a PDF copy of the Shareholder Report here.

Shareholder Report
2013 Vol. 1
HOW THEY SPEND IT IN
CHINA
Emerging Market Small-Caps Pack Big Punch | The Significant Impact of U.S. Oil Production
INSIDE
8
After seven long decades of importing oil,
the U.S. seems only a few years away from
reversing the flow. Find out what may hold
the country back from playing an exciting role in
global oil trade.
Eagle Ford Shale, Texas
Letter from the CEO
3
About the Cover:
Nanjing Road was the earliest
and busiest commercial street
after the birth of modern
Shanghai, with wealthy Chinese
merchants setting up shop in the
1850s. By the 1930s, businesses
along the road flourished as the
World Wars diverted Western
attention to China. It was along
this road that the average
Chinese was exposed to British
textiles, French cosmetics, Swiss
watches, American appliances,
German tools, Swedish enamel,
Czech glassware and Japanese
towels. Today, Nanjing Road
attracts 1.7 million people per
day with its five-star hotels,
upscale shopping, restaurants
and prime office buildings.
2 Volume 1, 2013 • www.usfunds.com
6
Why it’s important for
investors to follow
the money.
12
Spending on food has
decreased, but what
has gone up?
Chris Mayer, on a
World Right Side Up
Minute with
the Manager
You might be surprised to
learn about this country’s
decade-long boom.
Ralph Aldis discusses the
gold mining industry.
Emerging Market
Small-Caps Pack
Big Punch
7
How They Spend
It In China
The key is finding the
qualities that could
bring outsized gains.
14
www.usfunds.com
The arrow inside means
you can find expanded
coverage online.
We want to hear from you. Send your questions, comments or suggestions for the Shareholder Report to [email protected].
For account information, call 1-800-US-FUNDS (1-800-873-8637) or email [email protected].
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.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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 a specific industry, 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. 12-706
LETTER FROM THE CEO
FOLLOW THE MONEY
Would it surprise you
to hear that it has
been a phenomenal
four years for stocks
and gold bullion?
Dear Shareholder,
Take a look at the chart below, showing the cumulative returns of the precious
metal and the S&P 500 Index compared with the iShares Core Total U.S. Bond
ETF from the beginning of 2009 through December 31, 2012.
Bullion rose nearly 90 percent and the 500 largest U.S. companies climbed
more than 70 percent, while the bond investment only returned 22 percent.
For their contribution to this astounding market performance, we can thank
President Barack Obama for his generous fiscal policies and Federal Reserve
Chairman Ben Bernanke for his stimulative monetary policies. The combination
of taxing and spending decisions that seem to lack fiscal discipline has been
a positive factor. In addition, with record-low interest rates and a massive
bond-buying frenzy, the helicopter-drops of paper money into the economy
have propelled both gold and stocks. Helicopter Ben has unquestionably lived
up to his nickname.
That’s why I believe it’s important to follow government policies, not political
parties, as they have historically been precursors to change, especially when
it comes to altering the flow of money in and out of markets.
A Spectacular Performance from Equities and Gold Shows Power of the Policies
Cumulative Total Returns
120%
90%
Gold
S&P 500 Index
iShares Core Total US Bond
Gold
89.9%
72.4%
60%
30%
22.4%
0%
-30%
5/3/09
1/3/10
9/3/10
5/3/11
1/3/12
9/3/12
Source: Bloomberg
continued •
Frank Holmes, CEO and Chief Investment Officer
Volume 1, 2013 • www.usfunds.com 3
The selling out of
perceived “risky” equity
funds to purportedly safe
havens in long-term bond
funds has persisted over
the last four years.
• www.usfunds.com
Listen at your convenience
to our Outlook 2013 webcast
featuring more of our investment
team’s opinions on commodities
and global markets.
U.S. Mutual Fund Net Flows
Billions, USD
1,200
Buying Bonds
800
400
0
-400
2006
Selling Equities
2007
This appears to be the great disconnect for investors.
According to data from the Pew Research Center,
rather than feeling upbeat about policymakers’
decisions in the past four years, trust in government
has sunk to a historic low: Over the last seven years,
only three out of 10 Americans said they trust
Washington to do the right thing always or most
of the time.
The opinion holds across partisan lines, although
more Democrats than Republicans say they trust
government most of the time. Historically, the
party in control of the White House receives
a stronger conviction from its supporters, yet
“partisan differences in trust in government
have been much wider during the Bush and
Obama administrations than during previous
administrations,” says Pew Research.
Compounding the depressed levels of trust is the
drumbeat of negative news from around the world.
The European crisis was punctuated by footage
of unionized government workers organizing antiausterity riots in the streets of Greece and Spain.
Worsening economic data in China led to a rising
fear of a hard landing. In the U.S., investors were
consumed by the presidential election closely
followed by the “fiscal cliff” debate that didn’t
conclude until New Year’s Eve.
The result seems to be showing up in the buying
pattern of investors, as the selling out of perceived
“risky” equity funds to purportedly safe havens in
long-term bond funds continued throughout the
4 Volume 1, 2013 • www.usfunds.com
2008
2009
2010
2011
Source: Investment Company Institute
last four years. Data from the Investment Company
Institute shows the persistence of this extreme
behavior of billions of dollars flowing into bond
funds and out of stock funds. According to Bloomberg,
“Americans have missed out on almost $200 billion
of stock gains as they drained money from the market
in the past four years.”
Consider the famous words once spoken by boxer
Mike Tyson: “Everybody has a plan until they get
punched in the face.” With the incredible results
from gold bullion and the stock markets, an investment plan that sold equities and bought bonds was
typically dealt a terrible blow. Life is about managing
expectations, and in the ring, a champion quickly
shifts his strategy or faces a knockout.
I urge you to resist the negative headlines this year
and follow the government policies to see where
the money is heading, so you can get your money
working for you. One opportunity investors can
take advantage of is the trend favoring gold stocks.
Take a look at the next page and make sure your
portfolio is positioned to benefit.
Sincerely,
Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors, Inc.
Gold Stocks Poised for a Comeback?
Over the past year, gold stock investors have been
fleeing the sector after seeing declining returns
throughout the year. As of December 31, 2012,
the FTSE Gold Mines Index declined nearly 14
percent over 2012. We’ve seen this pattern before,
as gold stocks have historically performed poorly
during a U.S. presidential election year. This is
data going back nearly 30 years.
However, the math suggests gold stocks may stage
a significant comeback during 2013. Historically,
during post federal election years, the Philadelphia
Stock Exchange Gold and Silver Index has seen
significant gains.
• www.usfunds.com
Take advantage of this potential
rise by investing in U.S. Global’s
gold funds.
As always, we recommend a prudent investment
in the precious metal. Make sure to maintain a
modest 5 to 10 percent weighting in gold and gold
stocks, and rebalance annually.
Historical Performance of Philadelphia Stock Exchange Gold and Silver Index (XAU)
U.S. Presidential Election Year Historically Weak for Gold Stocks
Rebound in Years Following Federal Elections
105
130
VS.
100
1985 – 2009
120
Barack Obama
95
Mitt Romney
1984-2008
90
110
85
100
80
75
Jan Feb Mar Apr May Jun
Jul
Aug Sep
Oct
Nov Dec
90
Jan Feb Mar Apr May Jun
Jul
Aug Sep
Oct Nov Dec
Source: Bloomberg, CIBC World Markets
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The FTSE Gold Mines Index
Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year and that derive 75% or more of their revenue from mined gold.
The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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.
Holdings as a percentage of net assets in the funds mentioned as of 12/31/2012: iShares Core Total US Bond ETF 0.00%; Coca-Cola 0.00%; Exxon Mobile 0.00%.
Volume 1, 2013 • www.usfunds.com 5
GUEST COLUMNIST
WORLD RIGHT SIDE UP
Plaza-de-Armas, Cusco, Peru
What follows is a humble peek at the Peruvian
economy from the ground up, based on the thesis
of my new book World Right Side Up: Investing
Across Six Continents. The ideas behind it, I believe,
animate the most important big picture investment
trend unfolding in the early 21st century and extend
well beyond just Peru.
Let’s start in Cusco.
Chris Mayer,
Managing editor for
Capital and Crisis
and Mayer’s Special
Situations. He is also
a contributor to The
Daily Reckoning.
6 Volume 1, 2013 • www.usfunds.com
Cusco is a pleasure to walk, with great cathedrals
seemingly on every block. There are plenty of good
restaurants. You can eat well for very little. At El
Fogon, a little restaurant just off the main square
in Cusco, I had a salad, soup, main course, dessert
and bottled water for 10 soles—or about $3.74. The
streets are full of people. There are busy shops
everywhere, including a colorful open market
full of fruits, meats and other delights of Peru.
And it is quite safe.
Peru is turning right side up, as I like to say. But it
had a tough road to get here.
As recently as the 1980s, it was dangerous to travel in
much of Peru. There was the Shining Path movement,
a sort of Maoist guerrilla movement that terrorized
the people of Peru. “It was scary,” one Peruvian told
me. “If you saw a parked car that you hadn’t seen
before, you stayed far away from it for fear that there
was a bomb inside.”
Beyond that, Peru had an almost comical run of
politicians. Today, Ollanta Humala is president and
despite tough leftist talk that had a lot of investors
worried, he seems to have mellowed out in office.
The Peruvian economy meanwhile is one of the
fastest-growing economies in the world. It’s enjoyed
a decade long boom, driven by its rich copper and
gold mines.
Tourism, too, is booming in Peru. There are more jobs and
more money. I did not meet a single Peruvian who pined
for older days. Instead, they wished, hopefully, that things
would be as good for their children.
I got an email from a reader who was in Peru the same time I
was. He is an electrical engineer working for a U.S. blue chip in
Santa Clara. He gives his perspective on the changes he’s seen.
“I was here for the same company four years ago,
and what a change! The streets near the plant
are crowded with people, moto-taxis and cars
and trucks. Four years ago, the area was incredibly
impoverished, with almost no business in the streets.
Now, there are factories and schools in the area,
and people watering the plants in front of their
houses. Chicken restaurants are everywhere — you
can get a quarter of a grilled chicken for less than
five bucks.”
I saw much the same thing — all the trappings of a healthy,
growing emerging market. As usual with these things, some
developments come last, such as infrastructure. I am sure
there will be a lot of investment in this area as well — for
roads, power, water and the other bones of modern economies.
I spent six days hiking through the mountains with a
friend, stopping at mountain hamlets and enjoying the
local culture. Near the end of the hike, we came to a spot
where the Peruvians were building a hydroelectric plant.
There is awesome potential for hydro in Peru where rivers
make dashing runs down the sides of the Andes Mountains.
Not far from this plant, we arrived at our destination: one
of those great little train stations you come across in South
America. It seemed to just sprout out of the jungle, in the
middle of nowhere. Yet, it was full of people from the
surrounding mountains. There were little makeshift
stalls selling Coca-Cola, ice cream and other goods.
Here we would take a train to Aguas Calientes, on the
Urubamba River. The next day we would make for
Machu Picchu.
My travels in Peru added to the pile of anecdotal evidence
I have seen at work in Chile and Colombia, in Vietnam and
Cambodia, and other places in between. We have many
people and places joining the global marketplace in ways
they hadn’t only a decade before. There is a lot of opportunity
in new markets for everything from power plants to soft drinks.
It makes for an exciting time to be an investor amidst so
much change. Though it may not feel like it sometimes, I
think we’ll look back on these days as a sort of golden age.
Small-Caps Pack Big Punch
in Emerging Markets
Last fall, the International Monetary Fund painted a gloomier
picture for global investors. It projected the global economy would
be “sluggish” over the next several months due to slumping world
trade and uncertainty in the West. In 2013, advanced economies
are expected to grow about 1.5 percent while GDP in emerging
economies may average 5.6 percent.
Emerging Markets Set to Grow Faster than Developed
Selected International Monetary Fund GDP Projections
10%
8%
6%
4%
2%
0%
Euro Area
Japan
U.S.
Brazil
Russia
India
China
Source: IMF
To unlock the bigger gains in the faster-growing emerging
markets, we believe growth investors should be focusing on
the smaller, domestically driven and undervalued companies.
Smaller companies are more affected by the strong domestic
growth driven by a higher investment rate, rising urbanization
trends, an increasing consumption of goods and relatively low
unemployment rate. In addition, small-caps are less impacted
by slower Western demand.
However, as the Wall Street Journal recently pointed out, “investing
in emerging markets isn’t as straightforward as it might seem.”
That’s because exchange-traded funds (ETFs) that invest in emerging
markets mimic an index that is weighted by market capitalization. This
means that the majority of holdings tend to be larger multinational
companies much more dependent on the global economy.
What’s even more confusing for investors is that when you dig
deeper into the holdings of mutual funds labeled as “small-cap
emerging market” investments, many funds hold larger companies
in their top 10. That’s likely due to liquidity constraints as well as the
manager’s reluctance to stray from the benchmark index and peers.
To find the most attractive small-caps in developing markets,
we believe in analyzing stock fundamentals across the entire
emerging markets universe rather than focusing on specific
countries. At U.S. Global, we routinely rank companies by
dividend yield, revenue growth and price-to-earnings ratios,
selecting those dividend-paying companies that are growing
faster than the emerging country’s GDP and offering the lowest
price-to-earnings among their emerging market peers. Research
has shown that stocks with these criteria have historically
outperformed the overall MSCI Emerging Markets Index.
While these markets may give investors pause due to higher
volatility, we believe in the trend of mean reversion. In emerging
markets, it’s the hard-hit small companies that can pack a big
punch and stage a strong comeback.
Volume 1, 2013 • www.usfunds.com 7
The Significant
Impact of U.S.
Oil Production
8 Volume 1, 2013 • www.usfunds.com
Eagle Ford Shale, Texas
T
he Eagle Ford shale formation
lies south of our headquarters in
San Antonio, Texas, giving the U.S.
Global investment team firsthand perspective on the oil and gas
industry’s growing natural resources
phenomenon. The oil activity has been boosting the
local economy, creating more than 4,000 solid-paying
jobs, a healthy housing market and strong consumer
sentiment, as many oil giants take a bigger stake in
the area.
After seven long decades of importing oil, the U.S.
seems only a few years away from reversing the flow,
largely from shale technology not only in Texas but
several areas around the country. In 2005, the U.S.
reported net imports of 13.5 million barrels per day,
or almost two-thirds of its oil needs, according to
Raymond James. By the end of 2012, net imports are
projected to fall to 8.6 million barrels per day, which
is about half of the country’s current consumption.
By 2020, the estimated gap between supply and
demand narrows considerably.
2012 might have been the year that the world
fully realized the significant contribution North
America has made to the overall global oil supply,
especially after the International Energy Agency
(IEA) claimed that the U.S. would surpass Saudi
Arabia as the largest oil producer around 2020.
The U.S. output expected by 2020 amounts to more
than 10 percent of what the IEA says will be the
world’s daily oil requirement of 96 million barrels
per day by 2020. This compares to a consumption
of 87.4 million barrels per day today. And, when
you factor in the expected decline of about 10.5
million barrels per day from the mature fields
around the world, North America’s success in this
area is significant to global supply.
In addition, new discoveries of oil have led to
disappointing results. There was hope that a
small group of countries — Brazil, Russia, Iraq and
Kazakhstan, or the BRIKs — would “redraw the
world’s oil map by boosting their production over
the next two decades,” says the Financial Times.
However, the newspaper reported that Kashagan
field in Kazakhstan, “the biggest oil discovery in
nearly four decades,” will finally begin pumping
next year after several delays. Its anticipated flow
is about 150,000 barrels per day, then rising to
350,000 barrels a day, but those figures are way
below the maximum pumping target of 1.5 million
barrels a day.
continued •
Volume 1, 2013 • www.usfunds.com 9
Yet century-old legislation may be the biggest
obstacle to the U.S. becoming a card carrying
member of OPEC. Around the time when Henry
Ford was selling his Model T to millions of Americans,
the government passed the Minerals Leasing Act
of 1920, dictating that all U.S. crude exports must
get approval from the government before proceeding.
At the time, the country had net imports of about
300,000 barrels of oil a day.
Since the 1940s, the U.S. hasn’t had to worry about
what to do with excess barrels of oil. With the rising
use of oil, the country increasingly consumed
more of the commodity than it produced. However,
over the years, certain types of exports have been
allowed, including exports to Canada (not including
the crude from the Trans-Alaska Pipeline System,
which has other restrictions), exports from Alaska’s
Cook Inlet, re-exports of foreign origin crude, and
exports made under international agreements, says
Raymond James.
But other exports are only permitted on a caseby-case basis as they are more dependent on what
the government believes is in the nation’s best
interest. Beyond what’s written in the rule books,
“there are political overtones to anything that entails
presidential discretion,” says Raymond James.
The firm compares potential oil exports in the
future to the experience of natural gas exports today,
noting that “utility and manufacturing trade groups
are actively lobbying against U.S. liquefied natural gas
export permits because, of course, any such exports
would incrementally raise domestic gas prices.”
In the spirit of economic nationalism, Raymond
James believes that “as applications for crude export
permits become more common, we would anticipate
opposition to emerge, which means that the newly
reelected Obama administration will probably
suffer political backlash if it signs off on increasing
exports of U.S. crude.”
The backlash that would result is likely because there
is a common misperception between exporting
crude and the price of a gallon of gasoline at the
pumps, which is based on the Brent price of oil. “The
irony here is that U.S. consumers pay a global price for
gasoline, and exporting U.S. ‘land-locked’ light sweet
crude would actually help push down the global price
of gasoline,” according to Raymond James.
Oil in the U.S.: Rising Supply and Declining Demand
Million barrels per day
25
20
Biofuels Supply
Oil Supply ex-Biofuels
Oil Demand
15
10
“Keeping the ‘land-locked’ crude in the U.S. does
nothing to help domestic consumers, but as we all
know, politics and reality can be very different things,”
says the research firm.
5
0
2005
2007
2009
2011
2013E
2015E
2017E
2019E
Source: EIA, IEA, Raymond James estimates
10 Volume 1, 2013 • www.usfunds.com
HOW INVESTORS
BENEFIT FROM
SHALE GROWTH
Barnett Shale, Texas
If Washington prevents oil from leaving the
country, the likely outcome is that barrels will
begin stacking up in the Gulf Coast area. With
the significant growth from areas such as the
Bakken, Eagle Ford and the Niobrara Formation
in Nebraska, Bank of America Merrill Lynch
estimates that by 2017, refiners will likely be
“saturated with light oil.”
According to Exxon Mobil’s Outlook for Energy
report, energy demand in developing nations
is expected to rise 65 percent by 2040. Overall
demand for energy will grow 35 percent as the
world expands from 7 billion people today to
9 billion by 2040. With the world running on
energy, the U.S. has an exciting role to play in
the future of global energy.
U.S. Shale Oil Production Growing
Thousand barrels per day
3,500
Bakken
Eagle Ford
3,000
Barnett
Niobrara
Monterey
Other
U.S. oil refiners with
assets in shale areas
stand to benefit from these
rising trends in production.
Refiners have two distinct
advantages: One is the
fact that the price of WTI
oil has been trading at a
discount to Brent. In 2012,
the spread between WTI
and Brent averaged about
$17 per barrel. Domestic
refiners have access to
less expensive crude and
benefit from the price
differentiation as their
refined product is priced
closer to Brent. The other
big advantage for U.S.
refiners is record low
prices for natural gas, a
commodity used in large
quantities by refineries.
The Global Resources
Fund (PSPFX) gives
investors front seat access
to this growth. Its multifaceted approach to the
natural resources sector
offers multiple ways to
benefit, including access to
experienced managers who
understand and follow these
shifting trends.
2,500
2,000
1,500
• www.usfunds.com
1,000
500
0
2007
2009
2011
2013
2015
2017
Source: Woodmac, IEA, EIA, Reuters, company reports, BofA Merrill Lynch Global Commodities Research
Read the article from Financial
Planning that shows how
natural resources strengthen
a balanced portfolio.
Volume 1, 2013 • www.usfunds.com 11
HOW THEY SPEND IT IN
CHINA
Did you know that Chinese visitors traveling through London’s Heathrow
today buy about 25 percent of luxury goods at the airport, even though China’s
tourists make up less than 1 percent of passenger volume? This buying trend has
been influencing the type of goods sold at the terminal, especially during the
Chinese New Year.
12 Volume 1, 2013 • www.usfunds.com
Shanghai, China
Chinese consumerism has significantly changed over the past 20 years. Within the
country, more and more residents are relocating to the cities to get higher paid jobs
and acquire discretionary income. In addition, government economic, social, rural
and welfare policies are influencing the cost of goods. You can see the changes in
spending through Jefferies Equity Strategy team’s pie chart comparison. In its special
report, “China 2025: A Clear Path to Prosperity,” the research firm compares urban
spending across major categories in 1995 versus the spending habits in cities in 2011.
In 1995, “a lion’s share” of Chinese spending was on food; by 2011, this amount decreased to a third
of total consumption. In 1995, the second biggest category was recreation, education and cultural,
at 9.4 percent, and this increased to 12.2 percent 16 years later. However, in 2011, the second-biggest
expense was transport and communication, as hundreds of thousands of migrant workers traveled
to see their families.
Clothing made up 13.5 percent of spending in 1995, and although the percentage spent in this category
dropped by 2011, it still comprised 11 percent, which figures in “economic growth and the influx of
global fashion brands and culture.”
To see what consumption spending might look like 12 years from now, Jefferies studied four decades
of consumption patterns, spending behaviors and how the retail format has transformed not only
in the Asian giant, but also in developed countries. The firm believes that the “Chinese economy is
set to enter a ‘post fast-growth’ era where a consumption-driven model is facilitated by accelerated
urbanization, enhanced social welfare and fast changes in lifestyle.”
Specifically, spending on basic needs, such as food, clothing and housing, will continue to decline
as a percentage of per capita consumption. Luxury goods, on the other hand, will likely “enjoy
much faster growth” than other consumer goods, as residents become wealthier and have access
to global fashion. Jefferies believes China’s gifting culture along with its business network will be
a “resilient platform” for luxury good demand.
Over 2013, we expect the government to continue its accommodative efforts, focusing on improving
and reforming policies that will help provide its residents with opportunities and social security,
increase incomes and raise standards of living. These actions, in turn, should increase renminbi
in residents’ pockets and encourage domestic consumption.
• www.usfunds.com
Urban Consumption in 1995
Others
3%
Residential
8%
Recreation,
Educational
and Cultural
10%
Transportation and
Communication
5% Medicine
3% Household
Clothing
Facilities
14%
7%
Food
50%
Frank Holmes lists 5 Amazing
Global Consumer Trends
Happening Around the World.
Read his post online.
Urban Consumption in 2011
Residential
9%
Recreation,
Educational
and Cultural
12%
Others
4%
Food
36%
Transportation and
Communication
14%
Medicine
Clothing
7%
Household
11%
Facilities
7%
Source: Jefferies Equity Research, CEIC, NBS
Volume 1, 2013 • www.usfunds.com 13
MINUTE WITH THE MANAGER
Despite a rising gold price over the past decade, supply has
not risen as miners face an increase in rules and regulations
and rising costs. Portfolio Manager Ralph Aldis believes these
factors underline why investors need to be even more selective
about gold miners.
The gold mining industry has often had
complex geological, political and environmental risks. What challenges are new?
I believe the challenges facing gold companies today
are in response to a decade-long bull market for gold.
Long-term gold investors will likely remember when
miners operated under very different circumstances.
From 1990 through 2001, gold fell 30 percent as
central banks were selling their gold reserves. Also,
China and India were not yet significant buyers of
gold. The mining industry responded by cutting back
on exploration spending.
Now, there’s been a lag in production as miners
react to increased demand. However, the industry
faces increased regulatory hurdles, with permitting
taking longer, delaying projects and hurting
production growth.
14 Volume 1, 2013 • www.usfunds.com
In addition, governments around the world have
fallen for what I call “cash cost fairytales,” believing
that because of the rise in the gold price, gold miners
must have windfall profits. I recently discussed with
Mineweb that miners need to communicate an all-in
cost which factors in operating costs, construction
capital discovery costs, overhead taxes, sustaining
capital along with an acceptable profit. Governments
need to be educated on an updated, sustainable cost
to mine an ounce of gold so they don’t unintentionally
destroy gold companies’ profits.
You often meet with executives, visit
mining operations and conduct frequent
conference calls with analysts. Why is
this essential to stock selection?
With the ever-changing complexities mentioned
above, gold company executives who understand
these challenges can wisely manage their cash
flows, production and reserves to provide a return
on capital for their shareholders. I don’t believe that
a product holding a basket of all gold miners is
serving the investor well. Over my 20 years of
analyzing mining operations, I have seen many
gold mining companies that have been successful.
Still, many others have failed. Professional management gives the investors an advantage because
the quicker one recognizes promising projects and
knows that management can effectively execute on
them, the more potential upside for the investor.
In addition, we believe success in the mining sector
relies on the companies’ ability to raise capital and
effectively communicate with investors. This is
especially true with explorers and developers. Often
the heads of junior companies are geologists or
engineers who tend to have no relationships in the
brokerage business, which impedes their ability to
generate market support.
Some of the most successful company builders in
the gold-mining industry are what we call “financial
engineers.” These are people who have the contacts,
understand the capital markets and know how to
hire the best geological and engineering teams. We
tend to have more confidence investing in them.
You manage U.S. Global Investors’
two gold funds. How do they differ?
The Gold and Precious Metals Fund (USERX)
and the World Precious Minerals Fund (UNWPX)
both invest in gold producers that are currently
pulling gold or other precious metals out of the
ground. While established gold producers make up
a majority of the Gold and Precious Metals Fund,
the World Precious Minerals Fund adds a potential
performance boost because of its exposure to
exploration and development companies along
with junior and intermediate mining companies.
Historically these junior miners outperformed the
larger miners, albeit with more risk.
• www.usfunds.com
Read more about gold miners
in the report, “What’s Driving
Gold Companies?”
What’s your outlook for gold?
Gold miners have never had a more diverse set of
buyers for their product. There is a set of buyers
driven to hold gold because of the monetary and
fiscal actions of the developed markets’ central
bankers. There’s continued demand out of China
and India due to their rising GDPs per capita as
well as their historic and cultural link to the precious
metal. And finally, emerging markets’ central banks
are diversifying away from the U.S. dollar by holding
gold in their reserves. These are all positive for
gold miners.
GET TO KNOW
Favorite subjects in school: Math and science
Ralph Aldis, CFA
Portfolio Manager
Quote to live by: “When challenged, a man is defined
by making the right decision.” Ralph’s father
Book you’re reading right now: Currency Wars: The
Making of the Next Global Crisis, James Rickards
Favorite sport: College football
Total tenure at U.S. Global Investors: 22 Years
Education: Master’s degree in energy and mineral
resources from the University of Texas at Austin;
Bachelor of Science in geology from Stephen F. Austin
University; CFA charterholder
Last countries to stamp your passport? Colombia
and Mexico to visit mining operations and talk
with management
Specialties: Ralph’s background as a geologist along
with his education in energy and mineral resources gives
him a deep technical understanding of the business.
Volume 1, 2013 • www.usfunds.com 15
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MAPPING IT
Taxing Gasoline
U.S. oil production is rising, but gasoline prices remain high due to global pricing. Pain at the pump can also be taxing: After
paying 18.4 cents to the federal government, Americans pay state tax, which can be as little as 7.5 cents (like it is in Georgia)
or as high as 39.15 cents per gallon (in North Carolina). How much are you paying in your state to fill up your car?
State and Federal Taxes
Per Gallon of Gas
■
■
■
■
■
■
Over 50.1 Cents
Between 45.1 and 50 Cents
Between 40.1 and 45 Cents
Between 35.1 and 40 Cents
Between 30 and 35 Cents
Under 30 Cents
Source: Bankrate.com
Note: All taxes include the federal gasoline tax of 18.4 cents per gallon