The Bedrock of the Gold Bull Rally

The Bedrock of the Gold Bull Rally

By Frank Holmes

CEO and Chief Investment Officer

U.S. Global Investors

This week I had the pleasure of participating in a webcast for Bloomberg Markets Magazine regarding gold investing. It was a very insightful presentation and I suggest you view the replay at Bloomberg Markets Magazine - Bloomberg. What struck me on the call was the negativity surrounding the gold market. Call it a bubble, a frenzy or mania, there seems to be a large number of voices in the marketplace who just are not fans of gold, whether prices are moving up, down or sideways.

Naysayers started calling gold a bubble back when prices hit $250 an ounce and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder as prices broke through $1,000, $1,200 and now $1,400 an ounce.

However, gold prices appear asymptomatic of the signs generally associated with financial bubbles.

For instance, we haven’t seen price spikes. Despite rising from under $1,000 an ounce to over $1,420 over the past six months, that represents only a 0.7 standard deviation move for gold prices, according to Credit Suisse (CS). The average standard deviation move of other bubbles—Japanese equities in 1986, the tech boom in 1999, the GSCI in 2005 and gold in 1979—is 5.3. Gold’s 180 percent move in 1979 represented a 10.3 standard deviation move, more than 14 times the magnitude we see today.

The reality is that gold doesn’t possess the traits necessary for a financial bubble to form. Rodney Sullivan, co-editor of the CFA Digest, has done some great research on the history of markets and bubbles going all the way back to the 1600s. He discovered three key patterns in the 47 major financial bubbles that occurred over that time period.

These three ingredients of asset bubbles are financial innovation, investor exuberance and speculative leverage. The process begins with financial innovation, which initially benefits society as a whole. In the exuberance stage, usage of these innovations broadens; they become mainstream and attract speculation. The third step, the tipping point for a bubble to form, is when these speculators pile on massive leverage hoping to achieve greater success. This excessive leverage adds increased complexity, which mixes with irrational exuberance to create an imbalance in the marketplace. Eventually, the party comes to an end and the bubble bursts.

This is what happened with the housing bubble in the U.S. as Main Street home buyers leveraged themselves 100-to-1, Fannie Mae leveraged itself 80-to-1 and Wall Street investment firms leveraged themselves over 30-to-1.

Gold as an asset class is far from being overbought by speculators. Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

Sprott estimates that the actual amount of new investment into gold since 2000 is about $250 billion. Compare that to the roughly $98 trillion of new capital that flowed into other financial assets over the same time period.

Gold equities have seen even lower levels of investment. From 2000 to 2010, $2.5 trillion flowed into U.S. mutual funds, but only $12 billion of that went into precious metal equity funds. Of course, those figures were significantly impacted by the advent of gold ETFs during the decade. Despite the growth of the SPDR Gold Trust (GLD), which held more 1,200 tons of gold as of March 31, gold remains largely underowned as a portion of global financial assets.

The bar chart from CPM Group shows gold as a percentage of global financial assets over time. In 1968, gold represented nearly 5 percent of financial assets. In 1980, the level had fallen below 3 percent. That figure had shrunk to less than 1 percent by 1990 and has remained there since. Sprott wrote that “it is surprising to note how trivial gold ownership is when compared to the size of global financial assets.”

That point is magnified by the pie chart from Casey Research. Dr. Marc Faber included it in his April newsletter to show just how small a portion gold and gold stocks are for large institutional investors like pension funds.

Investors who don’t think gold is a bubble but fear they’ve missed the boat need to look at the short- and long-term factors supporting gold at these historically high price levels. In the near-term, gold prices are being buoyed by continued weakness in the U.S. dollar.

The Trade-Weighted Dollar Index (DXY) is just above the lows experienced during November 2009 and is only 8 percent above the “critical” March 2008 low, according to BCA Research. BCA says the U.S. dollar’s weakness is driven by four factors:

• Federal Reserve balance sheet expansion via QE2


• Combination of low real interest rates, steeply upward-sloped yield curve and perky inflation expectations that should continue in the U.S.


• Plans by the European Central Bank to raise rates later this month


• Willingness of Chinese authorities to allow for yuan (RMB) appreciation when the U.S. dollar is weak

This is part of what we call the Fear Trade. This graphic illustrates that the Fear Trade is a function of two separate government policies: monetary and fiscal. Whenever there is a structural imbalance between a country’s monetary and fiscal policies, gold tends to perform as a “safe haven” currency. Currently, the quantitative easing measures implemented by the Federal Reserve and the significant size of the deficit spending by the government to increase entitlements to ward off a recession have created a significant imbalance between monetary and fiscal policies. This has devalued the U.S. dollar which, in turn, has boosted gold prices.

We believe that as long as the U.S. government refuses to trim entitlement and welfare programs and continues to keep Treasury bill yields below the inflation rate to battle deflation, gold will remain an attractive asset class.

Longer-term, our experience shows that whenever you have increased deficit spending, rapid money supply growth and negative real interest rates—that’s when the inflation rate is higher than the nominal interest rate—gold tends to perform well in that country’s currency. So far we have not seen rapid money supply growth here in the U.S., but the other two factors have been the main thrust behind gold’s record rise.

GFMS CEO Paul Walker echoed those drivers in an interview with MineWeb this week. Walker said that “ultra-low interest rates, macro-economic dislocation, fears of global imbalances…the wrath of these things still remain solidly in place and that’s really the bedrock of the gold bull rally.”

CS says the combined $6.3 trillion of excess leverage in the G4 economies (U.S., eurozone, Japan and Great Britain) means that their central banks will be forced to push real interest rates down to abnormally low levels. You can see from the chart that this is quite bullish for gold prices. Any time the real Fed funds rate is below 2 percent, gold tends to rise.

Current projections from the Congressional Budget Office (CBO) have the U.S. federal deficit at $1.5 trillion. To show the effect this has had on gold prices, we overlaid the rise in U.S. federal debt with the price of gold.

You can see from the chart that gold’s bull run began in 2002, about the same time federal debt began to rise significantly. Gold played catch up at first, but the two have tracked each other rather closely. Since 2002, gold prices have risen 308 percent versus a 119 percent increase in federal debt. This means that gold’s sensitivity to a rise in federal debt is just over 2-to-1. With lawmakers in Washington, D.C. still squabbling over where and by how much to cut the budget, it’s unlikely the federal debt level will recede any time soon.

This is very constructive for long-term gold prices, but just how bullish depends on who you ask. The team at CS sees gold at $1,550 per ounce by year end. BCA estimates gold to remain in the $1,400-$1,600 range in 2011. Walker of GFMS said he believes gold will surpass the $1,500 mark by year end because “all of the structural factors supporting gold are in place.” Perhaps the most bullish forecast has come from Rob McEwen, former gold analyst and founder of GoldCorp, who said late last year, and reiterated last week, that he thinks gold could hit $5,000 per ounce in the next three to four years.

It’s important to remember the strong cultural attraction that many people in emerging countries have toward gold. It’s a much stronger connection than that of the developed world and essential for rising gold demand.

We like to compare the G-7 countries to our E-7—the world’s seven most populous nations. Interestingly, the G-7 is 50 percent of global GDP but only 10 percent of the total global population. The E-7, on the other hand, represents roughly 50 percent of global population but only 18 percent of global GDP. We would like to point out that money supply and GDP per capita is rising substantially faster in the E-7 than it is in the G-7, 17.7 percent money supply growth in the E-7 versus 3.7 percent in the G-7. If money supply growth in the E-7 continues at a rate of 15 percent or more for the E-7, it would be a strong catalyst for higher gold prices.

In conclusion, based on the above factors and trends, we believe gold could double over the next five years.

Index Summary

• The major market indices were higher this week. The Dow Jones Industrial Index gained 1.28 percent. The S&P 500 Stock Index increased 1.42 percent, while the Nasdaq Composite rose 1.70 percent.


• Barra Value underperformed Barra Growth as Barra Value finished 1.36 percent higher while Barra Growth increased 1.47 percent. The Russell 2000 closed the week with a gain of 2.78 percent.


• The Hang Seng Composite Index finished higher by 2.40 percent; Taiwan was up 1.10 percent, and the KOSPI gained 3.26 percent.


• The 10-year Treasury bond yield closed 1 basis point higher at 3.45 percent.

Domestic Equity Market

The figure shows the performance of each sector in the S&P 500 Index for the week. Nine sectors increased and one decreased. The best-performing sector for the week was telecom services which rose 4.15 percent. Other top-three sectors were industrials and materials. Technology was the worst performer, down 0.09 percent. Other bottom-three performers were financials and consumer discretionary.

Within the telecom services sector the best-performing stock was AT&T, which rose 6.14 percent. Other top-three performers were Metropcs Communications and American Tower Corp.

Strengths

• The paper products group was the best-performing group for the week, up 8 percent. The group was led by International Paper, which increased its quarterly dividend by 40 percent from $0.75 per year to $1.05 per year. The company also announced that it is buying up to 75 percent of Andhra Pradesh Paper Mills, thereby taking its first position in India’s paper market.


• The health care facilities group (Tenet Healthcare) outperformed, rising 6 percent. Investors appeared to be more optimistic about the potential for an uptick in hospital utilization given a more stable economic environment. Most publicly-held hospital company stocks rose this week.


• The Internet retail group rose 5 percent, led by Amazon.com and Priceline.com. Amazon launched a cloud-based music service which allows users to store music on the cloud and access it on multiple devices. Also, a major brokerage firm raised its target price on the stock, citing their belief that the market is underestimating the positive share shift from specialty retailers to Amazon. On Thursday of the prior week a major brokerage firm increased its 2012 earnings estimate and its price target on Priceline.

Weaknesses

• The homebuilding group underperformed, losing 4 percent. The S&P/Case Shiller Home Price Index 20 City Composite was 3.1 percent lower in January compared to a year ago. Homebuilder Lennar Corp. reported a 12 percent year-over-year drop in new home orders for the three-month period ending February 28.


• The electronic component group lost 4 percent, led down by Amphenol Corp. A major brokerage firm lowered its 2011 revenue, earnings estimates and price target on the stock based on a slowdown in defense-related orders during the month of March.


• The electronic manufacturing services group fell 3 percent after being the best-performing group last week on a strong earnings report from Jabil Circuit. Jabil sold off this week, perhaps on investor concern about supply chain disruptions from the disaster in Japan.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.


• Quantitative easing currently being implemented by the Federal Reserve might result in unintended consequences.


• The nuclear disaster in Japan creates uncertainly, which is not good for stock prices.

The Economy and Bond Market

Treasury bond yields were mixed this week as investors balanced generally better economic data with continued uncertainty surrounding several global macro issues.

Employment data continues to slowly improve. The trend in initial jobless claims can be seen in the chart. Along with the employment data released on Friday, which indicated a gain of 216,000 jobs in March, there are signs that the economy is slowly but steadily improving.

Strengths

• Initial jobless claims remained in a general downtrend, potentially indicating a pickup in hiring and the economy overall. Nonfarm payrolls rose 216,000 in March and the unemployment rate fell to 8.8 percent.


• The ISM Manufacturing Index remained at an elevated level in March indicating continued strength in manufacturing.


• The Conference Board’s Index of Leading Economic Indicators for Europe rose for the fourth straight month in February.

Weaknesses

• Consumer confidence dropped sharply in March as higher gasoline prices took a toll.


• Federal Reserve officials were active again this week, with a fair amount of banter back and forth on the merits of the current quantitative easing and the future course of monetary policy.


• Eurozone inflation rose to 2.6 percent in March, which is the highest level since 2008 and reinforced views that the European Central Bank will raise interest rates soon.

Opportunities

• In an interesting twist, higher oil prices may actually act as a deflationary force if they materially slow global economic growth.

Threats

• Central bankers around the world are already raising interest rates and it appears England and Europe are poised to do the same. This would leave the U.S. in a difficult situation defending its current policy.

World Precious Minerals Fund - UNWPX • Gold and Precious Metals Fund - USERX

Gold Market

For the week, spot gold closed at $1,428.80, down $0.94 per ounce, or 0.07 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver (XAU) Index, rose just 0.13 percent. The U.S. Trade-Weighted Dollar Index (DXY) resumed its fall and gave up 0.49 percent for the week.

Strengths

• It appears that Chinese gold demand continues to run at a very high level. Fabricators in China are reporting difficulty in obtaining sufficient supplies for their businesses. China’s English Language TV station, part of state-owned CNTV, reported that gold demand is going “through the roof” despite the post-Chinese New Year period usually being a slow one for gold sales.


• One gold fabricator in China noted that sales for his business have been growing at the rate of 20 percent a month over the last couple of years. Gold demand in China has largely offset the slowing rate of demand for exchanged traded bullion funds in the U.S.


• The French Mint reported a sharp rise in demand for their offerings of a growing selection of gold and silver coins to lure collectors and people looking for a secure investment last year. “There is a real collector’s phenomenon around the coins that we produce,” the Mint’s chief executive told reporters.

Weaknesses

• Foreign mining firms in Zimbabwe must sell a majority stake to local black investors within six months, according to a release from the government. It also said companies had 45 days in which to submit details of how they planned to transfer ownership. Once published, it effectively becomes law.


• The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD), posted its biggest quarterly drop in assets since its inception during the first three months of 2011. The decline was fueled by the prospect of interest rate hikes and gains in other commodities drove investors to sell. The SPDR Gold Trust’s gold holdings were down 5.4 percent to 1,211 tons during the quarter. However, their holdings may have declined due to other gold bullion products, which have lowered their fee structures and can be more tax efficient to investors.


• “Concerns about inflation would trigger demand for gold as a store of value, but the precious metal’s bull run may be near its end,” China’s Central Bank said this week. “We need to note that gold prices have reached historical highs, and its downward risks should not be overlooked.”

Opportunities

• Ecuador expects mining companies to invest $7 billion in gold and copper projects over the next seven years, as the OPEC member tries to diversify its economy by encouraging mining activity. Natural Resources Minister Wilson Pastor said five project contracts will be signed in the next few months. “The investment in the five projects will reach $7 billion in an accumulated way. The cycle to put the mines at full capacity will last approximately seven years,” Pastor told reporters.


• Jason Hamlin, founder of Gold Stock Bull, recently noted “I believe gold has a good chance of hitting $1,800 per ounce by year-end. That’s been my target. Gold could then easily pass its official inflationary adjusted high of $2,300 per ounce next year. The true inflation-adjusted high for gold is somewhat closer to $5,000 per ounce if we’re not using the suppressed government statistics. I think there’s a good chance that gold will surpass that figure before the bull market is over.”


• GFMS, one of the world’s foremost metals consultancy firms, reiterated its bullish outlook on gold due to numerous economic and political factors. GFMS sees a gold price of $1,500 per ounce with the $1,600 mark within range this year. The firm says their outlook depends on how major economies of the world grow and how governments of major economies attempt to maintain this growth.

Threats

• Peruvian presidential candidate Keiko Fujimori said that if elected she might tax the windfall profits of firms in Peru’s vast mining sector. Two other leading candidates in the April 10 race, former President Alejandro Toledo and Ollanta Humala, have also expressed support for more taxing of mining companies in Peru, one of the world’s top exporters of minerals. However, mining companies bristle at what they have called populist policy proposals and say higher taxes would discourage billions of dollars in foreign investment.


• Indonesia will need between $500 million and $1 billion a year in new investments for exploration activities to maintain present levels of mineral production, the Indonesian Mining Association claims. Association chairman Martiono Hadianto says that in the past decade, Indonesia allocated only $10 million a year for exploration to find new mineral reserves in existing mining areas. He added that the Indonesian government had to work harder to create a more competitive and investor-friendly fiscal regime in order to attract more investments to the mining industry. “The mining industry is capital-intensive. The government needs to offer competitive incentives to be able to compete in attracting investors to conduct businesses in Indonesia,” he suggested.


• For a number of the large low-grade multimillion ounce gold deposits being hyped by the Street today, investors need to be cautious. The primary concern that is compounded at these projects right now is capital and operating costs. The lower the ore grades, the more capital will be at stake to achieve throughput rates that can carry the economics. When financing these types of projects, they are more likely to be forced to sell their gold forward in order to lock in a known revenue stream. However, these hedging arrangements do nothing to protect the investor from rising costs and project failure.

Energy and Natural Resources Market

Strengths

• Japan’s shipments of rolled-aluminum products increased 2.3 percent year-over-year in February amid strong demand for new housing and construction, the Japan Aluminum Association said. Supplies to domestic and export markets climbed to 168,092 metric tons last month, from 164,237 tons a year earlier, the group said.


• After a week’s lull, U.S. weekly steel output has returned to its upward trend. The latest release from the American Iron and Steel Institute shows that crude output rose 1.5 percent week-over-week to 86.9 million tons per year, 14 percent above November’s nadir. With the latest Platts assessment for U.S. Midwest hot rolled coil (HRC) rising to $975 per ton, up 65 percent from November’s lows, confidence in the economic recovery continues to flow through the sector.


• The Platts iron ore assessment (62 percent Fe) was up $5.50 to $175 per metric ton this week. The recent run up in price from a year-to-date low of $165 per metric ton in the middle of March is being attributed to mills running low on Australian fines inventories and traders holding back cargoes in anticipation of higher prices. Higher Chinese steel prices have also likely supported the rise in spot iron ore prices.


• The latest data from the International Air Transport Association (IATA) showed a substantial increase in air traffic volumes despite unrest in the Middle East-North African region curtailing air travel. February 2011 showed year-over-year increases of 6 percent passenger demand and 2.3 percent cargo demand with the political unrest in the Middle East estimated by the IATA to have cut international traffic by about 1 percent.


• The Wall Street Journal reported U.S. corn futures soared to their highest prices in more than two and one-half years as a decline in inventories reported this week continued to drive concerns about supply. The U.S. Department of Agriculture sparked the rally in corn on Thursday when it reported inventories as of March 1 were 6.52 billion bushels, down 15 percent from a year earlier and 2.7 percent below analyst. The tighter-than-expected inventories provided new evidence that high corn prices aren’t slowing demand for dwindling supplies.

Weaknesses

• Shares in South Africa-listed platinum miners tumbled on Monday as neighboring Zimbabwe turned up the heat on foreign mining firms and gave them six months to sell majority stakes to local black investors, according to a release in the Government Gazette on Monday. The release also said companies had 45 days in which to submit details of how they planned to transfer ownership.


• Copper output from Chile, the world’s largest copper producer, decreased 18 percent month-over-month and 6.6 percent year-over-year in February to 394,452 million tones, according to the Chilean statistics institute INE. INE indicated that the fall in production was due to lower ore grades and problems with primary crushing equipment at Codelco’s Gabriela Mistral mine.

Opportunities

• China approved an emergency coal reserve plan which will build up 5 million tons of coal this year, and will ensure the supply to thermal plants if any natural disaster or accident threatens to disrupt the supply. China’s 10 major mining companies, including Shenhua Group and China National Coal Group, have been chosen to build this reserve.


• The Chinese government has announced new targets by which it aims to reduce energy usage and carbon emissions by 4 percent per unit of economy output this year. These cuts are part of China’s plan to reduce energy consumption and carbon emissions by 18 percent per unit of GDP over the next five years. China has already completed its five year plan to reduce energy use per unit of economy output by 20 percent since 2005.


• President Obama outlined his plan for reduced dependence on oil this week. In his speech on energy security, President Obama called for reducing dependence on oil and shifting towards renewable sources of energy, especially natural gas and biofuels. President Obama called for a one-third reduction in oil imports by 2025. He especially stressed increasing the usage of vehicles dependent on natural gas rather than oil as fuel. President Obama has already called for a new Clean Energy Standard by which the country aims to achieve 80 percent of its electricity generation from clean energy sources by 2035.


• “Copper will lead a rally in base metals this year as increased consumption in China reduces inventories to higher prices encourage stockpiling,” according to Brook Hunt. “Fundamentally, the market’s tight,” Julian Kettle, head of metals research, said in an interview, predicting that cash copper may average $9700 per ton this year compared with $7543 in 2010. Copper is expected to have a 570,000-ton shortfall this year as China’s demand grows 6 percent, according to Brook Hunt.


• China Securities Journal has said that China is expected to produce 513 million tons of coking coal in 2011, while total consumption is expected to be at 569 million tons.

Threats

• Russia may raise the antitrust limit on ownership in companies involved in extracting the country’s natural resources. Legislation has been prepared that will allow investors to buy as much as 25 percent in a company involved in resource-extraction without anti-trust approval or the permission of a commission on foreign investment, Prime Minister Vladimir Putin told the Cabinet. The current limit without prior approval is 10 percent, he said. The proposal will be sent to lawmakers in Russia’s Duma for approval in April.

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April 1, 2011 The Strong Link Between GDP and Oil Consumption	March 30, 2011 Middle-Class Middleweights to be Growth Champions	March 28, 2011 What;s Driving Russia’s Outperformance?

Emerging Markets

Strengths

• As the Shanghai copper price improves, the Shanghai/LME spread is coming out of negative territory.

• Bank Indonesia has been using a strengthening rupiah as a tool to ease inflationary pressures versus rate hikes. The all-important food prices (35 percent of CPI) have stabilized and began trending downward as weather issues have normalized, according to CLSA. The Jakarta Stock market has responded positively to the government policy and improving inflation, which rose to 6.65 percent in March, better than February’s number by 0.32 percent. It may be an indication that Asian countries will be able to control inflation in the region. This may also provide a clue that a rising Chinese yuan (RMB) can help deter increasing energy and material costs.

• Casino revenue in Macau rose 48 percent in March.


• Ping An Insurance may “slightly” lift equities in its portfolio as it turns more optimistic on Chinese stocks, the company’s president said.


• China’s manufacturing growth accelerated for the first time in four months as the PMI rose to 53.4 in March from 52.2 in February. (Note: Manufacturing activities are in expansion when PMI is above 50.)


• Korea’s exports jumped 30 percent year-over-year in February, while imports advanced 28 percent, showing global demand for Korean industrial goods.


• Chile’s Falabella proposed a P60 dividend and stock buyback program, which has been welcomed by market participants.

Weaknesses

• Shanghai officials announced Monday that the price increase for newly-built homes in 2011 should be smaller than the increase in the city's annual economic growth (target 8 percent) or the local residents' incomes, the financial website Caijing.com.cn reported. We believe an 8 percent yearly price appreciation is still attractive, given inflation is at about 5 percent and there is a negative real interest rate of about 2 percent.


• As a part of its 12th Five-Year Plan, China plans to limit the number of automobiles in large cities with populations of more than 10 million people, the Economic Observer reports. In a country whose policy is aimed at growing its economy, we think this only reflects the need to improve China’s urban infrastructure, including roads and traffic system, and to develop clean energy.


• Hong Kong’s February retail sales missed expectations. Sales value rose 8.6 percent year-over-year to HK$29.2 billion, while sales volume grew 5.1 percent. The increase can be explained by the Chinese New Year for which purchases are usually front loaded. Nevertheless, Hong Kong saw tourists grow 2 percent in February, and 70 percent of those came from Mainland China.


• Rumor has it that the People’s Bank of China (PBOC) may increase both interest rates and the bank required reserve ratio (RRR) by April 10 and April 20, respectively. We are of the opinion that an interest rate hike and RRR increase are more concentrated in the first half of the year, but sporadic in the second half depending on monthly inflation expectations. While many in the market have believed China may delay a rate rise because of the Japanese earthquake, we think the PBOC policy is domestically oriented rather than being influenced by outside factors.


• Korean inflation rose 4.7 percent year-over-year in February, the highest in 29 months as oil and food prices increased.

Opportunities

• China may face a shortfall of 56 million tons of coking coal this year, the China Securities Journal reported on Tuesday, pushing Chinese steel mills to look further afield to make up the supply gap. China is expected to produce 513 million tons of coking coal, used in steel production, in 2011, but total consumption is expected to reach 569 million tons, the paper said.


• In the their earnings announcement in the last two weeks, Chinese banks have seen a sector trend of increasing NIM (Net interest margin) in a rising interest rate environment in China. Despite the PBOC tightening liquidity, those banks can still grow their new loans at about 13 percent for 2011.

Threats

• Disruption of Japanese auto parts manufacturing and chemical production caused by earthquake and power shortage are still a threat to many car manufacturers. However, it may be a good time for Build Your Dreams (BYD) dealers to sell off their inventories.


• PBOC potential tightening in April may increase market volatility in the short term, but it is already expected by the market consensus as an eventuality.


• President Cristina Kirchner of Argentina has agreed to a 24 percent wage hike by the truck union workers raising inflation expectations in the country before the country’s October election.


• The surge of Ollanta Humala, a left-wing candidate, to the first place in the Presidential race in Peru came as a surprise before the first round of voting takes place on April 10. Mr. Humala is reported to have the support of 21.2 percent of the electorate, followed by Keiko Fujimori at 20.7 percent and Alejandro Toledo at 20.1 percent.

Leaders and Laggards

The tables show the performance of major equity and commodity market benchmarks of our family of funds.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting Home - U.S. Global Investors or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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. 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 Eastern European Fund invests more than 25 percent 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.

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 percent to 10 percent of your portfolio in these sectors. Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

Past performance does not guarantee future results.

These market comments were compiled using Bloomberg and Reuters financial news.

Holdings as a percentage of net assets as of 12/31/2010:

GoldCorp: Gold and Precious Metals Fund 3.46%, World Precious Minerals Fund 3.54%, Global Resources Fund 0.50%

AT&T: All American Equity Fund 1.08%

Metropcs Communications: 0.00%

American Tower Corp: All American Equity Fund 1.45%, Global MegaTrends Fund 1.78%

International Paper: 0.00%

Andhra Pradesh Paper Mills: 0.00%

Tenet Healthcare: 0.00%

Amazon.com: 0.00%

Priceline.com: Holmes Growth Fund 1.48%

Lennar Corp: 0.00%

Amphenol Corp: 0.00%

Jabil Circuit: Holmes Growth Fund 0.99%

SPDR Gold Trust: Gold and Precious Metals Fund 0.36%, World Precious Minerals Fund 0.29%

Codelco: 0.00%

Shenhua Group: 0.00%

China National Coal Group: 0.00%

Ping An Insurance: 0.00%

Falabella: 0.00%

Build Your Dreams (BYD): 0.00%

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

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.

The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.

The S&P BARRA Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios.

The S&P BARRA Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios.

The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.

The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.

The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.

The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.

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 U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

The MSCI Russia Index is a free-float weighted equity index developed in 1994 to track major equities traded in the Russian market.

The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.

The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.

The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.

The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.

The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.

The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.

The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.

The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.

The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.

M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

The S&P/Case-Shiller Index tracks changes in home prices throughout the United States by following price movements in the value of homes in 20 major metropolitan areas.

The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

The Conference Board index of leading economic indicators is an index published monthly by the Conference Board used to predict the direction of the economy's movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy.

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.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.