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Shareholder ReportWinter 2010
Inside: Nuclear Power’s Revival | China on the Fast Track
Journey to
India
U.S. Global Investors2 Shareholder Report /Winter 2010
There is only so much that
an investment manager can
learn from reading analyst
reports and staring for hours
at numbers and charts on a
Bloomberg terminal. At U.S. Global Investors,
we also believe in being where the action is.
As investors in natural resources, that means
visiting the mines, looking at the rocks and
asking questions of the on-site engineers. As
investors in emerging markets and global
infrastructure, that means visiting these
dynamic countries to talk to companies,
look at projects and watch how things
are changing.
I was recently in India, one of the four major
emerging nations known as the BRICs
(along with Brazil, Russia and China), and
I was amazed at what I saw in this land of a
billion people. Not just important cultural
treasures like the beautiful Golden Temple
in Amritsar, which we feature on the cover
of this magazine, but all of the work being
done to create and modernize roads, airports,
telecom networks, power generation and the
like. India has embarked on a $500 billion
plan to expand and upgrade its infrastructure
assets by 2012.
We’re all aware of the economic growth
under way in the emerging world, but less
well-known is how that newly created
wealth is distributed within the population
as a whole. The chart below shows the
dramatic expansion of the middle class
in China and India�—�since 2000, 43 mil-
lion Chinese and 16 million Indians have
climbed up to this important income level
every year.
Estimates are that as many as 25 percent
of Chinese�—�more people than the entire
U.S. population�—�now have middle-class
incomes or higher, and that could double
within the next decade. India is seeing
the same trend�—�this rise of the “American
Dream” in emerging nations is memorably
portrayed in the Oscar-winning movie Slum-
dog Millionaire. One of our portfolio managers
visited Russia in January and reported back
that high-end grocery stores in Moscow
compare favorably to the best supermarkets
in the U.S., and that sales are brisk.
This trend has huge implications for com-
modities. Middle-class people in emerging
markets in general have more basic desires
than in developed countries�—�they want hot
and cold running water, reliable electricity,
paved roads and street lighting.
The fact that the biggest emerging economies
are commanding a greater share of the
Dear Shareholder, We believe in being where the action is.
“India is upgrading its roads as
more people move into the middle
class and buy cars. Have a look
at the photo below — that’s me
with the Tata Nano, at $2,500 the
world’s cheapest car.”
0
5
10
15
20
25
30
35
40
45
1970 – 1990
Mil
lio
ns
Average Annual Population Growth, Middle Class and Above
India
China
Source: PIRA
1990 – 2000 2000 – 2008
Shareholder Report /Winter 2010 3www.usfunds.com
world’s limited commodities is spurring
profound and permanent change in how
these resources are allocated. For investors,
these changes present opportunities.
Simply put, an investment in natural
resources is a vote of confi dence in global
economic growth.
Rapid urbanization and growing consumption
in emerging markets are among the key
themes in the global growth story. Just
over half of the world’s people now live in
cities �—�by 2050, that fi gure is likely to rise to
70 percent. The urban population in emerging
nations has expanded by an average of 3
million per week for the past 20 years.
On the consumption side, last year China
surpassed the U.S. as the world’s largest
automobile market. More than 13 million
cars and light trucks were sold in China
in 2009, further transforming a land once
dominated by bicycles. Forecasts for 2010
call for vehicle sales to increase by as much
as 10 percent. In only 10 years, China has
gone from being the world’s 20th largest
oil consumer to No. 2 behind the U.S.
Did you know that up to 90 percent of mobile
phone users in emerging markets have pre-
paid plans, and that a similar percentage of
car purchases are made in cash? In part be-
cause their households don’t carry big debt
burdens, these countries have been able to
rebound quicker than the credit-reliant West.
While demand is growing, the supply of
many key commodities is not keeping pace.
It is increasingly difficult and costly to
fi nd and develop large new oil fi elds, and
mining projects are often slowed down
by environmental opposition and tighter
regulatory requirements. Many promising
new commodity sources are in countries
with inadequate infrastructure and/or
signifi cant political risks.
Another stress in the markets is that insuffi -
cient capital has been invested in resources
in recent decades, while at the same time the
world’s population has doubled and gotten
richer. Any supply disruptions quickly lead
to price spikes.
We have updated our popular Periodic Table
of Commodity Returns and the headline
news should come as no surprise�—�2009
was a complete turnaround for the sector
after a disastrous second half of 2008.
Four industrial metals�—�copper, lead, zinc
and palladium�—�each rose more than 100
percent in 2009. Only three of the 14 com-
modities in the table ended up underwater
for the year, with coal coming in at rock
bottom at minus 13 percent. Gold received
a lot of attention last year, but its 24 percent
returns were only good enough for 10th
place. For the past decade, however, gold
posted annualized returns of 14.3 percent,
while the S&P 500 lost about 2 percent per
year on average.
There are a number of reasons to con-
sider an investment in commodities or
commodity-based equities, be it through
an actively managed natural resources
fund or a passive index fund. We consis-
tently suggest that investors consider a
maximum 25 percent allocation to hard
assets, with annual rebalancing, as part
of a well-diversifi ed portfolio.
We’re hearing more talk about infl ation�—�
natural resources are one of the few asset
classes that benefi t from infl ation. If prices
for fuel or other commodities rise, one way
to hedge against the impact of that price
increase is to invest in those commodities.
Commodities are also a natural hedge against
the erosive impact of a weak dollar. Given
massive federal defi cits for the next decade,
yawning trade defi cits and historically low
interest rates, it is hard to see how the dollar
could see a sustainable rally any time soon.
The annual rotations shown in the periodic
table, along with seasonal cycles and supply-
and-demand trends for specifi c commodities,
are important to watch in order to manage
volatility. We have published widely and done
many presentations relating to volatility and
managing expectations�—� I encourage you
to visit our web site, www.usfunds.com, to
see our research.
History shows that commodity supercycles
typically last 20 to 25 years, though not
without periods of volatility. If the current
cycle follows the historic pattern, we could
be just starting the second half of a prolonged
upward trend.
Sincerely,
CEO and Chief Investment Offi cer
U.S. Global Investors, Inc.
Diversifi cation does not protect an investor from market risks and does not assure a profi t. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
E www.usfunds.com
For more insight and perspectives from Frank
Holmes visit his blog at www.usfunds.com/
investor-resources/frank-talk.
Check out our popular Periodic Table of Commodity Returns at www.usfunds.com.
U.S. Global Investors4 Shareholder Report /Winter 2010
Two decades after the Three Mile Island and
Chernobyl incidents, nuclear energy is being
increasingly viewed as a relatively “green”
energy with greater cost-benefi t potential
than solar, wind and other alternatives.
The International Atomic Energy Agency
(IAEA) projects that global nuclear capacity
will grow from about 370,000 megawatts
(14 percent of world energy consumption)
now to as much as 540,000 megawatts by
2020 and 810,000 megawatts by 2030.
In dollar terms, capital expenditure on
nuclear plants could total more than $500
billion over the next 20 years.
Roughly 40,000 megawatts of nuclear
capacity are now being built on four
continents. China accounts for a quarter
of that total, followed by Russia and South
Korea. The chart at right shows that China
will be second only to the U.S. in terms of
future capacity when projects at all phases
are considered.
Like all major economies, China is preparing
for its energy future to accommodate rapid
growth and the movement of more and more
Chinese to cities. The foundation of the nation’s
electricity generation plan is coal, but with
loud calls coming from around the world
for China to cut its output of greenhouse gases,
a considerable portion of new power will be
nuclear even though questions remain about
the long-term storage of radioactive waste.
China’s nuclear capacity is now less than 9,000
megawatts, but the country has more than a
dozen more plants either under construction
or in the planning stages�—�according to
fi gures from the brokerage CLSA, the capacity
could grow fi vefold by 2015. The offi cial target
is 40,000 megawatts by 2020.
From an investment perspective, this
shows massive potential opportunity
both in terms of infrastructure and natural
resources, including uranium. Some
analysts say the price of uranium could
double over the next couple of years in
recognition of future market tightness.
The World Nuclear Association says the
world’s measured uranium resources are
suffi cient to last 80 years at current usage
rates, but China’s ambitious plans make
it clear that usage rates will be increasing
signifi cantly. Like other resources, more
uranium deposits may be economically
viable at higher prices.
E www.usfunds.com
For more information about investing in energy,
visit us at www.usfunds.com.
Nuclear Power’s Revival
Few of the earth’s resources are as important
as oil. Not only does the car you drive to work
run on gasoline, its rubber tires, polyester fabrics
and dashboard plastic are all produced from oil.
Oil has been the subject of books, songs, television
shows and movies. A lack of oil was one of the
reasons that Japan bombed Pearl Harbor, and an
abundance of oil transformed much of the Middle
East from wasteland to wealthy beyond belief.
You may already know all
this, but how much do you
really know about oil? Our
crack research team has
put together an interactive
quiz to test your knowledge
of “black gold.” Give it a try at
www.usfunds.com — you’ll
have fun, and you might learn
something, too.
Current and Future Nuclear Capacity as of 2008
USA
France
Japan
Russia
Germany
S. Korea
Ukraine
Canada
China
India
Existing
Under construction
Planned
Proposed
0 40,000 80,000 120,000 160,000
(MWe)
Source: CLSA Asia-Pacific Markets IEA, WNA, IAEA
Test Your Oil Knowledge at www.usfunds.com
Shareholder Report /Winter 2010 5www.usfunds.com
The 10 years from 2000 through 2009 were
the worst ever for the U.S. stock market. That
decade was worse than all of the boom-and-
bust cycles of the 19th century, worse than
the 1930s during the Great Depression, and
worse than the inflation- and recession-
plagued 1970s.
The S&P 500 opened the decade at 1,469.25
on January 3, 2000. When the market closed
on New Year’s Eve, the S&P 500 stood at
1,115.10�—�the index’s annual performance
over the decade was negative 2.7 percent. The
Dow Jones Industrials lost about 1 percent
per year over the same period, and the Nasdaq
Composite was down 5.9 percent annually.
When adjusted for inflation, the 10-year
returns for these indices were even lower.
Meanwhile, what about gold? The chart
below tells the story�—�a $100 investment in
gold when the market opened on January
3, 2000, was worth about $375 as of Decem-
ber 31, 2009�—�that’s a total return of 275
percent and an annualized return of 14.1
percent. Gold stocks (as measured by the
XAU Index) also had a good decade, climbing
9.5 percent annually.
There are many commentators out there
who see no value in gold and who denounce
it as an investment at every opportunity.
They are certainly entitled to their opinions,
but it’s hard to argue with the numbers over
the past 10 years�—�investors on average would
have been better off with a gold allocation
than having no exposure.
We consistently suggest that investors
consider a maximum 10 percent allocation
to gold-related assets�—�half in bullion or
bullion ETFs and the other half in gold
equities�—�and that they rebalance each
year to capture the swings.
What will the next decade bring for gold? Who
knows. But we do know one thing�—�those
who held gold for the past 10 years had a
happier New Year than those who didn’t.
Diversification does not protect an investor from market risks and does not assure a profi t. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. 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 S&P GSCI Enhanced Total Return Index refl ects the total return available through an unleveraged investment in specifi c commodity components of the S&P GSCI.
China:China became the world’s largest gold producer
a few years ago, and in 2009, it replaced India
as the world’s top gold consumer.
According to the metals consultancy GFMS,
China’s jewelry and investment demand for gold
added up to 432 metric tons. That was about 10
metric tons more than India, which has long
been the top consumer.
Central bank purchases are not included in these
demand figures. In November, India’s central
bank purchased 200 metric tons worth nearly
$7 billion from the International Monetary Fund,
but China’s central bank was also a net buyer
in 2009.
With 1,054 metric tons of gold reserves in its
holdings, China’s central bank has the sixth-
largest amount of gold reserves. But gold
amounts to only 2 percent of China’s dollar-
heavy foreign reserves.
The United States is fi rst on the list with more than
8,100 metric tons of government gold, making up
77 percent of U.S. foreign reserves. Germany is
second at 3,400 metric tons, followed by the IMF
(3,200 metric tons), Italy (2,450 metric tons) and
France (2,445 metric tons).
Gold was the Decade’s Top Performer
Top Gold Producer and Consumer
The Golden Decade
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
*Through December 21, 2009 Source: Bloomberg
$700
600
500
400
300
200
100
0
Gold prices
Commodities (GSCI Enhanced Total Return Index)
Oil prices
U.S. high-grade corporate bonds
U.S. Treasuries
U.S. stocks (S&P 500)
U.S. Global Investors6 Shareholder Report /Winter 2010
China is literally speeding into 2010. A new
high-speed rail system now connects the
important cities of Guangzhou in the south-
east with Wuhan in the interior. Trains
running the 655 miles of new rails will aver-
age more than 200 miles an hour, cutting
what had been a trip of more than seven
hours down to about three hours. Maximum
speeds on the new rail connection can top
240 miles an hour, making these trains the
fastest in the world.
Wuhan, on the Yangzte River, is the largest
city in China’s interior (about 9 million
people) and is also the region’s political,
economic and fi nancial center. Guangzhou,
once known as Canton, has about the same
population. It is a major port and manufac-
turing center near Hong Kong.
Linking Guangzhou and Wuhan is just the
beginning of an ambitious high-speed rail net-
work planned for China�—�more than 40 new
lines and 1,000 trains are envisioned by 2012
at a cost of $730 billion. The key hookup will be
the 925 miles separating the political capital
Beijing and the business capital Shanghai.
Work is also under way on what will be the
world’s longest sea bridge to connect and
strengthen the economic ties between
mainland China and the thriving former
European colonies of Hong Kong and Macau.
The ambitious $10 billion project includes
man-made islands, a 3-mile subsea tunnel
and a 23.6 mile bridge. It is scheduled to be
fi nished in 2016. The exploding gaming in-
dustry in Macau has made it the Las Vegas
of the East – its GDP has tripled in the past
decade. Hong Kong has long been the region’s
fi nancial center and the Pearl River Delta is
a sprawling manufacturing hub that accounts
for 40 percent of China’s GDP.
These projects are clear evidence that China
is committed to infrastructure on a scale
beyond any other country. It’s a key reason
why we believe so deeply in the long-term
global growth theme.
E www.usfunds.com
For more information about investing in China,
visit us at www.usfunds.com.
2009 was expected to be a rough year for emerging
markets because they depend so heavily on ex-
ports to developed markets. However, the overall
outcome was not nearly as bad as anticipated,
and the disastrous period of 1997-98 that crushed
Russia and much of East Asia did not repeat itself.
An Economist magazine article discussed the 2010
emerging markets outlook in great depth. Among
its observations:
Goldman Sachs estimates that the BRIC •
countries have been responsible for nearly
half of global economic growth since 2007.
In 2009 the stock markets in the largest •
emerging-market countries made up for all
of their 2008 losses.
The Institute for International Finance •
sees a doubling of capital inflows into
emerging markets in 2010 to $672 billion.
Belief in capitalism endured despite the •
weaker conditions. Nearly 90 percent of
Chinese were “satisfied with national
conditions” in 2009, compared to less than
40 percent of Americans, according to
the Pew Global Attitude Project.
China on the Fast Track
Emerging Markets in 2010
As seen on Frank Talk at www.usfunds.com
10
8
6
4
2
0
-2
-42007 2008 2009 2010
Source: IMF
Forecast
Rich countries
Developingcountries
World
A Bigger BounceGDP, % change on previous year
Shareholder Report /Winter 2010 7www.usfunds.com
Prior to the economic meltdown, there
wasn’t much interest in “boring” bond
funds. But nowadays an investment that
seeks to provide stability, preservation
of capital and tax-free monthly income,
might be just what your portfolio needs.
We have been pleased with the performance
of our Near-Term Tax Free (NEARX) over the
years, and are especially proud that the fund
has had positive returns for 12 straight years.
In the current low interest rate environment,
the Near-Term Tax Free Fund off ers attractive
yields and monthly income that is exempt
from federal income taxes. To provide
stability and preserve capital, the fund
seeks minimal fl uctuation in share price
and invests primarily in investment-grade
municipal bonds with an average weighted
maturity of fi ve years or less.
Take a look at the fund’s long-term track
record and the stars it has earned.
E www.usfunds.com
For more information about our Near-Term Tax Free
Fund visit us at www.usfunds.com.
The Near-Term Tax Free Fund
Take a look at the fund’s long-term track record and the stars it has earned.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
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. The Near-Term Tax Free Fund may invest up to 20% 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. Diversifi cation does not protect an investor from market risks and does not assure a profi t. The Near-Term Tax Free Fund 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. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. For each fund with at least a three-year history, Morningstar calculates a Morningstar RatingTM based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)
★★★★Morningstar Overall, 3-year and 5-year Ratings™
Among 127, 127, 120 and 65 Municipal National Short-term funds, the Near-Term Tax Free Fund earned 4 stars, 4 stars, 4 stars and 3 stars for the overall, 3-, 5- and 10-year periods 12/31/09. Ratings are based on risk-adjusted return. The Overall Morningstar Rating for a fund is derived from a weighted-average of the performance fi gures associated with its three-, fi ve- and ten-year (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results.
Average Annual Returns*
1-year 5.00%
5-year 3.32%
10-year 3.98%
Gross Expense Ratio 1.79%
Capped Expense Ratio 0.45%
*As of 12/31/09.
Gross expense ratio as stated in the most recent prospectus. Capped expense ratio is a voluntary limit on total fund operating expenses (exclusive of any acquired fund fees and expenses, performance fees, taxes, brokerage commissions and interest) that U.S. Global Investors, Inc. can modify or terminate at any time. Performance data quoted above is historical. Past performance is no guarantee of future results. Results refl ect the reinvestment of dividends and other earnings. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fl uctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.
Need Some Tax-Free Income?Earn More, Keep More
$3,000
$6,000
$9,000
$12,000
$15,000
Near-Term Tax Free FundS&P 500 Index
NEARX vs. S&P 500 IndexGrowth of $10,000 from 12/99 to 12/09
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
Dec-
06
Dec-
07
Dec-
08
Dec-
09
A Benefit of Diversification
The chart illustrates the performance of a hypothetical $10,000 investment made in the fund during the depicted time frame, compared to the S&P 500 Index. Figures include reinvestment of capital gains and dividends, but the performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees) which, if applicable, would lower your total returns.
Shareholder ReportU.S. Global InvestorsP.O. Box 781234San Antonio, TX 78278-1234
PresortedStandard
U.S. PostagePAID
U.S. GlobalInvestors
The Shareholder Report is published by U.S. Global Investors as a service to the shareholders of our funds. Please send any questions, comments or suggestions to [email protected].
For questions regarding your investments, please contact an investor representative via e-mail at [email protected] or call 1-800-US-FUNDS (1-800-873-8637) any business day between 7:30 a.m. and 7:00 p.m. (CST).
On the cover: The Golden Temple in Amritsar, India. The temple is the holiest shrine of the Sikh faith.All opinions expressed and data provided in this publication are subject to change without notice. Some of these opinions may not be appropriate to every investor. 10-19
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Q. What is the Investor Alert?
The Investor Alert is an award-winning, weekly
e-newsletter. Our investment team provides
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