Managing Expectations - Part IIIAugust 16, 2014by Frank Holmes

of U.S. Global InvestorsIn the first of this three-part series on managing expectations, I discussed the role cycles play in the investmentmanagement process. At U.S. Global Investors, we actively monitor both short- and long-term cycles, from the annualseasonality of gold to four-year presidential elections, in order to manage expectations based on historical patterns.

To understand how oscillators work, though, you’ll first need to be familiar with standard deviation and meanreversion.Among other important cycles and patterns that we use are oscillators, which are diagnostic tools that help usmeasure a security’s upward and downward price volatility. Think of an oscillator as a thermometer; with it, we canaccurately take a security’s “temperature.” The knowledge extrapolated from this reading is materially useful in managingexpectations, appreciating the dimensionality of a security’s short-term volatility and identifying when to accumulate ortrade a stock.

Standard Deviation

Standard deviation, also known by its Greek letter sigma, is a probability tool that gauges a security’s volatility. Specifically,it measures the typical fluctuation of a security around its mean or average return over a period of time ranging from oneday to 12 months or more.

In the following bell-shaped curve, the center line represents a security’s average return over a given period of time—oneday, 20 days, 60 days or 12 months. To the left and right of the line, the darkest blue sections indicate one standarddeviation, or sigma, either above or below the mean; the next lightest, two sigma above or below; and so on.

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No matter the security, returns can be expected to trade within one sigma of their mean 68 percent of the time. Ninety-fivepercent of the time they will fluctuate within two sigma, and nearly all of the time they will trade within three.

So why should investors care about this? Generally speaking, the higher the sigma, the higher a security's volatility; theprobability that it will fall back toward the mean also rises. A speculative tech stock, for example, has a greater tendency tohave a higher sigma than a blue chip stock. This tells you the tech stock's returns will fluctuate more widely, moreerratically, than the blue chip stock's.

But sigma is not as black and white as this comparison might suggest. Rather, it more closely resembles multiple shades ofcolor that help investors manage their emotional reactions to the market's swings and focus instead on the power of usingstatistics. It's easy to get pulled into market fears or "irrational exuberance"-to use former Federal Reserve Chairman AlanGreenspan's phrase-and this probability model helps us be more objective.

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To illustrate how these statistics operate in the real world, let's look at the S&P 500 Index. Over the last ten years, it hashad a rolling 12-month standard deviation of 17 percent. This means that if you were to chart its returns over the course of12 months, you could expect them to stay within ±17 percent from the mean about 70 percent of the time. That's onesigma. You could also reasonably expect returns to rise or fall within ±34 percent, or two sigma, 95 percent of the time.

Knowing this, it probably wouldn't be a huge cause for celebration if the S&P 500 rose, say, 8 percent during a 12-monthperiod, since this figure falls within the "normal" one-sigma range. Conversely, a loss of 8 percent wouldn't be a totaldisaster. A one-sigma move is a non-event from a historical perspective.

To put this in perspective, the S&P 500 rose about 30 percent last year. This is close to a significant two-sigma move fromits 12-month average. Incidentally, 2013 was the index's best annual performance since 1997.

The most important thing to keep in mind is that, just as we all have different fingerprints, every commodity, every stock,every fund and every index has its own DNA of volatility. The S&P 500 might have a sigma of 17 percent, but over thesame 12-month period, the MSCI Emerging Markets Index has a much more volatile 29 percent. Investors must strive toremain objective in the face of emotional factors that move markets and adjust their expectations of how these two indexesbehave compared to one another.

Using Weather Statistics to Explain Standard Deviation

As an analogy, consider the extreme temperature fluctuations in Minneapolis-St. Paul, Minnesota. Minneapolis has anaverage annual temperature of 45 degrees, which sounds pleasant enough. You might think that in such a climate, all youneed to get by is a warm jacket. But the picture changes dramatically when you learn that the Twin Cities' 12-monthstandard deviation is ±22 degrees. Statistically, this means that for a little over two thirds of the year-68 percent of the time-you can expect the temperature to swing between 23 and 67 degrees. Suddenly that jacket is looking pretty risky. At twostandard deviations, there's a strong probability that the temperature will fall anywhere between a bone-chilling 1 degree-which might very wel l occur, since the average low in January is 2.8 degrees-and 89 degrees. That's a huge, yawning gapthat Minneapolitans must contend with throughout the year.

Compare this to San Antonio, Texas, home of U.S. Global Investors. Here the average temperature is a balmy 70 degrees,with a less-volatile standard deviation of 13 degrees. Even at two sigma-which, again, occurs 95 percent of the time-thetemperature in the Alamo City statistically falls anywhere between 42 and 94 degrees, close to the average high in July.

If we're looking just at temperature fluctuations, Minneapolis resembles the Emerging Markets Index whereas San Antoniobehaves more like the S&P 500. Your expectations of "normal," therefore, will need to be different depending on which ofthese two cities you reside in or indexes you follow.

Mean Reversion

This leads us to mean reversion, which I discussed in full back in June. Mean reversion is the theory that, although pricesmight trend up for many years (as in a bull market), or fall for many years (as in a bear market), they tend to move backtoward their historic averages eventually. Such elasticity is the basis for knowing when a security is under- or overvaluedand when to buy low and sell high. We have just experienced a bull market with the S&P 500 and a bear market with goldstocks. Within these trends, though, are great internal volatility and oscillator tools that monitor these actions. Even in a bullor bear market, we can measure the 20- and 60-day volatility of any kind of security.

Again let's use Minneapolis as an illustration. We've already established its wide-ranging temperature fluctuationsthroughout the year, from highs reaching the 80s to lows flirting with zero. This being so, it would be unreasonable toexpect the weather to remain freezing indefinitely, as is the case in Game of Throne's aptly-named Land of Always Winter.Eventually it reverts back to its 12-month mean of 45 degrees.

The same goes in the world of investing. Mean reversion applies to everything, in both a micro and macro setting. In anApril 2012 Frank Talk, I showed that entire countries have their own means, which they eventually revert back to. Aftercharting Chinese stock performance over a 10-year timespan, a pattern emerged:

"Chinese stocks landed in the top half [of emerging markets] four out of 10 years-2002, 2003, 2006 and2007. In 2003, China climbed an astounding 163 percent; in 2007, it was the top emerging marketagain, returning nearly 60 percent. Since then, the country has fallen to the bottom half... If you applythe principle of mean reversion, history appears to favor China landing in the top half during this Year ofthe Dragon."

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Indeed, by the end of 2012, Chinese stocks jumped nearly 40 percent from the previous year, placing the country in the tophalf of emerging markets-just as predicted using the theory of mean reversion.

Look at the two oscillator charts below. They show the up-and-down movements in the price of gold stocks (top chart) andbullion (bottom chart) over the past ten years. One row above or below the mean, indicated by the black horizontal line,equates to one sigma; two rows above or below equates to two sigma; and so on. As you can see, mining stocks haverecently reverted to their mean for the first time in about three years, while spot gold is gradually working its way back.

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Again, every security has a different sigma for a specific period of time, and as such your expectations should reflect thesedifferences. Gold bullion currently has a one-day standard deviation of ±1 percent and a 12-month standard deviation of±18.8 percent. (The one-day will always be lower than the 12-month.) So if gold's return falls within a range of ±1 on anygiven day or ±18.8 percent for a 12-month period, it's behaving normally, as this is only one sigma. Anything over 18.8percent for a 12-month period would be heading toward two sigma, which is when a buy or sell action is advised

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Now compare spot gold to the NYSE Arca Gold BUGS Index, which has a 12-month standard deviation of 35.5 percent-nearly double that of bullion. Plus or minus 35.5 percent might sound incredibly scary and volatile, but for gold stocks, a

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fluctuation of this sort is "normal," occurring 68 percent of the time. It's all about managing your expectations and emotions.Look at the following oscillator that charts the S&P 500 and gold bullion's 60-day percent change over the past five years.Like the EKG tracings of a healthy patient, the lines bottom and peak, bottom and peak-but revert back to their mean withregular frequency.

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Oscillators are vital to identifying the optimal time to buy or sell. When prices exceed two sigma above the mean, it mightbe a good time to sell because the statistical data suggest the commodity is overvalued and, therefore, prices are due todrop toward their mean. When prices exceed two sigma below the mean, it indicates the commodity is undervalued. Buyingthe laggards at this time could enable you to participate in a potential rally.

No statistical tools are accurate 100 percent of the time, but investors can take ownership in how they use probability toolssuch as oscillators to manage the emotions of the market. It's when an asset moves more than one sigma that the powerof mean reversion raises your chances to capture opportunity. This is part of what makes investing so exciting. Strap yourself in and enjoy the ride.

Part III (Coming Soon)

In the third and final part of this series on managing expectations, I'll discuss the anatomy of a bear market such as whatgold mining stocks have experienced for three years. I'll also discuss how we use relative fundamental stock evaluations,growth at a reasonable price (GARP) to pick stocks and some of the statistical tools we use to trade around core positions.

The job of active managers and the need to trade around core holdings is extremely important, especially when the daily,monthly and annual volatility is so excitable.

Index Summary

Major market indices finished higher this week. The Dow Jones Industrial Average rose 0.66 percent. The S&P 500Stock Index gained 1.22 percent, while the Nasdaq Composite Index advanced 2.15 percent. The Russell 2000 smallcapitalization index rose 0.91 percent this week.The Hang Seng Composite Index gained 2.4 percent and Taiwan gained 1.3 percent. The KOSPI Composite Indexwas closed on Friday, but it gained 1.58 through Thursday.The 10-year Treasury bond yield fell 330 basis points to 2.34 percent.

omestic Equity MarketThe market was on its way to have the largest weekly gain of the year until Friday when the momentum turned on newsthat Ukrainian forces attacked an armed Russian convoy. When the closing bell rang the Standard and Poor's 500 Indexended the week up 1.2 percent. Trading volume on the week was on the lighter side.

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Strengths

The health care sector outperformed the broader market closing up 2.32 percent. Within health care, service nameswere pretty quiet, while Biotech, Pharma and Spec pharmaceutical names saw renewed strength as traders looked tocontinue investing money in the best-performing sector.

The technology sector wasn’t far behind health care. The sector went from being one of the weakest over the last twoweeks to one of the strongest, closing up 1.8 percent. One standout was Pandora rising on takeover rumors; thestock rallied over 10 percent.

Monster Beverage was the strongest name in the S&P after rallying 30 percent on Friday. Coca-Cola agreed to buy a17 percent stake in the company for $2.15 billion. The deal gives Coca-Cola greater exposure to the energy drinkmarket, one of the fastest-growing segments in the beverage industry.

Weaknesses

Energy was the only sector in the red for the week, finishing down 0.5 percent. The weakness seems to be attributedto talk of an oversupply in crude oil. One of the weakest names in the sector was Pioneer Natural Resources, falling3.3 percent for the week.

Fossil Group closed down 7.2 percent for the week making it the worst-performing stock in the S&P 500. Thecompany reported “in-line” earnings guiding higher for their core business, but evidently the street was expectingbetter.

Opportunities

Next week will be a big week for consumer earnings. Key companies reporting include Urban Outfitters, Home Depot,Target and Staples.

There is an energy conference in Denver next week which may direct investor focus and enthusiasm back to theenergy sector

Threats

Similar to last week, we still have geopolitical tensions with Ukraine and Russia on the forefront.

August has been a negative month every year over the past five years. With low volumes and overall markettiredness, any small news can cause this market to snap back. It seems the market is looking for reasons to makethis the sixth year in a row

The Economy and Bond MarketTreasury yields declined this week as the U.S. 10-year yield fell to close at fresh 52-week lows, hitting 2.30 percent beforepulling back to about 2.34 percent at end the week. Most U.S. economic data were relatively inline this week, though InitialJobless Claims, Empire State Manufacturing Index, and the University of Michigan Confidence numbers came in a bit

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light. U.S. investors kept a close eye on global economic data and geopolitical events this week and while geopoliticaltensions lessened late in the week, concerns about weakening European data rose.

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Strengths

The U.S. took part in a global bond rally on Friday as its 10-year yield fell to fresh 52-week lows. German, U.K., andJapanese 10-year bond yields also fell to new 52-week lows.U.S. economic data were relatively inline or benign, and U.S. markets largely shrugged off potential geopoliticalconcerns.Japanese second-quarter GDP data were better than expected, while Portugal, Spain and Greece also had relativelygood second-quarter GDP numbers.

Weaknesses

U.S. Initial Jobless Claims, the Empire State Manufacturing Index and University of Michigan Confidence numbers allmissed this week. Jobless Claims came in at 311,000, missing estimates of 295,000. Empire State came in at14.69, missing expectations of 20.00, while the Michigan Confidence number of 79.2 missed expectations of 82.5.

While the U.K. had a solid showing in the second quarter, some eurozone GDP data were weak. Germany andFrance both contracted in the second quarter, while Italy contracted for a second-straight quarter, placing Italy in atechnical recession.

Opportunities

With key global central banks in easy policy mode and inflation trending lower in many parts of the world, the path ofleast resistance for bond yields continues to be down. Weak European data elevates expectations for increasedaction and clarity from European Central Bank (ECB) President Mario Draghi and the ECB.Mark Carney at the Bank of England (BOE) offered these reassuring words with respect to future U.K. rate hikes:“increases … when they come, are likely to be gradual and limited.” The BOE is a key central bank for investors tomonitor, as the U.K. economy is a bit further along on the road to recovery than the U.S.

Small business optimism in the U.S. came in better this week, ticking higher to 96.0, better than analysts’expectations of 95.7 and nearing the 52-week high of 96.6.

Threats

The possibility for central banking policy error remains elevated in the U.S. and globally.U.S. wage growth continues to remains sluggish despite the recovery. Europe remains something of a wildcard as data are weak and geopolitics highly relevant.

Gold MarketFor the week, spot gold closed at $1,304.54, down $6.41 per ounce, or 0.49 percent. Gold stocks, as measured by theNYSE Arca Gold Miners Index, rose 0.50 percent. The U.S. Trade-Weighted Dollar Index rose 0.05 percent for the week.

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Date Event Survey Actual PriorAug 12 Germany

August ZEWSurveyExpectations

17.0% 8.6% 27.1%

Aug 13 China JulyRetail Sales

12.5% 12.2% 12.4%

Aug 14 Eurozone JulyCPI

0.8% 0.8% 0.8%

Aug 15 U.S. July PPIFinal Demand

1.7% 1.7% 1.9%

Aug 19 U.S. July CPI 2.0% - 2.1%Aug 20 U.S. Fed

ReleasesMinutes fromJuly 29-30FOMCMeeting

- - -

Aug 20 China HSBCPelim.ManufacturingPMI

51.5 - 51.7

Aug 21 U.S. AugustPelim. MarkitManufacturingPMI

55.6 - 1.9%

Strengths

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Gold analysts and traders are bullish on the metal for the third-consecutive week, the longest run since February asgeopolitical tensions continue to support the safe-haven demand. In addition, the weekly Bloomberg survey showsanalysts are the most bullish in seven months after rockets were fired from Gaza before the 72-truce expired, andUkraine reported it attacked a destroyed portion of a Russian military convoy entering Ukraine.

Klondex Mines reported strong second-quarter results, its first full quarter of operations. For the quarter, Klondexgenerated $7.4 million in free cash flow, setting it apart from both junior and senior peers, which have struggled togenerate free cash flow at current gold prices. The company also reported earnings per share of $0.04 on recordrevenue generation. Analysts’ expect costs to decrease even further in the third and fourth quarters on lower mine-development costs and higher production from long stopes.

Midway Gold updated its mineral resources estimate at its Spring Valley project in Nevada, boosting gold grades by20 percent to 0.55 grams per tonne. It also boosted total measured and indicated resource by 102 percent to 4.37million ounces of gold. Barrick Gold has agreed to carry Midway to production in exchange for a 75-percent stake inthe project. Similarly, True Gold received funding for up to $120 million from Franco Nevada and Sandstorm, which

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fully funds remaining development and construction at the Karma project in Burkina Faso.

Weaknesses

Gold demand in China shrank in the second quarter as consumers in the largest global gold market purchased fewerbars, coins and jewelry amid a clampdown on corruption. For the three-month period ended June 30, Chinapurchased 192.5 metric tonnes of gold, a 52-percent decrease from a year earlier. Fortunately, the decrease hasbeen offset by the lack of physical gold exchange traded fund (ETF) liquidations. In India, official statistics showsignificant drops in consumption, which are questionable given the government has allowed multiple grey marketparticipants to thrive.

Ernst & Young, in its latest quarterly report on mergers and acquisitions (M&As) for the mining sector, shows M&Aactivity subdued in the second quarter despite a strong deal pipeline and sizeable private capital funds sitting on thesidelines. The report highlights 112 deals worth $9.5 billion for the quarter, or a 21-percent decrease in deal volumefrom the previous quarter, 41 percent lower than the second quarter of 2013. Ernst & Young explained thatcommitment to capital discipline, together with lack of urgency given the lack of competition for assets, are reasonsfor the reduced deal volume.

Centamin reported second-quarter earnings that were nearly cut in half as a result of lower mine grade at its Sukarimine in Egypt. Earnings fell 49 percent to $32.6 million from a year earlier, while revenue fell 24 percent for the sameperiod.

Opportunities

Oppenheimer’s analysts believe gold stocks can soar more than 40 percent from current levels. As the chart belowshows, after underperforming gold since 2006, gold miners have begun to outperform as of late, breaking out fromthe long-term downtrend. Voicing similar comments was Dennis Gartman, highly respected and neutral gold marketcommentator. In his letter, Gartman asserts that the force keeping gold prices depressed may be well near defeat,leading a wave of big fund managers back into the sector.

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Paul Singer, founder of the $24.8 billion Elliot Management Corp., said in a letter to investors dated July 28, that goldpresents a "unique and not really very expensive" trading opportunity, anticipating a rise in gold prices on mountinginflation concerns. Not surprisingly, 13F reports published this week by all major hedge funds show John Paulson'sPaulson & Co., the largest investor in physical gold ETFs, held its stake over the period, while Soros FundManagement increased its exposure to gold miners.

Macquarie U.S. Economics research argues underlying inflation continues to be dependent on wage growth, which itexpects to accelerate, consistent with reduced labor slack. According to its research, current wage growth dynamicsappear comparable to the second half of 2004, a period soon followed by accelerating wage growth. With 10-yeargovernment bond yields setting yearly lows this week, any acceleration in wage growth and inflation would translateinto substantial negative impacts to real yields, and a strong tailwind for gold prices.

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Threats

A new PwC report shows the productivity of Australia’s open-pit mining equipment is so poor it only ranks aboveAfrican mining. After peaking in 2007, Australia’s productivity has trended down consistently, and now sits behindNorth American, Asian and South American productivity levels.

Imperial Metals’ shareholders are considering a class action lawsuit against the company as a result of the disastroustailings breach at its Mount Polley mine in British Columbia. Meanwhile, Alaska’s senior U.S. senator asked the U.S.Secretary of State to reiterate “concerns about large scale mining in British Columbia, which has the potential toadversely affect downstream fisheries and communities in Southeast Alaska.”

China and Russia, which are already making bi-lateral agreements to trade their currencies and bypass the U.S.dollar, are progressing to challenge the dollar hegemony in world trade. Interestingly, the two countries hold thesmallest proportions of their total foreign-currency reserves in gold. This may explain why China, and especiallyRussia have made significant investments to increase domestic gold production. Russia is likely to overcomeAustralia as the world’s second-largest producer of gold. The positive side is that gold produced will be purchased bytheir central banks and not released into the open market.

Energy and Natural Resources Market

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Strengths

Dry Ships had an unbelievable turnaround from the prior week. The rally coincides with the recent rise in the BalticDry Index, which was up 21.24 percent this week. After reporting a loss of 1.59 percent last week, this week saw theBloomberg Dry Ships Index rise 11.37 percent. Kinghtsbridge Tankers Ltd. rallied significantly with the index, gaining12.63 percent.

Refiners are at it again, putting up strong gains for the week. The S&P Supercomposite Oil & Gas Refining &Marketing Index rose 1.40 percent this week. Valero Energy Corp. rose 2.20 percent and Marathon Petroleum Corp. gained 1.81 percent.

Rail stocks jumped ahead this week, with the S&P Supercomposite Railroads Index rising 3.00 percent. Union PacificCorp. saw strong gains this week, rallying 3.40 percent.

Weaknesses

Franco-Nevada Corp. is struggling to sell shares of its $500 million equity offering. After pricing the shares at $ 59.75,a small 1.8 percent discount to Wednesday’s closing price, the stock fell to $58.10, making it cheaper to buy thestock in secondary markets. This, combined with the general negativity of increasing the supply of shares, hascaused Franco-Nevada’s stock to dip further, dragging down other royalty companies as well.

After seeing slight gains through Thursday, gold fell on Friday, bringing the weekly return down to minus 0.37percent. The sudden drop comes on the back of recent equity rallies and decreased geopolitical tensions, specificallyPutin’s pledge to work to halt further conflict, the extension of the truce between Hamas and Israel, and the

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resignation of Iraqi Prime Minister Nouri al-Malaki.

Base metals continue to decline amid fears that global growth and demand are slowing. The S&P/TSX CappedDiversified Metals and Mining Index fell 2.06 percent this week, making this the third straight week of negativereturns.

Opportunities

The HSBC China Manufacturing PMI is set to come out next Wednesday. Economists’ consensus places the indexat 51.5, signaling expansion in Chinese manufacturing. A strong PMI reading could serve to prop up base metals thathave been on the decline due to weaker growth outlooks.According to the International Energy Agency (IEA), U.S. shale oil production will rise 89,000 barrels per day inSeptember from a month earlier.Turquoise Hill Resources, the operator of the Oyu Tolgoi coppermine, announced on Thursday the signing of aPower Sector Cooperation Agreement with the Mongolian government. The agreement might not have any tangibleeffect in the short term but is positive news in terms of the miner’s troubled relations with the government.

Threats

The Treasury Department announced it is looking into Master Limited Partnerships (MLPs). Aiming to identifyinstances where the tax base may be weakened, the Treasury Department is suspicious of the increased use ofMLPs. Although the growing attention from the Treasury Department could negatively impact MLPs, any true effectsshould be slim to none in the near term.Lower than expected oil deliveries in the second quarter, along with a weaker economic outlook from the InternationalMonetary Fund (IMF), has led the IEA to lower its 2014 global oil demand growth forecast to 1 million barrels per day.The weaker demand could place downward pressure on oil prices moving forward.

Emerging Markets

Strengths

Russia was the best-performing emerging market this week after President Vladimir Putin pledged to “do all we can”to end the deadly conflict with Ukraine. The Russian market, which trades at five times estimated earnings, making itthe cheapest market among developing nations, saw buyers come in as price-to-earnings multiple valuations hitrecord lows.

Hong Kong remained the best-performing country in Asia this week, despite weaker-than-expected Chinese bankcredit, industrial production and fixed-asset investment in July. Although equity fund inflows to China moderated to$0.53 billion for the week ending Wednesday, August 13, it was the third-consecutive week that China reported thelargest inflows among emerging markets.

Health care was the best-performing sector in emerging markets this week, led by Indian health care andbiotechnology stocks. A wave of positive quarterly reports, showing strong top-line and bottom-line results led thesector higher in India. In addition, Ranbaxy Pharma, India’s largest drug maker by market value announced it willcontinue to be an active buyer in the merger and acquisition (M&A) space, leading smaller pharmacy companieshigher.

Weaknesses

Turkey was the worst-performing emerging market for the week following Prime Minister Erdogan’s victory in thecountry’s first direct election to the presidency. Fitch Ratings said the election of Erdogan as president will do little toimprove the country’s credit profile, while The Economist criticized Erdogan’s plans to give the presidency, hitherto aceremonial job, far more power. The compounding factor was a report by the central bank showing a widening of thecurrent account deficit to $4.1 billion in July after exports to Iraq, Turkey’s second-largest trading partner, declinedsignificantly as a result of violent confrontations taking place in the country.

Singapore was the worst-performing country in Asia this week. This was led by worries on negative earningsrevisions, a slowdown in GDP growth, rising domestic wage pressures (related to protectionist labor policies), alongwith a continuous decline in tourist arrivals due to a strengthening Singapore dollar against regional currencies inrecent years.

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The worst-performing sector within the emerging markets complex was materials, led lower by iron ore producers andsteelmakers. Brazilian steelmakers dropped the most on average following the bearish sentiment displayed duringthe annual Brazilian Steel Congress. Senior executives of the global steelmakers highlighted their concerns overslowing Chinese demand, excess capacity and structural inefficiencies. In Brazil’s case, poor first-half results thatwere initially blamed on the World Cup have turned more severe as domestic consumption from autos, constructionand machinery all remain especially weak.

Opportunities

Emerging market stocks posted the biggest weekly advance in four months as analysts grew bullish on emergingmarkets on the back of strong inflows. In addition, strategists at BlackRock, the world's largest asset manager, saidemerging market valuations relative to developed markets were at the most attractive levels in 10 years. The S&P500 trades at a forward price-to-earnings ratio of 17.7, compared with 13.69 for emerging markets. After a period ofunder-allocation to emerging markets in many portfolios, analysts believe this is a favorable time to re-enter thespace ahead of further money inflows.

Despite the negative surprise embedded in China’s July macroeconomic data, investor skepticism was more thanoffset by expectations for further government policy easing ahead. Historically, the year-over-year trend in China’sproducer price inflation (PPI) was highly correlated with nominal GDP growth. Slow but steady reduction ofdeflationary pressure in China should instill more confidence in the ongoing recovery in the country, benefittingcyclical sectors the most.

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The Greek Statistics office announced a better-than-expected, second-quarter GDP reading – a decline of 0.2percent, versus consensus of -0.5 percent. The trend reversal is evident and the full-year forecast of 0.6 percentgrowth appears achievable. According to Wood & Co. analysts, macro data and leading indicators support an exitfrom recession in the second half of the year, led by strong tourism, the restart of infrastructure projects and betterprivate consumption. In addition, Greek banks are showing a huge reduction in reliance on the European CentralBank (ECB), improving deposits and a deceleration in new non-performing loans.

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Threats

Rosneft reportedly asked the Russian state for as much as $42 billion of aid after U.S. sanctions drained liquidity toRussian borrowers. Rosneft, which is due to repay $12 billion by the end of the year and $15 billion next year,presented a proposal to buy back as much as $42 billion worth of debt using money from Russia’s National WellbeingFund. The proposal is unrealistic, with some reports showing it would fully deplete the fund’s resources since thefund is supposed to support the pension system.

German economic data continues to indicate an ongoing inability to gain traction in the country and region, accordingto Prime Execution strategists. Over the past several months, indicators of consumer and business sentiment havefallen, foreshadowing the second-quarter GDP contraction in the German economy. Germany is the main destinationfor Eastern European exports, making economic growth in the periphery highly dependent on German economicconditions.

Since the Second-Child policy was approved in China earlier this year, eligible couples have been slow to embracelooser restrictions based on provincial statistics. Growth prospects of China’s mass consumer sector, such as infantfoods and diapers, has significantly diminished due to structural migration to e-commerce and rising competition toname brands.

Leaders and LaggardsThe tables show the weekly, monthly and quarterly performance statistics of major equity and commodity marketbenchmarks of our family of funds.

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Weekly Performance

Index Close WeeklyChange($)

WeeklyChange(%)

Natural Gas Futures 3.78 -0.19 -4.67%S&P/TSX Canadian Gold Index 203.95 +0.64 +0.31%XAU 101.97 +0.71 +0.70%Russell 2000 1,141.65 +10.30 +0.91%Gold Futures 1,305.50 -5.50 -0.42%S&P Basic Materials 313.24 +2.80 +0.90%S&P Energy 700.15 -3.35 -0.48%Nasdaq 4,464.93 +94.03 +2.15%DJIA 16,662.91+108.98 +0.66%S&P 500 1,955.06 +23.47 +1.22%Oil Futures 97.10 -0.55 -0.56%Hang Seng Composite Index 3,409.41 +80.57 +2.42%10-Yr Treasury Bond 2.34 -0.08 -3.30%

Monthly Performance

Index Close MonthlyChange($)

MonthlyChange(%)

S&P/TSX Canadian Gold Index 203.95 +7.05 +3.58%Gold Futures 1,305.50 +4.20 +0.32%Nasdaq 4,464.93 +38.96 +0.88%S&P Basic Materials 313.24 -1.43 -0.45%S&P 500 1,955.06 -26.51 -1.34%XAU 101.97 +2.07 +2.07%DJIA 16,662.91-475.29 -2.77%S&P Energy 700.15 -31.44 -4.30%Russell 2000 1,141.65 -9.90 -0.86%Oil Futures 97.10 -4.10 -4.05%Natural Gas Futures 3.78 -0.34 -8.30%10-Yr Treasury Bond 2.34 -0.19 -7.36%Hang Seng Composite Index 3,409.41 -332.01 -14.83%

Quarterly Performance

Index Close QuarterlyChange($)

QuarterlyChange(%)

XAU 101.97 +13.11 +14.75%S&P/TSX Canadian Gold Index 203.95 +26.94 +15.22%Hang Seng Composite Index 3,409.41 +306.64 +9.88%Nasdaq 4,464.93 +374.34 +9.15%S&P Basic Materials 313.24 +11.65 +3.86%S&P 500 1,955.06 +77.20 +4.11%S&P Energy 700.15 +19.02 +2.79%Russell 2000 1,141.65 +38.75 +3.51%Gold Futures 1,305.50 +11.30 +0.87%DJIA 16,662.91+171.60 +1.04%Oil Futures 97.10 -4.92 -4.82%10-Yr Treasury Bond 2.34 -0.18 -7.25%Natural Gas Futures 3.78 -0.64 -14.41%Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other importantinformation, 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 beappropriate to every investor.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, aswell as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price

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may be more volatile than those of a less concentrated portfolio.

The Emerging Europe 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 moresusceptible to risk in these industries than funds which do not concentrate their investments in an industry and may makethe fund’s performance more volatile.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greaterrisks 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 regulatorydevelopments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals aresubject to substantial price fluctuations over short periods of time and may be affected by unpredicted internationalmonetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in thesesectors.

Stock markets can be volatile and can fluctuate in response to sector-related or foreign-market developments. For detailsabout these and other risks the Holmes Macro Trends Fund may face, please refer to the fund's prospectus.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Tax-exempt income is federal incometax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certaininvestors to the Alternative Minimum Tax as well. The Near-Term Tax Free Fund may invest up to 20% of its assets insecurities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to bothstate and federal income taxes. The Near-Term Tax Free Fund may be exposed to risks related to a concentration ofinvestments in a particular state or geographic area. These investments present risks resulting from changes in economicconditions of the region or issuer..

Investing in real estate securities involves risks including the potential loss of principal resulting from changes in propertyvalue, interest rates, taxes and changes in regulatory requirements.

Past performance does not guarantee future results.

Some link(s) above may be directed to a third-party website(s). U.S. Global Investors does not endorse all informationsupplied by this/these website(s) and is not responsible for its/their content.

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

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

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in theirindustry.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 Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell3000®, a widely recognized small-cap index.The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed onStock 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 TaiwanStock Exchange.The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the KoreanStock Exchanges. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leadingcompanies 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 S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights arecapped 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 ofthe S&P 500.The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a

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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 the1941-43 base period.The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in theindustrial 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 consumerdiscretionary 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 informationtechnology 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 inthe 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 ofthe S&P 500.The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as asubset 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 thetelecom sector as a subset of the S&P 500.The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly tradedcompanies involved primarily in the mining for gold and silver. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a marketbasket of goods and services purchased by individuals. The weights of components are based on consumer spendingpatterns.The New York Empire State Manufacturing Survey is sent out to companies in the manufacturing industry in New Yorkstate. The survey provides an early indication of business conditions, such as price levels and employment trends, and itgives an indication of changes in sentiment. The survey is produced by the Federal Reserve Bank of New York and isreleased around the middle of the month.S&P/TSX Capped Diversified Metals and Mining Index is an index of companies engaged in diversified production orextraction of metals and minerals.The China Purchasing Managers’ Index, a gauge of nationwide manufacturing activity, is issued by the China Federation ofLogistics & Purchasing and co-compiled by the National Bureau of Statistics.The University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan.The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spendmoney.The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equitymarket performance in the global emerging markets.

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