click to enlarge

With PV installation on the rise, silver demand is ready for a major surge. About 80 metric tons of the metal are needed to generate one gigawatt, or 1 million kilowatts, of electricity—enough to power a little over 90 typical American homes annually. In 2016, close to a million and a half metric tons of silver are expected to be needed to meet solar demand in the United States alone. 

An impressive 87 percent of IKEA's facilities here in the U.S. are powered by solar.Another clear indication of solar’s success and longevity is the rate at which employment in the industry is growing. Currently there are approximately 145,000 American men and women drawing a paycheck from solar energy, in positions ranging from physicists to electrical engineers to installers, repairers and technicians. Between 2012 and 2013, there was a growth rate of 20 percent in the number of solar workers, and between 2013 and 2014, the rate is around 16 percent. Nearly half of all solar companies that participated in a recent survey said they expected to add workers. Only 2 percent expected to lay workers off.

What this all means is that solar isn’t just for granola homeowners and small businesses. On the contrary, it has emerged as a viable source of energy that will increasingly play a crucial role in powering residences, businesses and factories. Already many Fortune 500 companies make significant use of the energy—including Walmart, Apple, Ford and IKEA—with many more planning to join them. This helps businesses save money over the long run and improve their valuation.

It’s also good news for silver demand.

Bullish on Bullion

Crude Cost of Production Rises as Demand Grows

Solar is only part of what’s driving demand right now. Since July, the metal has fallen close to 25 percent, attracting bargain-seeking investors.

“Commodities are depressed right now, but we’re seeing far fewer redemptions in silver ETFs than in gold ETFs,” says Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

Below you can see how silver ETF holdings continued to remain steady as gold ETFs lost assets earlier this year.

US-Solar-Installation-Forecast
click to enlarge

Ralph attributes much of this action to solar energy: “Investors recognize silver’s importance in manufacturing solar cells, and it doesn’t hurt that silver is currently pretty inexpensive relative to gold.”

It’s also oversold, as the chart below shows.

US-Solar-Installation-Forecast
click to enlarge

Last month about $1 billion was pulled out of New York’s SPDR Gold Shares, the world’s largest gold bullion-backed ETF, while holdings in silver-backed ETFs set a new record in September. Demand in India is booming, and sales of American Eagle silver coins rose last month to a two-year high of 5.8 million ounces, nearly doubling the sales volume from last October.

Silver-Prices-vs-American-Eagle-Silver-Coin-Sales
click to enlarge

A Note on Emerging Europe

As many of you might know, our Emerging Europe Fund (EUROX) began divesting out of Russia as early as December of last year, even before President Vladimir Putin started stirring up trouble in Ukraine, and was completely out by the end of July.

Our fund is all the better because of the decision to pull out. Between international sanctions and low oil prices, Russia’s economy has been wounded. Its central bank announced earlier this month that economic growth will likely stagnate in 2015, and the World Bank cited the ruble’s depreciation as a growing risk of stability.

Meanwhile, Greece, the third-largest weighting in the fund, has officially recovered after six years of recession. Its economy is finally in the black this year, expanding at an annual rate of 1.7 percent in the third quarter, its best performance since 2008. Next year the economy is expected to grow 2.9 percent. Greek auto sales are up 21.5 percent year-to-date.

Finally, be sure to read my story about two guys, one who invested in an S&P 500 Index fund, the other who chose a less dramatic path. Happy investing!

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.

Past performance does not guarantee future results.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

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% 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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: SunPower Corp. 0.00%, Walmart 0.00%, Apple 0.00%, Ford 0.00%, IKEA 0.00%, SPDR Gold Shares 0.32% in Gold and Precious Metals Fund.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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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Everyone Loves a Discount—But Where’s the Support for Oil Prices?
November 10, 2014

Christmas comes more than a month early.For the first time since 2010, the average price of a gallon of gas in the United States has fallen below $3, according to AAA’s Daily Fuel Gauge Report. An estimated $40 billion will be saved this year alone. That’s money that can be put toward other expenses—bigger cars, children’s education, retirement and investing.

But that discount comes with a price. Cheap gas might help consumers and companies in certain industries, but they’re a drag on oil producers, retailers and entire nations. This affects everyone. We live in a global economy, after all.

Since June, crude oil has tumbled 30 percent to prices we haven’t seen in about three years. For the past 20 days and 60 days, it’s down about two standard deviations. We can blame this dip on a number of things: geopolitics, the slowing of real GDP growth across the globe, a huge oil surplus here in the U.S. and a strong dollar. The strength of the dollar, as you can see, has historically had an inverse relationship with the price of oil.

A Strong U.S. Dollar Puts Pressure on the Price of Crude Oil
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Recent cuts to our military budget have also affected oil prices. The U.S. military uses more oil than any other institution on earth. Every year it consumes over 100 million barrels to fuel ships, aircraft and other vehicles, but that number is dropping at the same time supply is rising.

Meet the Frackers

Because of the success of unconventional extraction methods such as fracking, the U.S.’s production level is at a 25-year high. What would the rate of depletion be if fracking were no longer profitable at $70 or $60 per barrel and production had to be halted? There’s no definitive answer to that question because it’s not clear how many companies would be affected and to what extent. But what should be clear is that reserves would begin to shrink and we would go back to the days of an overreliance on foreign oil.

Below are the estimated breakeven points for some of the most important shale plays in the U.S. With crude currently priced at slightly under $80 per barrel, many companies, especially those that practice fracking, are starting to feel the pinch. Each play has its own unique set of challenges, one of the most significant being the region’s geology. As you can imagine, the harder it is to get the crude out of the ground, the costlier it becomes.

Estimate of Breakeven Points for Key U.S. Shale Plays
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Some analysts believe that approximately a third of all U.S. shale oil producers operate in the red when the price per barrel falls below $80. At $70 a barrel, these producers will need to make drastic changes such as production cuts and layoffs. According to energy research firm Wood Mackenzie:

If WTI prices were below $70 for most of 2015, we predict that around 0.6 million b/d [barrels per day] of U.S. tight oil supply growth would be under serious threat by the end of the year—a figure which would continue to increase with low prices.

And if crude were to fall to $60 per barrel? An estimated 80 percent of U.S. companies that extract tight oil, or shale oil, through fracking would be shut down and all new supply would diminish quickly due to the rapid decline rate.

Already oil producers must contend with the challenge of decreased production. When a well is first drilled, it might begin producing 1,200 barrels a day but, throughout the year, gradually decline between 5 and 20 percent. By the end of the year, the site is producing only around 100 barrels a day. Oil producers are often able to recoup exploration and production costs in that timeframe, but then it’s necessary to move on to the next drill site.

Oil Production Rate Declines Every YEar - Eagle Ford Shale
click to enlarge

Unconventional extraction methods accelerate the decline rate. If frackers were forced to halt production now, our reserves would dwindle even more rapidly.

Man on treadmill.It’s critical that America keeps running on this treadmill, so to speak. The results of stopping now would be similar to those of a workout buff who suddenly quits going to the gym. We all know how much harder it is to get back in shape than it is to stay in shape.

Layoffs would especially hurt, given that the tight oil revolution has significantly contributed to the U.S.’s economic recovery. Think not just of general oilfield roustabouts but also geoscientists, petroleum engineers and the thousands of other incidental professionals who face losing their jobs if prices continue to slip.

Meanwhile, people continue to have babies, drive their vehicles to work and heat their homes, all of which requires oil.

And there’s reason to believe that we’ll especially need oil for heating this winter. Already an intense storm even larger than Superstorm Sandy, Typhoon Nuri, is moving west along Alaska’s Aleutian Islands and is expected to bring freezing temperatures to much of the northern part of the U.S. It looks as if winter has arrived earlier than normal this year.

Bundle up! Typhoon Nuri is expected to bring freezing temperatures to much of the U.S.

Tiffany Stock Was a Better Investment Than Diamonds Were.For the time being, however, we can all enjoy lower gas prices this year. With the money saved, we can make better investment decisions. It’s as if we received an unexpected tax break. Lower gas prices leads to more consumer spending, which means that luxury goods stocks such as Tiffany & Co., which we own in our Gold and Precious Metals Fund (USERX), might benefit.

Speaking of Tiffany & Co., did you know that buying the company’s stock in 1987, the year it went public, would have been a better investment than buying an actual diamond? You can read about it here.

Enter the Saudis: Who Will Blink First?

Many of the world’s major oil-producing countries are also feeling the pressure of low prices. Of those shown below, only four—Oman, Kuwait, Qatar and the United Arab Emirates—are still able to balance their books with Brent oil flirting with $80 a barrel.

Producer Country Budget Breakeven Prices
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Oil reserves would be necessary if the U.S. ever engaged with a country as powerful as RussiaHere’s where geopolitics comes into play. Russia is currently the second-largest oil exporter in the world and set to overtake Saudi Arabia very soon. This might help explain why the Saudis aren’t in any hurry to limit their own production and support prices. They have everything to lose and nothing to gain by reducing output. They’re in a better position to maintain current levels and still be profitable with $80 oil than Russia, the U.S. and most of the Organisation of the Petroleum Exporting Countries (OPEC). The kingdom has already lowered the price of the oil it exports to the U.S., a sign that it’s aiming to undercut the competition and hang on to its status as the world’s top exporter.

As oil and gas policy expert Dr. Kent Moors argues in a recent article, Saudi Arabia is fighting a losing battle against three fronts: Russia, over control of the Asian market; neighboring OPEC members such as Iraq and Iran; and the U.S., a market the Saudis don’t want to lose to more efficient fracking companies here in America. And, of course, the U.S. and Russia are locked in their own energy skirmish, one that Casey Research’s Marin Katusa calls The Colder War, the title to his latest book.

OPEC officials will be meeting later this month, and hopefully an agreement can be reached. During our webcast last month, Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), emphasized the point that the current price of oil just isn’t sustainable:

I would be surprised if we did not see another production cut if oil remains at these levels. I think that OPEC and the Saudis need to come in and support prices even more so than they already have following the cut in August.

One Word: Plastics

Just as consumers have benefited from sliding oil prices, so too have many companies, including those in the transportation sector. Below you can see that near the start of September, the oil and gas industry decoupled from the transportation sector, composed of airline, trucking, delivery services, railroad and marine transportation companies. Currently there’s more than a 35-point spread between the Dow Jones Transportation Average and SPDR S&P Oil & Gas Exploration & Production ETF.

Transportation Stocks Have Decoupled from Oil and Gas Stocks since the Start of September
click to enlarge

Manufacturers of plastics and synthetic rubber, of which crude is the main component, have also benefited. The U.S. producer price of plastics and rubber products is up $1.20 year-to-date. In 30 days, Cooper Tire & Rubber has shot up 13 percent, Berry Plastics 14 percent, Goodyear 15 percent.

Shell, on the other hand, has given back 5 percent.

This is precisely why we’re attracted to low-cost oil producers such as EOG Resources and Devon Energy. Many, but not all, of them are nimbler and more adaptable in uncertain economic climates than the big names are. We strive to buy only those that have been well screened and fit our models.

Learn more about our investment process here at U.S. Global Investors.


Late last month I noted that the the eurozone is in trouble because its monetary and fiscal policies are sorely out of balance. The region relies too much on punitive taxes and entitlement spending and not enough on stimulation. Right now its GDP growth rate is a sluggish 0.1 percent, its inflation rate 0.4 percent.

I suggested that the eurozone should look to China to see how it’s handling its own slowdown—the government has cut hundreds of lines of regulation and plans to cut more—but members of the European Union, and especially the European Central Bank (ECB), might also do well to look to China’s neighbor, Japan.

A week ago the Bank of Japan (BOJ) surprisingly unveiled a gargantuan $724 billion-a-year stimulus package to combat deflation. The monetary measure will essentially turn the BOJ’s governor, Haruhiko Kuroda, into the world’s largest hedge fund manager. The market seemed to like the announcement, as the Nikkei 225 has risen 3 percent since then.

Janap's Monetary Policy on Steroids
click to enlarge

Such a plan, of course, is too extreme for the ECB to make, and there’s no guarantee that it will work. But at least no one can fault Japan for refusing to use both tools, monetary and fiscal policy, to jumpstart its economy and effect change.

 

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.

Past performance does not guarantee future results.

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.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The Dow Jones Transportation Average is a price-weighted average of 20 U.S. transportation stocks.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 9/30/2014: Berry Plastics 0.00%, Cooper Tire & Rubber Company 0.00%, Devon Energy Corp. 1.82% in Global Resources Fund, EOG Resources, Inc. 2.13% in Global Resources Fund, Goodyear Tire and Rubber Company 0.00%, Royal Dutch Shell 0.00%, SPDR S&P Oil & Gas Exploration & Production ETF 0.00%, Tiffany & Co. 0.44% in Gold and Precious Metals Fund. 

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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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Greece’s Darkest Hour Before Its Dawn
November 6, 2014

“Much better than expected.”

That’s how John Derrick, Director of Research here at U.S. Global Investors, summed up his trip to Greece, the beleaguered country that hopes to put its financial woes behind it and rise again like the phoenix from the Mediterranean culture’s ancient mythology.

Last week I spoke with John about his trip, which took place following his visit to Turkey to meet with companies held in our Emerging Europe Fund (EUROX). Here are the highlights of our conversation.

So why do you say “better than expected”?

Greece has been in recession for six years now but it’s finally on track to turn things around. Its economy has stabilized and is beginning to improve since the crisis. It has a balanced budget. The projected GDP growth rate for this year is 0.6 percent, which doesn’t sound great, but it would be the first time since the end of 2008 that it’s been above zero. We’d like to see the purchasing manager’s index improve, though—it’s been below 50.0 for four of the past five months, indicating that the country’s manufacturing sector is still in contraction mode.

Turkish Banks Starting to Recover After a Disappointing September
click to enlarge

Greek citizens are fed up with austerity measures that were set in place to secure a multibillion-dollar bailout, and their egos were bruised after their country was downgraded last year from a developed market to an emerging market. But as the saying goes, the darkest hour is just before the dawn, and we’re now beginning to see a glimpse of the sunrise, so to speak. The painful adjustments have already been made, they’re behind Greece now, and the worst appears to be over.

Prime Minister Antonis Samaras, in fact, plans to ease out of the European Union’s bailout by the end of this year, which would be a whole calendar year ahead of schedule. In doing so, he might also siphon support away from anti-austerity candidates in the far-left Syriza party.

The mostly positive results from the European bank stress test seem to confirm that things are better than expected.

They do. There was a lot of anxiety going into the results, and there was this collective sigh of relief after they came back better than expected. Markets responded positively. Of the 25 banks that the European Central Bank (BCB) failed, only two were Greek: Eurobank and the National Bank of Greece. This shows that the Greek financial sector is trying to stabilize in a time when it’s predicted that the eurozone might face its third recession in six years.

The slump in the Greek shipping industry, very important to Greece’s economy, is partially to blame for the country’s current troubles. Has it improved any?

Not by much, unfortunately. I met with two shipping companies, Goldenport and Tsakos Energy Navigation. What I took away from these meetings is that dry bulk shipping rates are not recovering as expected. The industry is washed out, with many companies having been put out of business over the last three years.

The good news is that this is probably the time to accumulate these types of companies, as many of them are trading at attractive discounts to net asset values (NAVs). But it’s still a waiting game until rates head higher.

On the crude and product transport side, lots of boat supply companies are hitting the market in the next two years, and rates have recovered some. They might move modestly higher in the short term. Tsakos has talked about a master limited partnership (MLP) structure before, but that sounds like a 2016 event if it ever gets done.

Talk a little about the Greek retailing industry.

This was the best part of my visit to Greece. I met with two retailers, Jumbo and Fourlis, both of which are seen as survivors in a down economy, with very strong market share.

Jumbo, kind of like a low-end Target, has 40-percent market share in its category. I visited the store and its layout resembles an IKEA—there aren’t any traditional aisles, and you basically have to walk through the whole store to get out. Its key products are toys, seasonal items and stationery. One of the most popular retailers in Greece, Jumbo plays its cards pretty close to the chest. Its management team doesn’t go to or hold conferences—they don’t even do conference calls, actually. This hurts valuation, but the financials have been very strong.

As for Fourlis, it holds the IKEA franchise for the region and also owns a sporting goods franchise, Intersport, which is seeing positive year-over-year same-store sales. Besides home furnishings and sporting goods, it’s also involved in fashion and electronic appliances. The company’s been operating since 1950 and has locations not just in Greece but also Romania, Bulgaria, Turkey and Cyprus. With the recent Greek equity selloff, this is likely an opportunity.

Check out our Emerging Europe Fund (EUROX) for more investment opportunities.

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.

Past performance does not guarantee future results.

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% 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.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 9/30/2014: Eurobank Ergasias 0.00%, National Bank of Greece 0.00%, Goldenport Holdings, Inc. 0.00%, Tsakos Energy Navigation, Ltd. 0.00%, Jumbo S.A. 1.79%, Fourlis Holdings S.A. 0.00%, IKEA 0.00%, Intersport 0.00%.  

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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Talking Turkey with John Derrick
October 28, 2014

Upon his arrival in Istanbul, John Derrick prepared his notes for the next two days’ worth of meetings while he spent a cool, drizzly afternoon outside a café, sipping coffee and watching ships cruise by on the Bosphorus. Separating Asia from Europe, the Bosphorus has long served as an important trading lane. Today it’s the second-busiest strait in the world, traversed by an average of 48,000 vessels annually, or roughly 132 per day.

A ship crusing the Bosphorus past IstanbulThis is just one of many observations and insights that John, Director of Research at U.S. Global Investors, returned home with following his visit to Turkey and Greece, where he met with companies held in our Emerging Europe Fund (EUROX) and sniffed out other potential investment opportunities.

As this was U.S. Global’s first visit to Turkey since May, I made sure to follow up with John about what he heard and saw.

So what’s changed since our last trip to the country?

Well, one major change is that Turkey has become our largest exposure in EUROX since we exited Russia. There’s a reason why it’s is such an attractive place to invest in. It has a relatively stable economy, despite the European slowdown and recent threat of ISIS. The International Monetary Fund (IMF) expects Turkey’s GDP growth to be about 3 percent this year, a little under what it was last year, but not by too much. Prime Minister Recep Tayyip Erdogan, who was elected in August, vows to make Turkey the world’s tenth-largest economy by 2023. This is probably a little too ambitious, but the country was able to grow its economy close to 230 percent between 2002 and 2013, so the goal might be achievable.

Like many other emerging markets, Turkish stocks had a rough September. Financials, which saw a nice rally this summer, took a tumble last month, but we’re starting to see some improvement. I had a very productive meeting with Garanti, Turkey’s second-largest bank and one of our top holdings in EUROX. Our discussion touched on a number of issues such as the threat of NPLs (non-performing loans), central bank policy and what actions Garanti might need to take if the lira weakens any further. The currency’s been banged up recently because of the strong dollar, but now that the dollar’s going through a correction, the lira is trying to stabilize.

Turkish Banks Starting to Recover After a Disappointing September
click to enlarge

I also was able to meet with Sabanci Holdings, another company in our fund. Part of our due diligence as investment managers, as you know, is catching up with such companies, meeting with their executives and top decision-makers, gaining tacit knowledge on their business models. Sabanci is a large conglomerate with interests in, among others, Turkish bank Akbank, tire manufacturer Brisa, cement maker Akcansa and Kordsa, which manufactures internal tire components. The company continues to do well and is expected to grow between 3 and 3.5 percent this year due to increased price competitiveness.

How does the Turkish telecommunications industry look?

Turkey, believe it or not, is third in the world in using smartphones for e-commerce, behind England and Germany, so the industry is pretty strong. I met with two of the country’s largest providers, Türk Telekom and Turkcell, the latter of which we own. Right now they mostly blame each other for being irrational players in the market, but they both offer potential opportunity. Türk Telekom has some legacy landline business and offers broadband. Although Turkcell has had an ongoing shareholder dispute that’s prevented them from paying a dividend for the last four years, it looks very promising that a resolution is near. It’s still six to nine months out, but hopefully we’ll see a dividend of between 20 and 50 percent of its market cap.

The Lounge Istanbul at Istanbul Ataturk International Airport, designed by Turkish Do&Co, takes luxuruy to a new level Describe the best experience you had during your stay in Turkey.

That would have to be Do & Co, self-described as “the Gourmet Entertainment Company.” They specialize in high-end, luxury airline and event catering, with additional business in restaurants, bars and airport lounges. Even though the company is based in Austria, Turkish Airlines is its flagship customer. I got to inspect the Lounge Istanbul in the city’s international airport and was awestruck by its lavishness. By far the nicest lounge I’ve ever been in. Even the fruit was arranged in an artful way.

Do & Co is a very attractive company, and I don’t mean that just from an aesthetic point of view. It’s a double-digit sales and earnings-per-share grower—it’s expected to grow 20 percent next year. It also has a reasonable valuation and pays a dividend. We’ll certainly keep our eyes on it.

So I hear you attended a San Antonio Spurs exhibition game! How did they do?

The Lounge Istanbul at Istanbul Ataturk International Airport, designed by Turkish Do&Co, takes luxuruy to a new level The Spurs performed well as always. They went up against Fenerbahçe Ülker in the Ülker Sports Arena, named for the wealthy family and food manufacturer, which makes Godiva Chocolate, among other products. Two of the people I attended the game with—investment professionals from Finansinvest, a Turkish banking and brokerage firm—generously gave me a jersey with “John” written on the back.

One of the highlights of the game was watching the audience’s reaction to the Spurs Coyote. Here in the U.S. we take sports mascots for granted, but I think initially the Turks kind of saw him as a curiosity. They were a little taken aback seeing him taunt the referee and dribble the ball with his “paws,” but they soon realized this was all part of the theater of American basketball. By the end of the game they were laughing at the Coyote’s antics.

For more on our Emerging Europe Fund, check out its composition. Also, make sure to look out for my chat with John about his visit to Greece.

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.

Past performance does not guarantee future results.

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% 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.

The Borsa Istanbul Banks Index (XBANK) is a capitalization-weighted free float adjusted Industry Group Index composed of National Market listed companies in the banking industry. All members of the index are also constituents of the XUMAL Sector Index.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as 09/30/2014: Turkiye Garanti Bankasi A.S. 3.31%, Turkcell Iletisim Hizmetleri A.S. 2.40%, Haci Ömer Sabanci Holding A.S. 1.96%, Ülker Bisküvi Sanayi A.S. 1.02%, DO & CO Aktiengesellschaft 0.00%, Akçansa Çimento Sanayi ve Ticaret Anonim Sirketi 0.00%, Kordsa Global 0.00%, Türk Telekom 0.00%, Brisa Bridgestone 0.00%, Akbank 0.00%, Finansinvest 0.00%, Turkish Airlines (Türk Hava Yollari) 0.00%.       

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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As the Eurozone Stalls, China Cuts the Red Tape
October 27, 2014

Forty-four percent. That’s the alarming unemployment rate for those aged 15 to 25 in Italy, where I traveled recently to meet with other global chief executives and business leaders.

The reasons for Italy’s high youth unemployment? Tortuous red tape, high taxation and thuggish unions. Many of the CEOs at the event I attended noted that Italy is mired in unionization. This has created a restrictive jobs market that crowds out well-educated, aspirational young people, many of whom are forced to flee their homes and seek work elsewhere.

A penny-farthing economy on a precarious ride: Fiscal and monetary policy are imbalanced in the eurozoneBut “elsewhere” within the European Union is currently not much of an improvement. Even in Germany, the EU’s most reliable economy, train and airline unionists have gone on strike, bringing the country to a near-standstill. Incredibly, both Italy and France—where the youth unemployment rate stands at 24 percent—want the EU to foot the bill for their joblessness woes. Global investors’ patience has been stretched thin as European Central Bank (ECB) President Mario Draghi and German Chancellor Angela Merkel continue to bicker over how to resolve the region’s slowdown.

As I told CNBC Asia’s Bernie Lo, the EU’s default policy is to tax anything that moves. Led by pro-taxation economists such as France’s Thomas Piketty, Europe’s policies have become a sort of contagion resonating throughout the rest of the world. The eurozone countries have an imbalanced approach to jumpstarting their economies, relying only on monetary policy but failing to address fiscal issues such as punitive taxation and over-bloated entitlement spending.

You can see how disastrous the results have been: France and Germany’s industrial production has turned down recently. Their purchasing managers’ index (PMI) numbers are below the 50-mark line, indicating contraction. This trend is especially worrisome because Europe is a bigger trading partner with China than the U.S. is.

So what’s the solution?

The EU would do well to look east, specifically to China.

China Handing over Its Economy’s Keys to Capital Markets
Last week senior Chinese officials met in Beijing to resolve the sorts of problems the EU can’t seem to fix, let alone acknowledge. On the chopping block were regulations—hundreds of them. According to Premier Li Keqiang, 416 lines of red tape have allegedly either been abolished or eased in order to facilitate business growth in important sectors such as transportation, logistics and telecommunications. In June, Li vowed to slash an additional 200 measures.

The Chinese government also plans to relax oversight of key areas such as utilities and natural resources, land and the pricing mechanism of money. Gone is the government’s control over shale gas, coal bed methane and imported liquefied natural gas (LNG). The mining sector’s tax code has been reformed. And for the first time, private companies have been granted the license to ship crude oil.

It appears as if China is starting to see the light. They’re introducing competition back into their capital markets instead of strangling it, as the eurozone has done. Between January and September, 10.97 million new jobs were created in China, exceeding the government’s goal of 10 million in 2014 and beating the benchmark by an entire quarter, according to China’s National Bureau of Statistics (NBS).

As you can see below, new business start-ups in China have skyrocketed.

China's Reduction of Red Tape Has Increased Business Start-ups, Despite Slowing Growth
click to enlarge

These red tape-cutting measures, coupled with fiscal stimulus, are needed now more than ever. As promising as Premier Li’s promises are, China still faces deflation and declining real GDP growth. The Asian country’s economy is currently headed for its slowest expansion since 1990, the main culprit of which is the struggling real estate market.

Other problems also continue to hold China back, many of them deeply-rooted and systemic. The Ease of Doing Business Index ranks China 158 out of 189 economies in the “Starting a Business” category and an almost-dead-last 185 in the “Dealing with Construction Permits” category. According to the World Economic Forum’s most recent Global Competitiveness Report, the two most problematic factors for conducting business in China are access to financing and corruption, another issue Chinese officials are addressing this week.

These issues can’t and won’t be fixed overnight. But unlike the EU, China acknowledges them and is seeking innovative solutions. One of the only benefits to having a one-party system, as China does, is that you can’t shuffle off a set of problems to another party and then lay the blame at their feet when they go unresolved. You must think long-term.

Constructive Manufacturing News
Last week we were relieved to learn that China’s flash PMI came in at 50.4. Anything over 50 indicates growth in the manufacturing sector, but as I’ve discussed on numerous occasions, what really matters is that the one-month reading crosses above the three-month moving average. Such a “cross-above” historically means that commodities and commodity stocks perform better in the coming months. Based on our research, three months following a cross-above, there’s a 73 percent chance that the S&P 500 Index will rise more than 2.4 percent and a 55 percent chance that the S&P 1500 Energy Index will rise more than 0.7 percent.

As you can see, this crossover did indeed occur, the first time it’s done so since May. 

One-Month Reading for china's Flash PMI Crosses Above the Three-Month Reading
click to enlarge

Of course, flash PMIs are merely preliminary, and we won’t know the final results until later. But for now this is certainly positive news.

Emerging Asia Wins with Cheap Commodities
One of the reasons why Chinese manufacturing is picking up steam might be the recent collapse in commodity prices. Low commodity prices undeniably hurt certain stocks in the space, and we’ve felt the pain in some of our funds. The silver-lining, though, is that these low prices have helped non-Japan Asian companies get ahead, a tailwind for our China Region Fund (USCOX). Because labor continues to be relatively cheap in Asia, commodities tend to be the single-largest company expenditure.

Lower Energy and Food Prices Will Help Chinese Businesses
click to enlarge

Lower steel and aluminum costs benefit machinery, automobile and equipment manufacturers, as well as homebuilders, shipbuilders and oil and drilling equipment suppliers; falling corn and wheat prices are welcomed by food and beverage producers; cheap copper is good for construction and engineering, utilities and electrical equipment.

Then there’s oil and gas. Since June, Brent crude has corrected itself over 25 percent. Again, this is a headwind for petroleum companies and large net-oil-exporting nations such as Russia and Mexico, but cheap energy equates to huge savings for emerging Asian countries. 

Asian Markets Benefit Most from Lower Oil Prices
click to enlarge

One final bellwether of economic growth I want to touch upon is accelerated electricity generation and usage. In the past, Chinese Premier Li Keqiang has cited this as one of the more reliable indicators of economic activity because electricity is not easily stored and the data is difficult to manipulate. This month, energy production improved 4.1 percent year-over-year —not a huge cause for celebration, but a step in the right direction nonetheless. 

Increased Electricity Production in China Is a Reliable Indicator of Economic Activity
click to enlarge

With a more balanced approach to monetary and fiscal policy than the eurozone, China is able to be more productive.China Is a Long-Term Story
Compared to many eurozone nations, China is relatively young. Whereas the median age in Italy is 43 years, in China it’s 35. There’s huge growth potential in this region, especially now that Premier Li has resolved to cut red tape and balance monetary and fiscal policy. In 10 years’ time, the 35-to-45 cohort, a well-educated group with good salaries and credit, will expand dramatically.

Consider this: of the 1.35 billion Chinese citizens, about 618 million, nearly half, have access to the Internet. Of those, 302 million, nearly half again, shop online. These numbers will continue to grow, and with them, greater investment opportunity. Name one Western European company that, in recent years, has achieved the sort of success Alibaba, Tencent or Baidu has. Not in a Piketty economy.

I encourage investors who are seeking growth potential to check out our China Region Fund’s composition.

And to those who prefer a “no-drama” fund, please take a look at our Near-Term Fax Free Fund (NEARX).

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. 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. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. 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. The Near-Term Tax Free Fund may invest up to 20% 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. The Near-Term Tax Free Fund 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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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 HSBC Flash China Manufacturing PMI is published a week ahead of the final HSBC China PMI every month. It analyzes 85-90 percent of the responses to the Final PMI from purchasing executives in more than 400 small, medium and large manufacturers, both state-owned and private enterprises.

The Doing Business Project, launched in 2002, looks at domestic small and medium-size companies and measures the regulations applying to them through their life cycle. By gathering and analyzing comprehensive quantitative data to compare business regulation environments across economies and over time, Doing Business encourages countries to compete towards more efficient regulation; offers measurable benchmarks for reform; and serves as a resource for academics, journalists, private sector researchers and others interested in the business climate of each country. The Global Competitiveness Index, developed for the World Economic Forum, is used to assess competitiveness of nations.  The Index is made up of over 113 variables, organized into 12 pillars, with each pillar representing an area considered as an important determinant of competitiveness: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 9/30/2014: Alibaba Group Holding, Ltd. 0.42%, Tencent Holding, Ltd. 5.62%, Baidu, Inc. 2.44%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Past performance does not guarantee future results.

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Net Asset Value
as of 09/25/2017

Global Resources Fund PSPFX $5.78 -0.04 Gold and Precious Metals Fund USERX $8.02 0.06 World Precious Minerals Fund UNWPX $6.69 0.06 China Region Fund USCOX $10.96 -0.46 Emerging Europe Fund EUROX $6.94 -0.06 All American Equity Fund GBTFX $24.34 0.10 Holmes Macro Trends Fund MEGAX $19.99 0.03 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change