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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.

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
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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
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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
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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
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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
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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
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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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The $330 Billion Global Tax Break
December 22, 2014

Warren Buffett: The ultimate contrarian investor.In an October 2008 op-ed in the New York Times, Warren Buffett famously advised: “Be fearful when others are greedy, and be greedy when others are fearful.”

Whereas most investors during that time of financial panic were dumping their freefalling U.S. equities, Buffett was snatching them up at such great volume that he imagined his personal, non-Berkshire Hathaway portfolio would soon be composed only of domestic stocks.

“I haven’t the faintest idea as to whether stocks will be higher or lower a month—or a year—from now,” he continued. “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.”

The same is true for oil prices. I can’t say when oil will begin to recover or by how much. What I can say is this: For far too many investors, by the time they gain back the confidence to put money into oil stocks again, the rally might have already taken off, making it challenging to capture the full benefit of the upswing.

In the 1860s Central Pacific Railroad Employed Over 12000 Chinese LaborersThink of it this way. Every Black Friday, merchandise is discounted to such an extent that thousands of bargain shoppers are willing to camp overnight in parking lots to be the first inside. When the doors open, people literally get pushed, shoved, elbowed and trampled on.

But too often, the stock market works in a curiously opposite way. When certain stocks drop in price, investors scramble for the exit instead of picking up the bargains.

Oil Extremely Oversold

Oil tycoon T. Boone Pickens recently told Mad Money’s Jim Cramer that oil would return to $100 within 12 to 18 months. Again, there’s no guarantee that this will happen—and keep in mind that it’s in Pickens’ self-interest that oil reach these figures again—but if it does, the most opportune time to participate in the oil trade could be now when stocks are at a discount.

Pickens’ prediction aside, there are sound reasons to believe that oil prices will be normalizing sooner rather than later.

For one, oil prices are currently below many countries’ breakeven prices. This could finally encourage the Organization of the Petroleum Exporting Countries (OPEC) to cut production, so long as Saudi Arabia got assurances from fellow members that they would comply with the cuts. Where they are right now, prices simply aren’t sustainable. According to Business Insider, oil rigs in the Permian Basin have fallen by nine; those in Williston by seven; and those in Marcellus by one.

Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), believes that the bottom for oil prices might have already been reached.

“Aggressive capex cuts in the oil industry right now will lead to lower supply in 2015 and 2016, increasing demand and pushing up prices,” Brian says. “Plus, there might be a positive seasonal trading session over the next few weeks, with a possible laggard rebound in January.”

Although past performance is no guarantee of future results, the chart below, which takes into account 30, 15 and five years’ worth of seasonal data for oil prices, illustrates Brian’s point. In the 30-year range, a steady decline in prices began in October and bottomed in February. This was followed by a substantial rally that carried us through the first and second quarters of the year. It’s possible the same will happen again early next year.

West Texas Crude Oil Historical Pattern
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“The theme going into 2015 is mean reversion,” Brian said in a Frank Talk a couple of weeks ago. “Oil prices are below where they should be, and hopefully they’ll start gravitating back to the equilibrium price of between $80 and $85 a barrel.”

Bad News Is Good News

While we wait for oil to revert back to its mean, however, the world can enjoy and benefit from inexpensive gas. Call it the “oil peace dividend.” Here in the U.S., the current average for a gallon of gas is $2.45. Just one year ago, it was $3.21 per gallon, $0.76 higher. Over the course of a year, those extra cents add up.

But the U.S. isn’t the only country that benefits from affordable fuel.

In an article titled “The Saudi Stimulus,” Jon Markman writes that the global economy is looking to save hundreds of billions of dollars on an annual basis:

According to EIA [U.S. Energy Information Administration] data, consumption of crude oil during the latest 12 months was 6.9 billion barrels. So the price drop from $107/barrel at the June 2014 high to $59 today represents a total presumptive savings of $332 billion per year.

In a time when China, the European Union and other major markets are trying to jumpstart their economies, a $330 billion tax break can only come as good news. It should help in stimulating spending and driving global economic growth.

The Weakening Russian Bear

It’s impossible not to discuss falling oil prices without also touching on Russia, half of whose budget depends on $100-per-barrel oil exports. In the past month alone, the federation’s currency has plunged more than 30 percent to 60 rubles to the dollar as Brent oil has slipped nearly 25 percent.

Russian Currency's Tumble Tied to Falling Brent Oil Prices
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President Vladimir Putin couldn’t have chosen a worse time to annex the Crimean peninsula because now the region must be subsidized with money Russia doesn’t really have at the moment. (That’s not to say, of course, that there was ever a good time to invade Ukraine, or that Putin could have predicted the dramatic decline in Brent oil prices.) But even before the ruble began to unravel, stocks in Russia’s MICEX Index had already taken a hit in July and fallen out of lockstep with other emerging markets.

Russian Stocks Decoupling from Emerging Markets
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There’s no lack of commentators making comparisons between the Russian Federation’s current tailspin and the country’s 1998 debt crisis. But a more apt comparison might be the lead-up to the collapse of the Soviet Union in 1991, given the many uncanny parallels between then and now involving oil.

Yegor Gaidar, acting prime minister of Russia between 1991 and 1994, wrote in 2007:

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985… The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive.

Today, Russia is similarly hemorrhaging capital as a result of international sanctions and crashing oil prices, prompted by both the American shale oil boom and OPEC’s inaction in stabilizing the commodity at last month’s meeting.

It’s unclear for how long Russia’s government can support its oil-dependent budget. During his press conference last Thursday, President Putin conceded that spending cuts were unavoidable, but that “under the most unfavorable external economic scenario, this situation may go on for about two years.”

Some readers might find that prognosis a little too optimistic. It could be that Russia is in for a much lengthier period of damage control.

USGI’s Emerging Europe Fund Resilient to Russia’s Woes

It states in our prospectus that “government policy is a precursor to change.” As such, we believe Russia poses too great of a geopolitical risk for our investors. Because of nimble active management, our Emerging Europe Fund (EUROX) now has minimal exposure to Russia, thereby avoiding losses as significant as the Market Vectors Russia ETF (RSX).

Historic Cost Trends in Gold Production
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MSCI Emerging Markets Europe 10/40 Index Country WeightsThis decision has also enabled the fund to outperform its benchmark, the MSCI Emerging Markets Europe 10/40 Index, which still maintained a 46-percent weighting in Russia as of the end of November. The index has consequently fallen more than 30 percent year-to-date, compared to EUROX’s 22.5 percent.

Since trimming nearly all of our Russian holdings, Turkey has replaced the beleaguered federation as our largest weighting in EUROX. The Borsa Istanbul 100 Index is currently up 16 percent year-to-date.

As anyone who watches the news closely knows, the situation in Russia is evolving rapidly day-to-day. We will continue to monitor events that could trigger opportunities in the region. In the meantime, check out EUROX’s current regional breakdown.

I would like to conclude by wishing all of our loyal shareholders as well as Investor Alert and Frank Talk readers a Merry Christmas, Happy Hanukkah and Season’s Greetings!

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.

For information regarding the investment objectives, strategies, liquidity, risks, expenses and fees of the Market Vectors Russia ETF, please refer to that fund's prospectus.

 

Total Annualized Returns as of 09/30/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Ratio After Waivers
Emerging Europe Fund -14.44% -1.61% 3.21% 2.13% n/a
Market Vectors Russia ETF (RSX) -18.53 -2.23 n/a 0.71% 0.63%
MSCI EM Europe 10/40 Index -13.19 1.04% 7.01% n/a n/a

Expense ratios as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

EUROX vs. Market Vectors Russia ETF (RSX)

Investment Objective: The Emerging Europe Fund is an actively managed fund that takes a non-diversified approach to the Eastern European market. The fund invests in companies located in the emerging markets of Eastern Europe.

The Market Vectors Russia ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Russia Index. The Index includes companies that are incorporated in Russia or that generate at least 50% of their revenues (or, where applicable, have at least 50% of their assets) in Russia.

Liquidity: The Emerging Europe Fund can be purchased or sold at a net asset value (NAV) determined at the end of each trading day.

RSX issues and redeems shares at NAV only in a large specified number of shares, each called a “Creation Unit,” or multiples thereof. A Creation Unit consists of 50,000 shares. Individual shares of RSX may only be purchased and sold in secondary market transactions through brokers. Shares of RSX are listed on NYSE Arca Inc. (“NYSE Arca”) and because shares trade at market prices rather than NAV, shares of RSX may trade at a price greater than or less than NAV.

Safety/Fluctuations of principal/return: Loss of money is a risk of investing in the Emerging Europe Fund, as well as the Market Vectors Russia ETF. Shares of both of these securities are subject to sudden fluctuations in value, and when sold, may be worth more or less than their original cost.

Tax features: The Emerging Europe Fund may make distributions that may be taxed as ordinary income or capital gains. Under current federal law, long-term capital gains for individual investors in the fund are taxed at a maximum rate of 15%.

RSX’s distributions are taxable and will generally be taxed as ordinary income or capital gains.

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.

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 MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

The MSCI Emerging Markets Europe 10/40 Index (Net Total Return) is a free float-adjusted market capitalization index that is designed to measure equity performance in the emerging market countries of Europe (Czech Republic, Greece, Hungary, Poland, Russia, and Turkey).  The index is calculated on a net return basis (i.e., reflects the minimum possible dividend reinvestment after deduction of the maximum rate withholding tax). The index is periodically rebalanced relative to the constituents' weights in the parent index.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The 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.

The Market Vectors Russia Index is a modified market cap weighted index that tracks the performance of the largest and most liquid companies in Russia. Its unique pure-play approach expands local exposure to include offshore companies that generate at least 50% of their revenues in Russia.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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 and Emerging Europe Fund as a percentage of net assets as of 9/30/2014: Berkshire Hathaway 0.00%, Cubist Pharma 0.00%, Market Vectors Russia ETF 0.00%, Merck & Co., Inc. 0.00%. 

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. 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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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
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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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Net Asset Value
as of 06/22/2018

Global Resources Fund PSPFX $5.81 0.12 Gold and Precious Metals Fund USERX $7.67 0.10 World Precious Minerals Fund UNWPX $3.87 0.08 China Region Fund USCOX $11.23 0.10 Emerging Europe Fund EUROX $6.74 0.09 All American Equity Fund GBTFX $25.78 0.01 Holmes Macro Trends Fund MEGAX $19.87 -0.05 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change