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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.

Africa Could Mine Its Way to Prosperity if It Addressed Instability
February 17, 2015

Last week I attended the Investing in African Mining Indaba in Cape Town, South Africa, as both a presenter and a student seeking opportunities. One of the highlights of the conference was former Prime Minister Tony Blair’s keynote address, during which he offered some crucial advice to African governments: To attract and foster a robust mining sector, a commitment to fiscal stability must be made.

Goods Trade with Africa in 2013

Since 2009, Blair has run the Africa Governance Initiative, which counsels leaders in countries such as Rwanda, Sierra Leone, Liberia, Guinea and others.

Simply put, without fiscal stability and predictability in taxation, capital will be unwilling to flow into any country—African or otherwise—for exploration and production. If a government changes its tax policy every three years or so, that instability discourages the inflow of financing. This is bad for Africa.

“The mining sector remains absolutely vital for Africa’s future,” Blair said, “and even with the sharp declines in [commodity] prices, there are tremendous opportunities and there will be, no doubt, an adjustment and reshaping of the face of mining within Africa over these next few years.”

I shared the following map last week, but it’s worth showing again, as it supports Blair’s point. Central and Southern Africa, especially, are extremely commodity-rich and maintain a large global share of important metals and minerals such as platinum, diamonds and gold.

In 2014, China Channeled Over $100 Billion into 156 Countries and Regions Around the Globe
click to enlarge

Fiscal instability is also bad for investors in Africa. If foreign investment is not respected by a government, if it is punitively taxed or arbitrarily confiscated, further investment will not flow into that country. Politically, African nations need to recognize that seemingly faceless investment institutions represent real people’s hard earned dollars.

In Zambia, for example, a huge 12 percent of the country’s GDP comes from mining, an industry that employs 10 percent of all Zambians. Yet its government has increased, rather than cut or at least eased, restrictive royalty taxes on mines. In the case of open pit mines, royalties were raised from 6 percent to a crippling 20 percent.

Speaking to Reuters, a mining industry spokesperson speculated: “Mining companies are not going to put another dollar in [Zambia]” if the government continues to be unreliable.

Less Friction, Fewer Disruptions

This is proof positive of what I frequently say: Government policy is a precursor to change. In the example above, the tax policy is leading to change that could very well hurt Zambia’s economy. With mining being such a strong contributor to its GDP, it seems the government would want to make it easier, not more challenging and costly, for international producers to conduct business there.

The less friction and fewer disruptions there are, the easier it is for money to flow.

But Zambia’s isn’t the only African government that’s placing roadblocks in front of miners. The Democratic Republic of Congo is in the early stages of hiking royalties on mines and revising its mining code. And in his recent State of the Nation Address, South African President Jacob Zuma announced that foreigners could no longer own land in the country, which raises the question of what implications, if any, this might have on U.S. and Canadian companies that own and operate South African mines. Zuma’s announcement comes at a time when persistent electricity shortages have stymied mining activity and rumblings of a miners’ strike similar to the one last year that brought platinum and palladium production to a five-month halt are intensifying.    

At the same time, many governments in Africa are waking up to see that they’re going to have to provide the sort of stability and consistency Prime Minister Blair outlined if they hope to attract the capital necessary to fund and develop their mining opportunities.

Miners Giving Back

A strong mining sector doesn’t just benefit the native country, either. It’s a global good that benefits all. In another presentation at the African Mining Indaba, Terry Heymann of the World Gold Council convincingly showed that the economic output of the global gold mining sector far exceeds the collective aid budget of world governments. Gold mining, he said, created and moved as much as $47.3 billion to suppliers, businesses and communities in 2013, compared to governments’ $37.4 billion.

Many gold mining companies take a more direct approach to helping the communities in the countries they operate in, including Randgold Resources, which works primarily in Mali. In an interview during the African Mining Indaba, CEO Mark Bristow detailed his company’s involvement in the fight against Ebola and other epidemics that have hit the West African country:

Our doctors, the Randgold doctors, run a technical committee meeting every day where we coordinate with the [Malian] health authorities, and we help manage the deployment of energy. Now that we’ve eradicated the second [Ebola] outbreak, our big focus is on prevention and education.
Goods Trade with Africa in 2013

Bristow explained that the company had sponsored the development of an educational film about Ebola, before highlighting other company achievements:

We were part of the Neglected Tropical Disease Initiative rollout… We’re very big on the AIDS programs around the country. We brought the malaria incident rate around our mines down by more than four times.

Because Randgold is the largest employer in Mali, Bristow suggested, he feels a moral obligation to partner with his host country and make it a healthier, safer place to live and work.

During the same interview, he insisted that Randgold, which we hold in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), has a “solid five years ahead of us,” citing the fact that the company holds no debt and managed to replace all the ounces it mined in 2014 at $1,000 long-term gold price. It also increased its dividend 20 percent.

Despite bullion’s price hovering just above the relatively low $1,230 range, Randgold has delivered 16 percent year-to-date.

This is in line with gold mining stocks in both the NYSE Arca Gold Miners Index and FTSE Gold Mines Index, which are outperforming the return on bullion.

Gold-Mining-Stocks-Outperforming-Bullion-Year-to-Date
click to enlarge

As I mentioned back in July, when mining stocks do well, bullion has tended to follow suit. This also shows that producers are successfully adjusting to a $1,200-per-ounce environment by scaling back on capital spending, selling off assets, putting exploration on hold and engaging in mergers and acquisitions—which in the past has signaled that a bottom in spot prices might be reached. B2Gold Corp. closed on its deal to buy Papillon Resources in October; we learned in November that Osisko Gold Royalties is taking over Virginia Mines; and last month it was announced that Goldcorp would be purchasing Probe Mines.

Weak Currencies, Low Fuel Prices

Speaking with Kitco News’s Daniela Cambone during last Monday’s Gold Game Film, I commented on some of the macro events aiding gold mining companies such as Randgold:

Mark Bristow has just hit the ball out of the park. He benefits from a weak Mali currency and he benefits from a weak euro because everything is priced in euros. He’s also benefited from weak oil prices.

Indeed, many miners not operating in the U.S. are the beneficiaries of a weak local currency. The West African CFA franc, Mali’s currency, is off 20 percent; the South African rand, 40 percent; the Canadian dollar, 15 percent.

Low energy prices are also helping gold producers, just as they’re helping companies in other industries, airlines especially. In most cases, fuel accounts for between 20 and 30 percent of gold miners’ total operating costs. Because Brent oil is currently priced around $60 per barrel, gold producers are seeing significant savings.

The Gold Demand

This Thursday marks the Chinese New Year, a traditional occasion for gold gift-giving. Chinese demand for the yellow metal was strong in 2014, as 800 tonnes flowed into the country. Over half of the global gold demand, in fact, was driven by the world’s two largest markets, China and India.

Chinese-and-Indian-Growth-Has-Spurred-Market-Infrastructure-Development
click to enlarge

Historically low real interest rates are also driving investors into gold and gold stocks. As I told Daniela:

When you look at real interest rates out of the G7 and G10 countries, the only one with a modest increase is the U.S. dollar. Any time you get this negative real interest rate scenario, gold starts to rally in those countries’ currencies. Now what’s really dynamite is the gold mining companies like Goldcorp, which pays a dividend higher than a 5-year government bond.

Emerging Markets Webcast

Make sure to join us during our webcast tomorrow, February 18. USGI Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing reflationary measures in China and emerging Europe. Don’t miss it!

Time-Tested History of No Drama - Near-Term Tax Free Fund - U.S. Global Investors

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.

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 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 index benchmark value was 500.0 at the close of trading on December 20, 2002.

The FTSE Gold Mines Index Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time. Note that stocks and Treasury bonds differ in investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features. A fund’s yield may differ from the average yield of dividend-paying stocks held by the fund.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund, World Precious Minerals Fund and China Region Fund as a percentage of net assets as of 12/31/2014: B2Gold Corp. 0.28% World Precious Minerals Fund; Goldcorp, Inc. 1.03% Gold and Precious Metals Fund; Osisko Gold Royalties 0.00%; Papillion Resources 0.00%; Probe Mines 0.00%; Randgold Resources Ltd. 2.30% Gold and Precious Metals Fund, 1.43% World Precious Minerals Fund; Virginia Mines, Inc. 1.14% Gold and Precious Metals Fund, 10.35% World Precious Minerals Fund.

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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Global Airline Stocks Soaring, and Not Just Because of Low Oil Prices
February 12, 2015

The airline industry is notoriously competitive. There’s even an old joke: If you want to make a million dollars in the airline business, you need to start with two million.

That joke might have run its course, however, as carriers all over the globe have been posting some of the most impressive earnings in commercial aviation’s 100-year history.

Airplane flying through pink sunset. Jets. U.S. Global Investors.

Revenue growth in the U.S. was “unusually strong” in 2014, achieving the best margin performance in the past 10 years, according to management consulting firm Oliver Wyman. The Dow Jones U.S. Airlines Index grew more than 87 percent during the year, and we’ve seen global airline stocks, as measured by the NYSE Arca Global Airlines Index, gain significant ground since 2012 and reach all-time highs.

Global Airline Stocks Posting All-Time Highs - Jets - U.S. Global Investors
click to enlarge

Some investors might approach this rosy news with a dash of skepticism. Oil prices have fallen over 50 percent since the summer, after all, and conventional wisdom says that as soon as they start to rise again, airlines will be one of the first industries to be negatively affected.

Although it’s true that fuel is carriers’ top operating expense—they collectively spent $48 billion on fuel in 2013—there’s more to the industry’s recent bull run than the low price of oil. In fact, airlines are in a better position now to manage an increase in oil prices than they have been in recent memory, for a number of reasons.

Additional Seating

It only makes fiscal sense. The more seats an airline has, the greater the likelihood is of generating more revenue in airfare. The decision to increase seat density has helped carriers significantly lower their cost per available seat mile (CASM).

With greater seat density, carriers have had improved success at meeting and surpassing their breakeven load factors, or the necessary number of filled seats for companies to recoup operating costs. Currently, the breakeven load factor for large domestic airlines is 79 percent, meaning around three quarters of all available seats on every flight need to be filled. According to the most recent data from the U.S. Bureau of Transportation Statistics, the load factor was an exceptional 85 percent in 2014, an increase of 1.2 percentage points from the previous year and 12 percentage points from 10 years ago.

As you can see, this has resulted in the industry’s best annual performance for the 10-year period:

Domestic Airline Load Factor Exceeds Breakeven Load Factor - Jets - U.S. Global Investors
click to enlarge

Ancillary Revenue

Another way carriers have managed to beat expectations is through ancillary, or non-ticket, fees. Baggage fees, priority boarding, Wi-Fi, on-board meals and other fees are increasingly responsible for making up a large chunk of airlines’ earnings, allowing them to remain profitable in a highly competitive industry.

According to airline consulting group IdeaWorks, global ancillary revenue for 2013 was $31.5 billion. That’s up from $2.45 billion in 2007, which is about what Delta alone—which we own in our Holmes Macro Trends Fund (MEGAX)—generated in 2013 from such fees.

More so than major network carriers, low-cost value carriers increasingly depend on non-ticket fees to stay in the air, if you compare ancillary revenue as a percentage of total revenue in 2007 and 2013:

Ancillary Revenue as a Percentage of Total Revenue
Annual Results - 2013 Annual Results - 2007
Spirit Airlines 38.4% Ryanair 16.2%
Wizz Air 34.9% Vueling 14.2%
Allegiant Air 32.6% Allegiant Air 12.8%
Jet2.com 27.7% Air Deccan 9.0%
Ryanair 24.8% easyJet 8.8%

A Growing Middle Class

Arguably the most important factor contributing to airlines’ recent uptrend is the emergence and expansion of the middle class in the developing world. Air travel demand is strongly correlated with improved incomes. Spots around the world where we’re seeing some of the greatest surges in middle class growth are Africa, China, India and Southeast Asia.

Suvanaphumi Airport, Bangkok, Thailand. U.S. Global Investors. Jets.

This has led to advancement in worldwide revenue passenger miles, or the number of miles flown by commercial airlines. The most recent annual data from the Bureau of Transportation Statistics shows that over 1.1 billion miles were spent in the air in 2013, a 3.6-percent increase over the previous year.

The Organization for Economic Cooperation and Development (OECD) estimates that the middle class could increase from 1.8 billion people in 2010 to 5 billion in 2030.

Owing to a developing middle class as well as increased seat density and non-ticket fees, airlines are expected to post a collective profit of around $25 billion this year, up from $20 billion in 2014, according to the International Air Transport Association.

Also helping margins expand are low oil prices, which have stayed below $55 per barrel since the end of December. But even when prices do begin to rise, the industry should be in a good position to fly through the turbulence. 

Webcast

Registration for our next webcast, scheduled for February 18, is now available! Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing monetary easing policies in China and Emerging Europe.  Don’t miss it!

 

Sign me up for the webcast!

 

 

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.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

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 Dow Jones U.S. Airlines Index measures the performance of the portion of the airline industry which is listed in the U.S. equity market. Component companies primarily provide passenger air transport. Airports and airplane manufacturers are not included.

The NYSE Arca Global Airlines Index is a modified equal-dollar weighted Index designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified as being in the airline industry and listed on developed and emerging global market exchanges.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund and China Region Fund as a percentage of net assets as of 12/31/2014: Delta Air Lines, Inc. 1.28% in Holmes Macro Trends Fund; Spirit Airlines 0.00%; Wizz Air 0.00%; Allegiant Air 0.00%; Jet2.com 0.00%; Ryanair 0.00%; Vueling 0.00%; Air Deccan 0.00%; easyJet 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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China Just Crossed a Landmark Threshold
February 9, 2015

Back in July 2013, the think tank Heritage Foundation predicted that China’s outbound investment “could very well exceed $80 billion [by the end of the year] and is on course to breach $100 billion by about 2016.”

With all due respect to the Heritage Foundation, China just beat the forecast by a couple of years, exceeding the $100 billion mark at the end of 2014. For the first time, in fact, China invested more capital outside its own borders than it did inside. As legendary Major League Baseball player and coach Yogi Berra once quipped: “It’s tough to make predictions, especially about the future.”

Be that as it may, it’s now estimated that within the next decade, China will have invested a staggering $1.25 trillion into the global market.

It was once said that the sun never sets on the British Empire. Now the same might be said of China’s growing influence around the world.

In 2014, China Channeled Over $100 Billion into 156 Countries and Regions Around the Globe

“As China’s domestic infrastructure expansion matures and the yuan’s purchasing power rises, Chinese companies are seeking overseas opportunities so they’re not pigeonholed in any one marketplace,” says Xian Liang, portfolio manager of our China Region Fund (USCOX).

When you consider world economies using purchasing-power parity, China’s actually surpassed America’s in the second half last year.

Gross Domestic Product in Absolute Terms, GDP on Purchasing Power PArity Valuation
click to enlarge

One of the most headline-worthy developments is China’s $16.3-billion infrastructure initiative intended to revive trading routes along the centuries-old Silk Road. Thousands of miles of railways, roads and pipelines will link Beijing to major markets all over Asia, Africa and Europe.

Many are already likening the new Silk Road undertaking to the Marshall Plan, the large-scale U.S. program that aided Europe following World War II and helped secure America’s role as the world’s leading superpower.

Into Africa

We all know that China is a big place with lots of people. As such, it requires unfathomable amounts of resources, for which it’s spending historic amounts of money. Between 2005 and June 2013, China spent $202 billion globally on energy and power, $100 billion on metals and $18 billion on agriculture.

Much of this capital is being channeled into Africa, home to about 60 percent of the world’s uncultivated arable land. If irrigated and optimized properly, Africa’s land has the potential to supply the same percentage of the world’s food needs. The continent is also home to 30 percent of the world’s minerals, with a large percentage of the deposits being platinum, diamonds and gold.

Eleven African Countries Are Among The Top Ten Global Resource Countries In At Least One Major Mineral
click to enlarge

Since 2005, China’s spending in Africa has jumped 30 percent, and in 2009 it became the continent’s largest trading partner, surpassing the U.S. Every year it exchanges around $160 billion in goods with Africa, but with China’s middle class growing in number and demanding a higher quality of living, we expect that figure to surge.

Goods Trade with Africa in 2013Its largest trading partner among all African countries is South Africa, where I’m attending the 2015 Investing in African Mining Indaba and participating in a keynote panel on mining opportunities on the continent. Twenty years ago, we were the initial speakers at the creation of this event when there were only around 100 attendees. Last year, there were over 6,000, making it the biggest mining conference in Africa.

Some economists are suggesting that Africa is shaping up to be “China’s Second Continent,” the title of New York Times journalist Howard W. French’s 2014 book. Just as the Roman Empire reshaped and brought together disparate European cultures through its sophisticated network of roads, China’s presence in Africa promises to have a long-lasting effect on the continent’s financial wellbeing. Roads, mines, hospitals, schools and other important infrastructure are being financed and built at a rapid pace. Last November, for example, China Rail Construction Corp. signed a $12-billion high-speed rail construction deal with Nigeria.

Cape Town

Funneling Capital Around the World

Back in December, I discussed at length Premier Li Keqiang’s desire to turn China into the go-to country for the world’s high-speed rail construction. The country also shows signs of becoming a major creditor on the scale of the World Bank. According to Business Insider, it’s already overtaken other nations as a “primary source of credit for the developing world.”

The article continues: “When China invests in one country, it quickly becomes the biggest creditor, sometimes to the extent of altering the economic and diplomatic scenario.” Many developing countries now owe China many times more what they receive from the International Monetary Fund.

Last week, for instance, we learned that Chinese President Xi Jinping promised $250 billion in investment in Latin American countries over the next decade. China will be buying copper from Chile and Peru, oil from Venezuela and soybeans from Brazil and Argentina. Xi and Argentine President Cristina Fernandez de Kirchner also agreed on a deal that would see China cooperate with the Latin American country on two nuclear power plants.

The packaging displays the U.S. flag on the front and pictures of Smithfield, Virginia, home to Smithfield Foods, on the backIt’s not just developing countries China has invested in. Since 2007, the U.S. has received around $72 billion. Among the American brands that Chinese companies have purchased are AMC Entertainment, Inc., IBM’s personal computer division and meat giant Smithfield Foods. WH Group, which owns the Shuanghui brand, acquired Smithfield in 2013 and is now introducing imported U.S. pork to the local Chinese market.

“Because of various food-related scandals in the last five to seven years, the average Chinese citizen tends to trust foreign food brands more than domestic brands,” Xian says.

This is just one of many examples of the Chinese preferring American brands to others. Buick, the best-selling automobile manufacturer in the Asian country, sold 1 million vehicles in 2013—810,000 of those in China.

China Ramping up Business Creation

Indeed, the U.S. continues to be the engine of the world in a time of Chinese and European deflationary risks. Having said that, I’m troubled by the fact that American business startups have been steadily declining over the past 30 years. For the first time in 2008, the “death rate” of businesses crossed above the “birth rate.”

U.S. Business CLosings Hold Steady while Business Startups Decline
click to enlarge

Although Gallup says that “there has been no definitive answer as to why the rate of U.S. startups has declined so precipitously,” it seems likely that ever-expanding and restrictive government regulations play a huge role.

Now compare this to what’s happening in China:

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

Back in October, I pointed out that China has slashed hundreds of lines of red tape in an effort to jumpstart economic growth and encourage business startups. Even though its real GDP growth is slowing, the country has become much more efficient at fostering business activity.

Emerging Markets Webcast

Our next webcast, scheduled for February 18, will focus on the very topic of emerging markets. Portfolio manager of our Emerging Europe Fund (EUROX) John Derrick, Xian and I will discuss how China and the eurozone are confronting deflation through a series of monetary easing measures. As soon as you can sign up, you’ll be first to know!

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.

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 and Emerging Europe Fund as a percentage of net assets as of 12/31/2014: AMC Entertainment, Inc.; China Rail Construction Corp. 2.00% China Region Fund; International Business Machines Corp. 0.00%; Smithfield Foods 0.00%; WH Group 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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7 Things about Saudi Arabia You Need to Know
January 29, 2015

A week ago we learned that the king of Saudi Arabia, Abdullah bin Abdulaziz Al Saud, passed away at the age of 90. Following the announcement, crude oil immediately spiked 2.5 percent over uncertainty of how this might affect the Middle Eastern kingdom’s position on keeping oil production at current levels.  

But the new leader, King Salman bin Abdulaziz Al Saud, has already tamped down this uncertainty, stating that Saudi Arabia will hold to the decision made at last November’s Organization of Petroleum Exporting Country (OPEC) meeting.

All of this speculation just shows that Saudi Arabia is indeed the 800-pound gorilla when it comes to oil. Until very recently, it was the world’s top oil producer and exporter, before the American shale boom catapulted the U.S. into first place. Now, however, with prices less than half of what they were in July, many U.S. oil companies have been forced to shut down rigs, effectively slowing down output.

Total Number of U.S. Oil Rigs in Use Sharply Declining
click to enlarge

These events got me curious to dive deeper into Saudi Arabia’s economy and the extent to which it’s dependent on crude revenues. Below are some of the most interesting facts, gathered from a September case study by Richard Vietor and Hilary White of Harvard Business School.

1. Despite beliefs to the contrary, Saudi Arabia requires a breakeven price of $80 per barrel of oil. True, the stuff is easy and inexpensive to extract in Saudi Arabia’s desert—the prevailing notion is that one need only stick a straw in the ground and oil comes gushing out—but to afford its bloated social spending program, the government needs prices to be much higher. Right now, oil revenues make up a whopping 90 percent of the country’s budget.

OIl Rigs

2. Recognizing that its economy and energy portfolio are too oil-dependent, the kingdom is seeking ways to diversify. Before his death, King Abdullah ordered that other sources of energy be pursued, including nuclear and renewable energy. State-owned Saudi Aramco, the largest oil producer in the world, is currently ramping up exploration for natural gas. The company estimates that only 15 percent of all land in the nation’s borders has been adequately explored for the commodity.

3. Saudi Arabia is nearing completion of a 282-mile high-speed rail line connecting the holy cities of Mecca and Medina. It’s unclear how many Saudis will use the trains, though, since fuel prices are extremely low as a result of government subsidization. Prices are so low, in fact—a gallon of diesel is less than $0.50—that it has led to excessive and wasteful use of energy resources that could be reserved or exported instead.

Haramain High Speed Railway

4. Saudi Arabia maintains a strong pro-business climate to reel in foreign investors. It offers low corporate taxes (20 percent), no personal income taxes and attractive perks, including land, electricity and free credit. Because of these efforts, the country boasts the highest amount of foreign investment in the Middle East—$141 billion in the past five years alone.

5. Saudi Arabia, believe it or not, has the largest percentage of Twitter users in the world. One of the main reasons for this is that more than half of its 29 million citizens are under the age of 25. As is the case in India, which also has a high percentage of young people, this is seen as an opportunity for the country’s future productivity.

Saudi Arabia twitter users

6. However, the kingdom has high unemployment among not just young people but also women. About 30 percent of working-age young people are without jobs; the figure is 34 percent for women. The country also has a shockingly low labor force participation rate of 35 percent. Saudi Arabia relies on cheap migrant workers, who now make up about 30 percent of the population.

7. A vast majority of Saudis work for the government. Only about 10 percent of working Saudis are employed by private companies. Why? Workers can make either $400 a month on average in the private sector, where working conditions tend to be dubious at best, or $2,000 a month in the public sector. In 2011, about 800,000 new private-sector jobs were created, but of these, 80 percent went to foreign workers.

But this trend is not restricted to Saudi Arabia. As you can see in the chart below, here in the U.S., government jobs growth has broadly outpaced all other industries over the years.

U.S. Government Jobs vs Private Sector Jobs, by Industry
click to enlarge

This saps intellectual capital from the real engine of innovation and ingenuity, the private sector. A robust private sector is necessary to create and foster successful companies such as Apple, held in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX). The tech giant’s iPhone 6 sales led the way to a record earnings report of $74.6 billion—the largest corporate quarterly earnings of all time.

Make sure you’re subscribed to our award-winning Investor Alert to receive the best insight on oil, gold and emerging markets!

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.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund and Holmes Macro Trends Fund as a percentage of net assets as of 12/31/2014: Apple, Inc. 3.52% All American Equity Fund, 5.37% Holmes Macro Trends Fund; Saudi Amarco 0.00%; Twitter, Inc. 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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Chindia 2014: Our Top 10 Stories You Don't Want to Miss
December 24, 2014

There are many reasons for curious investors such as yourself to closely follow and care about the economic health of China and India, or “Chindia,” as the region is sometimes referred to. Fortunately for you, we closely monitor these two powerhouse markets and regularly report on them to keep you informed.

Both countries’ voracious appetite and need for natural resources have far-reaching implications for a few of our funds, most notably our Global Resources Fund (PSPFX), Gold and Precious Metals Fund (USERX) and of course China Region Fund (USCOX).

For every seven people on Earth, more than two and a half are either Chinese or Indian. Last year, China overtook its southwestern neighbor as the world’s largest purchaser of gold, and this year, China’s economy surpassed the U.S.’s on a relative basis, while India’s is gaining fast.

Gross Domestic Product in Absolute Terms
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As I often say, government policy is a precursor to change, and both Asian powerhouses have implemented new courses of action that have already made an impact on the funds mentioned above. With that in mind, let’s look back at 10 of the most important stories from 2014 involving China and India.   

Keeping Tabs on China’s Favorites – January 22

In anticipation of the National People’s Congress Conference, China’s State of the Union Address, I noted that Premier Li Keqiang had invited several academics and corporate executives to advise him on what was vital to China’s economy going forward.

Of special interest were two tech entrepreneurs: Lei Jun, the “Steve Jobs” of China, and Pony Ma, CEO of Tencent.

I wrote that, because of Premier Li’s emphasis on tech, “we believe [China’s] technology and Internet areas are positioned to succeed in 2014.”

Indeed we were right, as Asian Internet stocks have outperformed U.S. American stocks.

Asian Internet Stocks Are Outperforming U.S. Internet Stocks Year-to-Date
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Follow the Money to Asia’s Tech Hub – March 17

In this Frank Talk, I proceeded with the Chinese tech theme, highlighting the country’s focus on innovation and a renewed entrepreneurial spirit.

At the time of writing, technology stocks in the MSCI Asia Index (excluding Japan) had increased an impressive 14.2 percent in the previous 12 months. Additionally, China had the best-performing technology market, beating rivals Taiwan and South Korea.

China is Best Performer Among Major Asian Technology Sectors
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What India’s 815 Million Voters Have on Their Minds – April 10

As India was preparing to vote for its next prime minister, I discussed the issues and factors that might help sway the election’s outcome, two of the most important being urbanization and wealth accumulation.

“Urban dwelling usually is paired with an increase in wealth as city residents have more regular income,” I wrote, noting a surge in cell phone usage, television ownership and Internet connectivity.

“Every American born will need a whopping 2.9 million pound of minerals, metals and fuels in their lifetime,” I continued. “When you think about babies born in India, aspiring to the American lifestyle, you can begin to recognize the implications for resources demand in this part of the world.”

China Holds the Keys to the Gold Market – April 28

China’s middle class is growing larger and more robust every year, which helps support investments in fine metals and luxury goods, such as bullion and jewelry. Another driver of gold demand, on the rise as well in China, is industrial application.

In this Frank Talk I also discussed the reasons why China might be interested in pulling away from and limiting its exposure to the U.S. dollar. Little did we know in April just how strong the dollar would get later in the year and the actions China would take to position its own currency, the renminbi, as a viable alternative to the dollar in international trading.

China Leads the World in Green Energy, Gaming and Gambling Markets – June 9

The Asian gambling industry, especially in Macau, was on a tear back in June. But in November, gambling stocks took a nosedive by as much as 20 percent after the Chinese police announced they would begin investigating money laundering in the region.

However, the Chinese mobile-gaming market continues to thrive at an incredible rate, showing growth of 38 percent over the previous year.  For the first time this year, the industry crossed the RMB100 billion mark, which amounts to about $15 billion, handily beating the $3.7 billion that was projected by year’s end.

Mobile Game Monetization to Grow Rapidly in China
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It’s Morning in India: Narendra Modi’s Pro-Business Policies Point to Strong Sectors Growth – May 29

In May, former tea merchant Narendra Modi was elected to take India’s top position as prime minister, bringing with him a promise to deregulate the free market, improve infrastructure and loosen gold import restrictions.
We’re already seeing some of what he promised come to fruition. In November his government scrapped the 80:20 rule, which mandated that 20 percent of all imported gold must be exported before any new shipments could be brought in. As a result, gold imports in November rocketed to 150 tonnes, a 571-percent increase over the previous year.  

600 Million Reasons to Keep Your Eyes on India – October 6

And what do these 600 million Indians under the age of 25 have on their minds? Good-paying jobs. Adequate housing. A secure future. World-class infrastructure. An improved level of comfort.

All of this and more might be somewhere on the horizon under the leadership of Narendra Modi, who declared in a speech at Madison Square Gardens: “The 21st century will be that of India.” India’s consumer confidence is up, as are domestic car and truck sales.

CLSA’s Christopher Wood, recognized as one of the best Asian market strategists, asserted in September that he had “allocated 41 percent of [his] long portfolio to India.”

Not a bad strategy. The Bombay Stock Exchange Sensitive Index is up 32.7 percent year-to-date, making India the second-best-performing market among the BRIC countries, following China, whose Shanghai Composite Index is up nearly 50 percent.

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

In October I traveled to Italy to meet with other global chief executives and business leaders. There I heard from others just how imbalanced the European Union’s economic policies really are, “relying only on monetary policy but failing to address fiscal issues such as punitive taxation and over-bloated entitlement spending.”

The solution, as I see it, is to do what China has done: slash the regulations that stymie business and capital creation as well as jobs growth. Although China is also struggling to jumpstart a flagging economy, the numbers speak for themselves:

China's Reduction of Red Tape Has Increased Business Start-ups, Despite Slowing Growth
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The Holiday that Jack Ma Built – November 13

2014 might very well be remembered as the year that Jack Ma’s Alibaba locked up for good its position as the world’s leading online marketplace and e-commerce payment hub. By the end of its 24-hour “Double 11” promotion, the company had generated—are you sitting down?—a record $9 billion in sales.

Compare that to disappointing Black Friday and Cyber Monday turnouts this year, and you would be blind not to see which way the wind is blowing.

As I wrote in this Frank Talk: “We’re seeing a tectonic shift in the online marketplace ecosystem and payment services. This shift is led not by eBay or Amazon.com so much as it is by Alibaba and other Asian e-commerce merchants.”

UPDATE: China Wants to Conduct the World’s High-Speed Rail Market – December 15

At a time when America’s rail lines are in desperate need of renovation and modernization, China is forging ahead with fast, efficient, high-speed rails. To date, over 80 percent of the world’s second-largest country is connected by high-speed rail, making travel for both business and leisure affordable and fast. By 2019, every corner of China is expected to be linked, which “makes the nation more energy- and time-efficient, and concentrates real estate development.”

Most Cities in the Network Should be Connected int the Next Five Years
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On top of that, China is aggressively seeking international buyers of its rail technology. Already it has contracts and pending negotiations the world over, the most notable being a $230 billion high-speed rail system connected Beijing and Moscow, which will largely replace the storied 100-year-old Trans-Siberian Railway.

Looking Ahead to 2015

Many exciting events and policy changes took place in the Chinese and Indian regions this year, and we eagerly look forward to seeing what else these two important economies have in store for 2015. We at U.S. Global Investors will continue to seek investment opportunities here and elsewhere around the globe, and continue to keep you informed with news, analysis and insight.

Later this week, keep an eye open for my top 10 commodities stories of 2014. You won’t want to miss it!

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. 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 MSCI AC Asia ex Japan Index captures large and mid-cap representation across 2 of 3 Developed Markets countries* (excluding Japan) and 8 Emerging Markets countries* in Asia. With 603 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Bloomberg Asia Pacific Internet Index is a capitalization-weighted index of internet companies from the Asia Pacific Region.

The NASDAQ Internet Index is a modified market capitalization-weighted index designed to track the performance of the largest and most liquid U.S.-listed companies engaged in internet-related businesses and that are listed on the NASDAQ Stock Market, the New York Stock Exchange (NYSE) or NYSE Amex.

The Bombay Stock Exchange Sensitive Index (Sensex) is a cap-weighted index.  The selection of the index members has been made on the basis of liquidity, depth, and floating-stock-adjustment depth and industry representation.  Sensex has a base date and value of 100 on 1978-1979.  The index uses free float.

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

BRIC refers to the emerging market countries Brazil, Russia, India and China.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources Fund, Gold and Precious Metals Fund and China Region Fund as a percentage of net assets as of 9/30/2014: Alibaba Group Holding 0.42% in China Region Fund, Amazon.com 0.00%, eBay 0.00%, Tencent Holdings 5.62% in China Region Fund.

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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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