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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.

What We’re Paying Attention to Following the Paris Attacks
November 23, 2015

Ten days ago, 129 lives were brutally cut short when assailants affiliated with the terrorist group ISIS, also known as the Islamic State, stormed Paris in a series of coordinated attacks. Along with the rest of the world, we were shocked and saddened as the tragic news unfolded, worsening as the night progressed. Our thoughts are with the victims’ families and friends.

For us, the atrocity struck especially close to home, as one of our portfolio managers, Xian Liang, was in the city at the time of the attacks. We’re extremely grateful he and his wife returned home safe and sound. I wish the same could be said for the victims in Paris that day, the 224 on the Russian jet brought down by an ISIS-built bomb, the hostages in Mali Friday, and many others whose lives have been affected by the global scourge of terrorism.

We Take Our Role as Fiduciaries Seriously

As money managers, it’s our duty and responsibility to be cognizant of such geopolitical events—large and small, good and bad—and to consider all of the possible ramifications. The consequences often reach far and wide, and can be felt in the short-term (changes in investor confidence) as well as the long-term (changes in government policy).

Early last year, for instance, we were quick to adjust asset allocations when Russia invaded and annexed Crimea. We anticipated that sanctions would be imposed on the country, and indeed they were, by the U.S., European Union, Australia and other international organizations. These sanctions, coupled with falling oil prices, contributed to the Russian ruble’s dramatic breakdown.

Diesel, the seven-year-old belgian shepherd who was killed recently during a French SWAT raid

Against these challenges, I’m impressed by how strongly Russian stocks have performed lately. Last Tuesday, the Micex Index jumped to an eight-month high in ruble terms. This is especially interesting since both Brent oil and the ruble are way down. It suggests that investors are showing approval of President Vladimir Putin’s involvement in Syria.

Putin is also benefiting from a strong public relations push. The Daily Mail writes: “Russia has shown its solidarity with the people of France in an unusual way—by donating a new puppy to carry on the memory of Diesel, the police dog killed by a suicide bomber.”

It should come as a surprise to no one that, following the tragedy in Paris, defense spending will likely increase. French President François Hollande has already told Parliament that France is at war and will “be merciless” in its pursuit of justice. The country wasted no time in striking back against ISIS and has begun bombing raids in Syria.

As early as last Monday, stocks of companies that manufacture weapons and fighter jets traded up.

War Stocks Rally Following Attacks in Paris
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We own Lockheed Martin, manufacturer of the F-35, F-22 and F-16 fighters; Boeing, manufacturer of the Tomahawk cruise missile, F-18 fighter and more; and Northrop Grumman, which was recently awarded the contract to build America’s next generation of long-range strike bombers. Raytheon develops and manufactures guided missiles.

The U.S. Navy plans to buy more Boeing F/A-18E/F Super Hornets in the coming years.

International Travel to Be Hit

Understandably so, the terrorist attacks will have an impact on international travel, immigration and border security. France immediately tightened its borders, and other European countries quickly followed suit. Meanwhile, Poland’s newly-elected government rejected the European Union’s quotas for accepting refugees from Syria, an attitude that’s echoed by more than 30 U.S. states. The House of Representatives just passed legislation to suspend the admittance of 10,000 Syrian refugees, though it’s likely to be vetoed.

This is the climate we find ourselves in right now. It has a huge effect, at least in the near-term, on perceptions of international travel.

“Most people are risk-averse,” Xian says. “When my wife and I left for the airport by taxi the morning after the Paris attacks, we agreed not to travel to Europe again any time soon.”

Others share Xian’s attitude. Paris has for years been the world’s top tourist destination, but the City of Lights has already seen a huge drop-off in tourists as people have delayed or cancelled travel plans. Hotel stocks were up 10 percent in October but will likely face headwinds as a result of Paris and Mali.

Gold, Diamond and Oil Declines Good for Manufacturers

Xian stresses the importance of having gold exposure as diversification. A good diversifier is any investment that’s expected to have a low correlation with the rest of your portfolio, and gold historically has little to no correlation with equities.

The yellow metal has traditionally been seen as a safe haven in times of war, but so far we’ve seen little movement. Year-to-date, gold is down nearly 9 percent, and it could possibly end 2015 in negative territory for the third straight year.

Even so, the yellow metal has performed better than other select world currencies for the year, including the Russian ruble (-10 percent), Australian dollar (-11 percent), euro (-12 percent) and Canadian dollar (-13 percent).

Gold and Diamonds Follow the Same Downtrend
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Diamonds have likewise struggled over the past four years, but with the recent news that Canadian miner Lucara discovered the largest diamond in 100 years, investors might show renewed interest. The massive 1,111-carat diamond was unearthed in Lucara’s Botswana project. Although the stone has yet to be assessed, it’s worth noting for comparison that a 100-carat diamond sold at Sotheby’s in April for $22 million.   

Gold and Diamonds Follow the Same Downward Trend
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These declines over the past three and four years have been good for jewelry companies such as Tiffany, which I wrote about last December. Gold and diamond supply is now less expensive, so the company has margin expansion.

The same can be said of oil. Low prices have hurt South Texas, the Middle East, Russia and Colombia, not to mention drillers and explorers, but they’ve been a windfall for the end consumer, including manufacturers and airlines. Falling energy prices are finding their way into the global engine of growth.

$500 Billion Peace Dividend for Global Consumers and Businesses
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Many analysts expect to see crude oil prices tick up on mounting tension in the Middle East. During past military engagements, oil has typically performed well since a lot is required to fight a war. We haven’t seen prices move just yet—oil still sits at $40 per barrel—but it’s something we’ll monitor closely. As I said earlier this month, the global purchasing managers’ index (PMI) turned up in October after bottoming in September, and in the past this has been followed by a jump in oil prices.

Oil Trends Typically Drive by Global Economic Activity
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Inflation Rousing from Sleep

We learned this week that the consumer price index (CPI) rose 0.2 percent in October, suggesting that inflation is finally picking up steam in the U.S. and giving the Federal Reserve further excuses to raise rates next month.

Based on the 2-year Treasury yield (0.89 percent) and the headline CPI (0.20 percent), real rates now stand at 0.69 percent. (Real interest rates are what you get when you subtract the CPI from the Federal funds rate.) I’ve often explained that gold responds positively when real rates turn negative, as you can clearly see in the chart below, so we’re eagerly awaiting stronger inflation.

Real Interest Rates and Gold Share an Inverse Relationship
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In a note this week, Drew Matus, an economist at UBS, wrote that inflation in the U.S. is poised to jump in the next couple of months. The CPI measures the price of a basket of goods to the price of the same goods a year ago, so inflation fell dramatically between November 2014 and January 2015 as energy prices plunged.

But “absent a similar move this year, those sharp price declines will drop out of the year-over-year data, resulting in a rapid, technical acceleration in overall inflation measure,” Matus says.

If such inflation occurs—possibly as soon as January or February, Matus points out—real rates could have a better chance of dipping into negative territory, which would be constructive for gold prices.

Thanksgiving is this week, and in light of recent events, I think we all have ample reason to express gratitude to friends and loved ones. Everyone have a blessed week!  

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 9/30/2015: Lockheed Martin Corp., The Boeing Co., Northrop Grumman Corp., Lucara Diamond Corp.

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

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5 World Currencies That Are Closely Tied to Commodities
November 18, 2015

5 World Currencies That Are Closely Tied to Commodities

For more than a year now, commodity prices have been under pressure from the strong U.S. dollar and slowing global demand. This has made a huge dent in the balance sheet of many net exporters of resources, in turn weakening their currencies.

This should come as a shock to no one, but what most people don’t realize is just how closely some currencies track certain commodities. When I presented at the International Mining and Resources Conference in Melbourne, Australia, earlier this month, I shared several charts that show this correlation. Many attendees were astounded—and we’re talking professional economists, money managers and CEOs here.

With that said, I think it’s important that you see this correlation as well. Below are five world currencies that have been impacted by lower commodity prices.

1. Australian Dollar

Australia now accounts for around a third of global iron ore production, according to the country’s budgetary office. This means that its income is very sensitive to price changes. As demand from China, the world’s largest consumer of iron ore, has softened, so too has the Australian dollar.

Australian Dollar Tracks Iron Ore Prices
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2. Canadian Dollar

The sixth-largest oil producer in the world is Canada, about a quarter of whose exports is oil. The Conference Board of Canada, a not-for-profit economic research group, estimates that sales for the country’s energy sector will recede a sizable 22 percent this year. In Alberta, where revenue from oil sand exports had until recently helped the province become the fastest-growing in Canada, GDP is expected to contract 1 percent. And in September, the country’s economy shrank for the second straight quarter. As for the Canadian dollar, it’s fallen around 15 percent against the dollar for the one-year period.

Canadian Dollar Tracks Oil Prices
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3. Russian Ruble

Compared to Canada and Australia, Russia’s export mix isn’t nearly as diversified: About half of its exports in terms of value are a combination of oil and natural gas. (Russia sits atop the third-largest oil reserves in the world, the number one natural gas reserves.) It should come as no surprise, then, that its currency is highly influenced by Brent oil. Where oil went starting in July 2014, so went the ruble.

Russian Ruble Tracks Oil Prices
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4. Colombian Peso

The same story can be found in Colombia, where oil exports are responsible for about 20 percent of government revenue. Officials estimate, however, that oil sales will total $1.1 billion in 2016, compared to $6.7 billion in 2014. With prices lingering just above $41 per barrel, the Colombian peso has retreated 30 percent against the U.S. dollar for the one-year period.

Colombian Peso tracks Oil Prices
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5. Peruvian Sol

Besides gold, copper is Peru’s most important mineral export by value. With around 13 percent of the world’s copper reserves, it’s the third-largest producer after Chile and China. As such, the Peruvian sol has declined in tandem with the red metal.

The Peruvian Sol Tracks Copper Prices
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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 Bullish Case for Aussie Gold
November 16, 2015

A Qantas A380 in flight

On Thursday of last week, I arrived back in the States after spending two weeks globetrotting and attending international investing conferences, first in New Orleans, then in Lima, Peru.

Most recently I was in Melbourne, Australia, for the International Mining and Resources Conference, one of the largest and most distinguished in the world, attended by not only top economists, geologists and CEOs of mining companies but also mining ministers from all corners of the globe.  

I was encouraged to see that sentiment for gold was very positive. There’s a gold bear market here in North America, where the yellow metal has plunged to a six-year low of $1,083 per ounce on the strong U.S. dollar. But when priced in the weaker Aussie dollar, the precious metal is sitting at $1,520. As recently as last month, it touched $1,642.

This, combined with lower fuel costs, has been a huge boon to many gold companies in the world’s second-largest gold-producing nation after China. The country has excellent sponsorship by both the Australian and state government of Victoria, where Melbourne was built like San Francisco in a Gold Rush.

Strong Gross Margins and Cash Flow Returns

For the one-year period, the Australian dollar has fallen about 20 percent against the U.S. greenback, so gold looks very attractive—especially compared to iron ore and copper—and has lots of upside potential.

Iron Ore vs Gold vs Copper in Australian Dollar
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As a result, if you look at the top Aussie gold producers by gross margin, they all beat the median for world gold producers, currently at 15.9 percent. We own the names with a star next to them. Also note the total returns for the one-year period, shown in Aussie dollars.

Top Australian Gold Producers by Gross Margin
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A similar story emerges when you look at the top Aussie gold producers by cash flow return on invested capital (CFROIC).

Top 10 Australian Gold Producers by Cash Flow Return on Invested Capital (CFROIC)
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We like to focus on stocks that offer high reserves per share, growth in sales, low debt to equity and high returns on invested capital. Australia has many outstanding companies whose financial fortunes have improved with a decline in the Aussie dollar. There’s little hope for iron ore to outperform due to China’s slowdown in mega-infrastructure projects, which means fewer imports.

St. Barbara, one of our holdings, is up 1,120 percent for the 12-month period. The company operates in Western Australia and has a project in the New Zealand province of Papua New Guinea.

St. Barbara Is up 1,1120% for the 12-Month Period
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But gold companies aren’t the only ones reaping the benefits of a weak Aussie dollar and low fuel prices. Qantas Airways, Australia’s flagship airline, was up nearly 150 percent for the 12-month period.

Qantas vs Crude Oil vs Australian Stock Market
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Sights and Sounds of the International Mining and Resources Conference

During the conference, I had the pleasure to meet Bernard Salt, a columnist for The Australian and a popular social commentator who has written widely on changes in demographics and social behaviors. His presentation focused on how shifting demographic trends are shaping the demand for commodities.

Top 10 Australian Gold Producers by Gross Margin

In a fascinating article published last month in The Australian, Bernard shows that there’s a “tectonic shift in corporate power” happening right now, from New York City to Beijing. The number of head offices of Fortune 500 companies in New York has dropped from 36 to 25 between 2005 and 2015, while the number has risen in Beijing during the same time period, from just 12 to 51.

What’s going on? It’s not that the U.S. economy is struggling, Bernard argues. It’s that China grew more rapidly over these 10 years—especially its middle class, a topic I’ve written and spoken about numerous times.

In any case, it appears as if Greater Beijing is now the world’s most powerful corporate city.

Capital Flows from New York City to Beijing
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S2 Resources CEO Mark Bennett

I also had the chance to hear Mark Bennett, managing director and CEO of S2 Resources, on the ingredients of a successful mining entrepreneur. The two-time recipient of the AMEC Prospector of the Year Award, he once served as chief geologist for LionOre Mining, which we used to own.

He’s also just as capable in a New York boardroom as he is in the Australian Outback. In 2009, Mark seeded gold and nickel miner Sirius Resources with $5 million, and soon before it merged with Independence Group this year, it was valued at $1.5 billion. You expect to see this kind of growth with a tech startup, not a mining company! This is just further proof of how exceptional Mark is.

S2 Resources CEO Mark Bennett

Also presenting was Jim Askew, Chairman of the Board of Directors of OceanaGold. Jim is a mining engineer with over 40 years of international experience as a director and CEO. He also serves on the Board of Evolution Mining, one of Australia’s leading mining companies.

Another notable speaker was Dr. Mehdi Karbasian, Iran’s deputy minister for industry, mining and trade, whose presentation on investment opportunities in the country’s mining sector drew a packed house. (Iran is seeking $29 billion of investment, following the lifting of sanctions.) To me, what really stood out was how inexpensive labor and energy in Iran were. According to Karbasian, skilled labor costs about $300 per month, whereas in Australia it’s closer to $300 per day. And as for energy, a kilowatt hour (kWh) will set you back only a penny and a half. (In the U.S., it’s between 5 and 15 cents on average.) Meanwhile, Iran sits atop the second-largest natural gas reserves in the world, following Russia.

My question, then, is this: If energy is already so cheap and abundant, what does Iran possibly want with a nuclear power plant? It makes you wonder.

Central Banks and Retail Consumers Gobble Gold at Near-Record Pace

I want to end by sharing with you some good news. Judging from a new report from the World Gold Council (WGC), global central banks’ appetite for gold remains insatiable. In the third quarter, net purchases rose to 175 tonnes. This is the second-highest level ever recorded, nearly equaling the all-time high of 179.5 tonnes in the same period last year.

Third-Quarter Gold Purchases by Central Banks Was Second-Highest on Record
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Russia and China were the top buyers, but we also saw some central banks return to the list of those that hold gold. The United Arab Emirates (UAE), for instance, reports that it now has 5 tonnes of the yellow metal, after holding none since 2003. The only net-seller for the quarter was Colombia.

Relatively low prices no doubt factored into the buying spree, but more than that, central banks recognize gold’s ability to hedge against inflation and monetary instability. It’s probably not appropriate to have 72 percent of your portfolio in gold, as the Federal Reserve does, but investors should nonetheless take note of what the banks are doing.

In fact, this might be what was on U.S. investors’ minds in the third quarter. Sales of American gold eagle coins shot up a whopping 200 percent year-over-year to 32.7 tonnes, a five-year record. I always recommend having around 10 percent: 5 percent in gold stocks, the other 5 percent in bullion or gold jewelry.

This never changes, whether we’re in a bear market or, in the case of Australia, a bull market.

Finally, just a reminder that on November 23, I’ll be giving the keynote address at the Silver Summit and Resource Expo in San Francisco. I invited you once before to attend the conference as my guest, and the response was very positive. But there’s still room for more! If you’d like a complimentary registration, send me an email.  

Past performance does not guarantee future results.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 9/30/3015: Doray Minerals Ltd., St. Barbara Ltd., Northern Star Resources Ltd.    

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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Get Ready for Commodity Liftoff: Global Manufacturing Just Made a HUGE Move!
November 9, 2015

Global PMI Just Crossed Above Its Three Month Moving Average

By most standards, October was an explosive month, with domestic equities recording their biggest monthly gains in four years.

But the most exciting news was that the global purchasing managers’ index (PMI) reading for the month of October rocketed up to 51.4, almost a point higher than September’s 50.7. Not only does this represent the strongest monthly surge in nearly two years, but the index shot above its three-month moving average for the first time since March.

As Donald Trump might say: This is going to be huge.

Global-Manufacturing-PMI-Crosses-Above-Its-Three-Month-Moving-Average
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We monitor the global PMI very closely because in the past it has reliably anticipated how commodity prices might behave in later months. Our own research shows that when a PMI “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has signaled a possible spike in certain commodities, materials and energy. Three months following previous breakouts, copper had an 81 percent probabilty of rising approximately 7 percent, while crude oil jumped 7 percent three quarters of the time.

Commodities-And-Commodity-Stocks-Historically-Rose-Three-Months-After-PMI-Cross-Above-Cross-Below
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Indeed, oil prices have tended to track the global PMI pretty closely. With manufacturing exploding off the launch pad, could oil be very far behind?

Upturn-In-Global-Manufacturing-PMI-Could-Be-A-Tailwind-For-Crude-Oil
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What’s more, domestic equities are strongly correlated with global PMI readings. Investment research firm Cornerstone Macro shows that in five separate incidences since 2001, a PMI liftoff after hitting a bottom was soon followed by a rally in the S&P 500 Index.

A-Bottom-In-The-Global-PMI-Has-Marked-An-Inflection-Point-for-Domestic-Equities
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A similar trend can be observed in world equities. In the past, the MSCI World Index has rallied when the global PMI turned up.

The-Beginning-Of-An-Emerging-Market-Rally-Starts-With-An-Improvement-In-The-Global-PMI
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Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), agrees that the PMI reading is promising.

“It’s definitely constructive for commodities going forward,” he said.

One of our holdings in PSPFX, by the way, had a huge jump this week. British Columbia-based Sunridge Gold announced that it would be selling its 60 percent interest in the Asmara Mining Share Company, holder of the Asmara Project in northeastern Africa, to Sichuan Road & Bridge Mining Investment Development, a Chinese company, for $65 million. Sunridge jumped 41 percent this week alone and for the year is up 71 percent.

Did I mention that U.S. Global Investors is the largest holder of Sunridge stock (by a very wide margin)? That’s the power of active portfolio management.

So When Will Liftoff Occur?

As exciting as this news already is, we believe the real commodity liftoff should occur when the U.S., Europe, China and global PMIs all score above a 50.0, with the one-month readings above the three-month trends.

Of those regions, China is the only one whose reading still trails below the 50.0 level. For the month of October, it came in at 48.3, up from 47.2 in September.

But like the global PMI, the China PMI crossed above its three-month moving average, suggesting that manufacturing activity is contracting at a slower pace and preparing to reverse course into expansion mode.

It’s crucial that China’s PMI move above 50.0, as the Asian giant is the top driver of global commodities demand. We believe that once purchases, new orders and exports gain further momentum, commodities might have the fuel they need to skyrocket.

Heading Down Under

I’m nearing the end of my worldwide conference tour, which kicked off the week before last at the 2015 New Orleans Investment Conference.

Last week I was in beautiful Lima, Peru—the third-largest city in the Americas—where I attended and spoke at the Mining & Investment Latin America Summit.

Downtown-Lima-Peru

During this leg of the trip I managed to gain some tacit knowledge by visiting the Mineral MuseumAndrés del Castillo as well as downtown Lima, which is currently undergoing lots of construction and rapid population growth.

Frank-Holmes-Visiting-Mineral-Museum-Andres-Del-Castillo-Lima-Peru

Right now I’m in Melbourne, Australia, getting ready for the International Mining and Resources Conference. Stay tuned for my thoughts and insights on what I saw and heard during my travels!

 

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.

This news release may include certain “forward-looking statements” including statements relating to revenues, expenses, and expectations regarding market conditions. These statements involve certain risks and uncertainties. There can be no assurance that such statements will prove accurate and actual results and future events could differ materially from those anticipated in such statements.

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.

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

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.

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 (PSPFX) as a percentage of net assets as of 9/30/2015: Sunridge Gold Corp. 1.59%, Sichuan Road & Bridge Mining Investment Development Corp. Ltd. 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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Have Commodities Reached an Inflection Point?
November 2, 2015

Iceberg, Nominal Interest Rates and Real Interest Rates

Last week the Federal Reserve announced it would delay the interest rate liftoff yet again, but while everyone seems concerned about nominal rates—the federal funds rate, in this case—real rates have already risen about 5 percent since August 2011. This “invisible” rate hike is much more impactful to commodity prices and emerging markets than a nominal rate hike, which is simply the “tip of the iceberg.”     

Since July 2014, the U.S. dollar has appreciated more than 20 percent. This has had huge implications for net commodity exporter countries, both developing and emerging, which typically see their currency rates fluctuate when prices turn volatile.

But why does this happen?

The main reason is that most commodities, including crude oil, metals and grains, are priced in U.S. dollars. They therefore share an inverse relationship. When the dollar weakens, prices tend to rise. And when it strengthens, prices fall, among other past ramifications, as you can see in the chart below courtesy of investment research firm Cornerstone Macro.

Dollar-Appreciation Spikes Almost Always Lead to International Currency Crises
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Indeed, commodities have collectively depreciated close to 40 percent since this time a year ago and are at their lowest point since March 2009. We might very well have reached an inflection point for commodities, which opens up investment opportunities.

Net Commodity Exporters under Pressure

The number of developing and emerging markets that are dependent on commodity exports has risen in recent years, from 88 five years ago to 94 today, according to the United Nations Conference on Trade and Development (UNCTAD). Many of these countries—located mostly in Latin America, Africa, the Middle East and Asia—have a dangerously high dependency on a small number of not only commodity exports but also trading partners.

For many suppliers, China is the leading buyer. But the Asian giant’s imports have been slowing as its economy transitions from manufacturing to services and housing, forcing many net commodity export countries to rethink their dependency on China.

China's Services Industry Surpasses 50 Percent GDP
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This is the position Indonesia finds itself in right now. As much as 50 percent of its total exports consists of crude oil, palm oil, copper, coal and rubber, all of which China has historically been a vital importer. A stunning 95 percent of Mongolia’s exports flow into its southern neighbor, according to the World Factbook. And for Chile, commodities represent close to 90 percent of total exports, about 25 percent of which goes to China.

But countries needn’t have such a high dependency on commodities for their currencies to be affected. The Australian dollar, for instance, has a positive correlation with iron ore prices.

Australian Dollar Tracks Iron Ore Prices
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About 98 percent of the world’s iron ore supply is used to make steel. So important is the metal to the state of Western Australia, where most of the continent’s deposits can be found, that every $1 decline in prices results in an estimated $49 million budget loss.

The same relationship exists between the Peruvian sol and copper. Peru is the fourth-largest copper producer in the world, preceded by Chile, China and the U.S.

The Peruvian Sol Tracks Copper Prices
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The Russian ruble, Canadian dollar and Colombian peso all follow crude oil prices. (Russia is the third-largest oil producer in the world; Canada, the fifth-largest; Colombia, the 19th-largest.)

Russian Ruble Tracks Oil Prices
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Canadian Dollar Tracks Oil Prices
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Colombian Peso tracks Oil Prices
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It’s important that we see stability in emerging market currencies, which would help support resources demand. We’ve seen some stabilization in the Chinese renminbi after it was depreciated in August, but a few others are down pretty significantly.

Currency Depreciations Against the U.S. Dollar for the 12-Month Period
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Global Manufacturing Could Reverse Course Sooner Than You Think

I’ve shown a number of times that commodity demand depends on manufacturing strength, as measured by the J.P. Morgan Global Purchasing Manager’s Index (PMI). This indicator has steadily been trending lower. Although the reading is still above the neutral 50.0 line, commodity prices have reacted negatively.

Commodities are Highly Correlated to Global PMIs
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Cornerstone Macro believes both the Chinese and global PMI are “likely” to rise in October, leading to a full year of upside potential. If true, this is indeed welcome news, but it’s worth remembering that the PMI looks ahead six months, meaning it’ll take approximately that long for commodities to recover.

In any case, now might be a good time for investors to consider getting back into commodities and natural resources since we could be in the early innings of an upturn.

“You want to buy commodity stocks when they’re out of favor, because they are cyclical,” Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), told The Energy Report last week. “If you look out 12, 18, 24 months from now, those equity values should reflect equilibrium commodity prices and move significantly higher from here.”

Conference Hopping

Last week I returned from the 2015 New Orleans Investment Conference, widely considered as the “World’s Greatest Investment Event,” where I participated in an investment panel and presented a speech. For 41 years, this event has attracted some of the world’s most distinguished speakers—from Margaret Thatcher to Steve Forbes to Dr. Ben Carson—and this year was no exception. Among the attendees were respected Fox News commentator Charles Krauthammer, “Gloom, Boom & Doom Report” publisher Dr. Marc Faber and James Rickards, author of “Currency Wars.”

This week I'm in Peru for the Mining & Investment Latin America Summit, and next week I’ll wrap things up in Melbourne, Australia, at the International Mining and Resources Conference.

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

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Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change