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Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., a boutique investment advisory firm based in San Antonio that manages domestic and offshore funds specializing in the natural resources and emerging markets sectors. The company’s no-load mutual funds include the... More
My company:
U.S. Global Investors
My blog:
Frank Talk: Insights for Investors
My book:
Goldwatcher: Demystifying Gold Investing
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  • Cleaner, Greener China

    Did you know that energy use in China is estimated to be double that of the United States by 2040? Assuming world GDP rises 3.6 percent per year, energy use around the globe will expand 56 percent between 2010 and 2040, according to the U.S. Energy Information Administration. Half of this increase is attributed to China and India.

    You can see below that by 2040, China's energy consumption may grow to 220 quadrillion British thermal units, while U.S. energy consumption remains nearly flat, growing to an estimated 107 quadrillion British thermal units.

    (click to enlarge)

    China's rapidly increasing middle class and more residents moving to urban areas are two driving factors of this skyrocketing energy consumption. According to McKinsey & Company, "by 2020, an additional 300 million Chinese will become urban residents, who consume as much as four times more energy and two-and-a-half times more water per capita than rural Chinese do."

    To address the environmental issues that come with this tremendous growth, China's leaders have been focusing on moving toward a cleaner, greener lifestyle. For example, China is trying to double the share of natural gas in its energy mix to 10 percent by 2020 from less than 5 percent now, according to The Wall Street Journal.

    See how much vehicle emissions comprise of Beijing's total air pollution in this recent post.

    Our portfolio manager of the China Region Fund (USCOX), Michael Ding, witnessed this boom in natural gas consumption on his recent trip to China. Michael saw a significant number of vehicles, mainly taxis and long-haul trucks, fueled by liquefied natural gas (LNG).

    Additionally, he saw several tanker trucks used to transport LNG on his travels through Shanxi Province. Many of these trucks were owned by Enric, which holds more than 80 percent of the market share of LNG tanks.

    Michael snapped this photo during his visit to China, showing an LNG tanker truck with the Enric logo printed on the side.According to Michael, Enric stock is currently facing short-term headwinds. This is due to misunderstanding of the natural gas price hike at wellheads announced by the National Development and Reform Commission in July, which the market fears may negatively affect LNG consumption. Michael believes this price increase may actually spur natural gas development and production to meet growing demand, therefore, increasing consumption.

    Because we believe that policy is a precursor to change, the government's focus on clean energy use should propel companies focused on this "green" theme, such as Enric.

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

    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.

    All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Holdings in the China Region Fund as a percentage of net assets as of 6/30/2013: CIMC Enric Holdings Ltd 1.31%.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long CIMC Enric 3899: Hong Kong

    Aug 08 9:23 AM | Link | Comment!
  • How Far Is Gold Off Course?

    Gold has been in extremely oversold territory lately despite drivers for the metal remaining in place.

    Here's a different way to look at how far gold has been off course. The chart below tracks the correlation of the price of an ounce of gold to global liquidity, with global liquidity defined as the sum of the U.S. monetary base and the foreign holdings of U.S. Treasuries. Since June 2000, as the U.S.'s monetary base and foreign holdings increased, so did the price of gold.

    The correlation suggests the current level of liquidity supports a gold price of $1,780 per ounce, well above the current spot price around $1,300.

    (click to enlarge)

    According to Canaccord Genuity, the U.S. economy is "growing at lower than targeted rates," which means that further quantitative easing will likely be required. In addition, citing a recent White House Office of Management study, Canaccord says that over the next decade, a tremendous $6.6 trillion will be added to the federal debt. "We estimate that the only way to fund the current QE3 program (as well as future government spending) is through the printing of money, therefore further increasing global liquidity," writes Canaccord.

    To the research firm, this correlation trend points to "a greater potential for an increase in gold price versus a further decline."

    Compounding the extraordinary debt in the U.S. is Europe. Government debt-to-GDP across 17 European countries climbed to 92.2 percent, hitting "all-time highs in the first quarter of 2013 even after austerity measures were introduced to rebalance the governments' books," reported CBS News.

    While government liquidity and debt will likely drive the Fear Trade for gold, here are other gold drivers to watch for in the coming months.

    All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

    Jul 25 3:29 PM | Link | Comment!
  • Challenging A Long-Held Assumption About Commodities

    There's no denying China's massive economic growth over the past decade, as the country recorded an average GDP of more than 10 percent per year. In only seven years, China's economy doubled; in 13 years, it tripled.

    With this incredible expansion, China began to import commodities at an incredible pace. In 2000, the country imported only 70 million tons of iron ore; today, it's more than 10 times that amount, at 763 million tons. Copper imports increased dramatically too, growing from 1.6 million tons in 2000 to more than 4 million tons per year today, according to BCA Research data.

    And when it comes to oil demand, 17 years ago, China was a net exporter. Today, it is the second-largest importer, transporting 5.4 million barrels of oil into the country every day.

    That's why it is widely accepted that the Asian giant spurred higher commodity prices in the past decade.

    And if the country was the force behind the boom, then the assumption is that China's lower, but still healthy growth will be a drag on commodity prices.

    But recent research challenges this assumption.

    According to BCA Research's Chen Zhao, what is initially an "outrageous proposition" may not actually be. The analyst says the fact that China's consumption of industrial commodities significantly increased at the same time prices rose may have only created "the impression that China was the main driving force behind the commodities boom. "

    Consider that since the substantial growth early in the last decade, China has continued to import commodities at a remarkable pace. Since 2007, the Asian giant buys 2 times more iron ore, 1.5 times more copper and 6 times more coal from other countries.

    (click to enlarge)

    "The level of Chinese commodity imports obviously reflects the size of its economy," says BCA. So even if the growth rate has slowed down, "the absolute level of Chinese commodity demand continues to set new records every year."

    Then what's really driving commodity prices?

    If you can't entirely blame weak commodity prices on Chinese demand, what is the culprit? Take a look at the chart below. The red line plots the 10-year rolling correlation of annual returns on the Thomson Reuters/Jefferies CRB Commodity Index (CRB) with China's real GDP growth. The correlation between these two numbers has stayed close to 0.4 since the late 1990s.

    Now take a look at the blue line, which shows a negative correlation between the CRB and the trade-weighted U.S. Dollar. The correlation since 2010 has hovered around -0.8, implying that "the dollar has much more explanatory power," says BCA.

    (click to enlarge)

    The data confirms BCA's "long-term suspicion that the bull market in commodities last decade was mainly a reflection of a sustained fall in the U.S. dollar."

    This isn't the only time we've experienced this phenomenon. In the 1990s, when the U.S. economy was booming and the dollar was strong, commodity prices were weak and oil prices fell to an all-time low of $10 per barrel.

    Today, many emerging market economies that had no global footprint a few decades ago are now growing at a much faster pace than the developed countries. These emerging nations have young, growing populations who are moving to the cities, becoming wealthier, and consuming more goods and services.

    However, like I shared recently, Credit Suisse is of the opinion that prices of commodities may no longer rise and fall together in unison, emphasizing that investors will need to focus on individual commodities depending on the supply and demand factors. This is why we advocate that investors hold a diversified basket of commodities actively managed by professionals who understand these specialized assets and the global trends affecting them.

    Want to see more on commodities or emerging markets? Provide us with your email address and you'll receive a note every time Frank Holmes updates his blog. You can also follow U.S. Global on Twitter or Facebook.

    All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.

    Jul 22 5:03 PM | Link | Comment!
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