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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.

Extreme Divergence Between Coal Rocks and Stocks Unwarranted
October 3, 2011

Coal Cars
The Dow Jones Industrial Average experienced its worst quarter since the beginning of 2009. The S&P 500 Index fell 14 percent during the third quarter, with the materials sector as the worst performer, falling 25 percent. Many base metal commodities saw double digit declines, but not surprisingly, gold increased 8 percent over the quarter. It appears that fear of a “2008 repeat” drove investors from stocks despite positive long-term fundamentals.

Coal was relatively flat for the quarter, but what’s interesting is that coal companies were severely discounted. Over the last two years, coal stocks and the commodity have closely tracked each other, until this summer, when worries about a global slowdown caused coal stocks to fall off a cliff, not once, but twice, in August and again in early September. This extreme divergence between coal companies and the commodity seems unwarranted when the long-term drivers of coal remain supportive.

Coal Stocks

We discussed coal in May in Coal Use in China Shines Light on Growth, and highlighted how the price of coal was supported by strong demand from reconstruction projects in Japan along with reduced supply from floods in Australia, Indonesia, South Africa and Colombia. As the largest consumer of coal in the world, China was expected to continue to demand a significant amount of coal over the long term.

This long-term driver hasn’t changed, even with China’s concentration on controlling inflation this year. Coal inventory levels at China’s top loading port have dropped, hitting a new low at the end of September, reports Macquarie Research. In mid-September, the Daqin Railway was under maintenance for a few weeks, causing reduced deliveries, which put further pressure on the country’s inventory. As the world’s largest coal transport railway, the Daqin line transports coal from northern China to Zinhuangdao for shipping to manufacturing centers in the south and the east.

Throughout the world, coal demand is expected to rise significantly over the next 25 years. According to the U.S. Energy Information Administration’s (EIA) recent International Energy Outlook 2011, total coal demand will be driven largely by the non-OECD economies, which are primarily emerging markets. Specifically, the Asian non-OECD countries are projected to account for nearly all of the increase from 2008 through 2035, with China averaging 5.7 percent each year and India averaging 5.5 percent per year, says the EIA.

MSCIEM 60 day OscillatorToday’s worries about a global slowdown shouldn’t impact China’s consumption levels for many commodities. In fact, a worldwide slowdown may spur additional demand from China. Macquarie explains that China’s government tends to “de-synchronize” the country compared with the rest of the world, creating an inverse relationship. This means that when the world is growing, China becomes so concerned about rising costs and inflation, that it moves quickly to slow growth.

Conversely, when world demand for commodities slows, China ramps up its infrastructure projects and scoops up unwanted commodities. In China-The Great Stabilizer, I showed a Macquarie chart indicating how China’s demand for many base metals has run counter to world demand over the last 10 years. Most recently, in 2008, the de-synchronization took place when China first moved to slow growth to combat increasing inflation. As the global crisis caused a significant slowdown, “authorities moved quickly to substantially ease monetary and fiscal policy,” says Macquarie. Due to its long-term planning, China can start and stop infrastructure projects at will.

In addition, Macquarie says that potential growth of the country generally outpaces its energy and resources capacity.

The recent dramatic decline in coal stocks has been driven by concerns of a global slowdown, but with equities already down 40 percent from their July highs, we feel this negative sentiment is already priced in. Given the encouraging long-term fundamentals, along with the fact that the underlying commodity has roughly stayed the same over the past few months, it appears that fear is the driver. This is often when opportunity knocks.

John Derrick, director of research, contributed to this commentary.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies

None of U.S. Global Investors Funds held any of the securities mentioned in this commentary as of 6/30/11.

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Rev Up for Resources Boom in China
July 25, 2011

Frank on MarketWatchLast week I sat down with Laura Mandaro from Marketwatch to discuss what’s currently driving commodity markets. One of the key drivers today is the robust economic activity and commodity demand taking place in Asia.

Frequent Frank Talk readers know there is something profound and significant happening in China—the building of a massive high speed rail network. It’s a $300 billion project that will connect more than 250 Chinese cities, span 18,461 miles and reach roughly 700 million people. This is going to create massive demand for commodities and a wave of investment into the sector. We believe that resource companies associated with coal, iron ore and steel are well positioned to benefit from China’s long-term sustainable bull market.

I also discuss a few individual stocks I think are structurally sound as well as talk about a market ready to take off and The Fear and Love Trade.

Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus.

The following securities mentioned in the interview were held by one or more of U.S. Global Investors Funds as of June 30, 2011: Freeport-McMoRan, Joy Global.

By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

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Move at the Speed of China
July 14, 2011

Shareholder ReportOur latest shareholder report highlights what we believe to be China’s true Great Leap Forward. The country is developing at a much greater and faster rate than America’s boom time in the 1950s. The report recaps portfolio manager Evan Smith’s latest research trip to iron ore facilities in China and discusses where most of the millionaires live in 2020…take a guess where that may be?

Its epic build-out is already having an impact on international businesses vying for market share. American industries, including automobile manufacturers and hoteliers, as well as the European luxury market are all setting up shop along China’s “millionaire row.”

China’s expansion has affected gold demand too. In the article, “Asian Tiger Sinks Teeth into Gold,” we write about how China’s 2010 demand for gold jewelry, bars and coins outpaced the demand of the Developed West, which includes the U.S., France, Germany, Italy, Switzerland, U.K. and other European nations.

To receive your copy in the mail, send us a quick email at editor@usfunds.com with your address. Or, click on the link below to see an online version.

View the Report Online

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China Opens World’s Longest Cross-Sea Bridge
July 5, 2011

Qingdao BridgeWhen the new Qingdao Jiaozhou Bay Bridge opened to traffic this week in China, it made the Guinness World Records for the longest cross-sea bridge in the world. The 26.4-mile long and 110-foot wide bridge stretches across the bay, linking the Huangdao district to the city of Qingdao and Hongdao Island.

China spent 17 years planning and designing the engineering marvel to be able to withstand the bay’s high salt content and icy winters. Yet, it only took four years to build, with at least 10,000 workers on the construction team. The Xinhua news agency says about $2.3 billion was spent, and 450,000 tons of steel and 81 million cubic feet of concrete were consumed in its construction.

Qingdao Jiaozhou Bridge Bay Bridge Map

An estimated 30,000 cars are expected to make the trek across the bay each day. Residents already traveling between Huangdao and Qingdao will have their trip cut in half, from 40 minutes to 20 minutes.

According to The Telegraph, Qingdao is one of China’s fastest-growing cities. It is among the top ten largest container ports in the world, and is the main port of the Chinese navy. Home to around 8 million people, half live in the metro area of the city. Many people might recognize the city as host of the sailing events during the 2008 Beijing Olympics.

While the bridge made headlines for breaking a world record, it is only one of many major infrastructure projects planned by China. In only a few short years, the country has been redefining urbanization at a phenomenal scale:

  • From 2005 through 2025, Chinese cities will add more than 350 million people, which is the entire population of the United States.
  • More than 200 Chinese cities will have more than one million inhabitants. Europe today has 35 cities of that size.
  • There will be 50,000 new skyscrapers, the equivalent of ten New York Cities.

Many of these urban residents have rising incomes and discretionary income to purchase cars and upgrade their homes in pursuit of a better life—just like the American dream. To accommodate this rapid economic development, rising middle class and growing car ownership, China has been ramping up its transportation system. Similar to our story of China’s high speed rails, the magnitude of opportunity is expected to span across many industries, including tourism, restaurants, hotels, construction, property, rail, roads and airlines.

To grasp the immense size of China’s newest bridge, watch this short video* from The Telegraph.

Fire up the grill, enjoy the fireworks and celebrate freedom! Here’s wishing you and your family a very safe and happy holiday weekend!

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 website and is not responsible for its/their content.

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Emerging Markets Building Highways to Wealth
June 30, 2011

If you think Los Angeles traffic is bad, take a look at the results of IBM’s Commuter Pain Index. Last summer, IBM surveyed more than 8,000 motorists in 20 cities across 6 continents to determine the emotional and economic toll of commuting. They measured the amount of time it took to commute and time stuck in traffic along with whether there was an agreement of the following: the price of gas is already too high, traffic has gotten worse, and driving causes stress and anger.

According to IBM, 13 cities other than LA cause more commuter angst. The top three hail from three different countries: Beijing and Mexico City tie as the world’s worst, with Johannesburg coming in third.

Beijing, Mexico City Tie for Top Place

Yet, of IBM’s 20 surveyed cities, three of them fall within U.S. borders. It’s been 50 years since the U.S. began its infrastructure road project that connected the Heartland to the tip of Florida and the east coast to the west coast. Since then, infrastructure spending has been flatter than America’s buckled roads. As a share of GDP, spending has slowly declined to 2.4 percent.

Infrastructure Spending

In emerging markets, it’s a completely different story. Among the E-7 countries (the seven most populous nations), Brazil, China, India and Mexico have projects in the works that most likely will have a substantially greater impact than America’s “great road program.” These programs attempt to address infrastructure needs to support increasing urban populations with rising incomes and a significant growth in automobile ownership.

Below are a few highlights published in an extensive report done by the Urban Land Institute (ULI) and Ernst & Young:

Brazil Flag Brazil Growth Acceleration Program

The country is preparing to host the 2014 World Cup and the 2016 Summer Olympics, with an infrastructure plan to help fans travel around the country. The government has committed to spending $900 billion over several years to construct power plants, hydroelectric dams, port facilities and a high-speed railway which will run from Rio de Janeiro to Sao Paulo. In Rio, major upgrades to highways and bus lines will help link the downtown to the suburbs and airport.

China flag China’s 12th Five Year Plan

Beginning in 2011, China will allocate $1 trillion in infrastructure spending over the next five years. According to KPMG Insight Series, key projects will be to increase the number of airports from 175 to 220, including building a new airport in Beijing; and extending the length of highways to more than 50,000 miles and high-speed rail to 27,000 miles.

India flag India’s 12th Five-Year Plan

Over the 2012-2017 period, the ULI and Ernst & Young report indicates the national government in India is planning to spend $1 trillion—or about 9 percent of GDP—to build necessary power, water and a transportation system to sustain the growth of its country. As an example of the country’s poor roads and rickety railways, nearly half of fruits and vegetables rot on the way to market. To improve this situation, ULI and Ernst & Young state that the Transport Ministry has “set out an ambitious agenda to build 12 miles of road per day, or 30,000 miles over the next four years.”

Mexico Flag Mexico’s National Infrastructure Plan

In 2007, Mexico began a five-year infrastructure plan totaling more than $141 billion spent on 300 projects including ports, airports, roads, railways, water and energy.

General Roy Stone, American Civil War hero and head of the U.S. Office of Road Inquiry, once said, “Good roads are the highways to wealth.” We agree, as we think these infrastructure projects will help transform these most populous countries from the poorest areas of the world to the next economic powerhouses.

Read a previous blog on the $6 Trillion Opportunity in global infrastructure.

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Net Asset Value
as of 12/12/2018

Global Resources Fund PSPFX $4.59 0.03 Gold and Precious Metals Fund USERX $6.46 -0.01 World Precious Minerals Fund UNWPX $3.03 -0.02 China Region Fund USCOX $7.97 0.06 Emerging Europe Fund EUROX $6.18 -0.01 All American Equity Fund GBTFX $24.18 0.06 Holmes Macro Trends Fund MEGAX $18.17 0.13 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change