Giving Thanks to the Innovators and Creators of Capital

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

DrKaye-E-Wilkins Innovators

Last week our office had the pleasure of welcoming Dr. Kaye E. Wilkins, who practices pediatric orthopedic surgery here in San Antonio. The recipient of the 2008 American Academy of Orthopedic Surgeons (AAOS) Humanitarian Award, Dr. Wilkins has made it his mission to bring life-changing treatments to underprivileged parts of the world. He established the Haiti Clubfoot Project, which trains nonphysician technicians to correct this debilitating deformity and give Haitian children a second chance at life. We were humbled to see and hear of Dr. Wilkins’s lifelong altruism and passion for helping others, no matter their background.

No one needs justification to tout Dr. Wilkins’s accomplishments, but I bring him up because he’s reflective of the America I believe in. The United States ranks as the most giving, charitable country on Earth, and this is especially true during the Thanksgiving and Christmas seasons. Near the end of last year, Facebook CEO Mark Zuckerberg and wife Priscilla Chan donated nearly $1 billion to charity. One billion dollars! The combined amount of the top 20 largest donations of 2013 actually exceeds a mind-boggling $5.7 billion.

Breakdown-of-How-High-Net-Worth-Individuals-Donate

To the right you can see where high net worth individuals donate their money, broken down by the value and number of gifts. But a person need not travel abroad to poverty-stricken countries or donate thousands of dollars to make a difference. Our capitalist system allows entrepreneurs to find solutions to problems as well as profit from these solutions. Many critics tend to focus their derision on profit-seeking while taking for granted how much their own lives have improved as a result of private innovation and entrepreneurialism.

In a scintillating essay, Professor of Economics Mark Hendrickson writes that this Thanksgiving, we should be grateful for such entrepreneurs, the creators of our wealth:

 

 

Wealth doesn’t just appear spontaneously; someone has to produce it… In a free-market economy characterized by voluntary, and therefore positive-sum, transactions, the profits of entrepreneurs signify that at least that much wealth has been created for their customers. In other words, the larger profits are, the more wealth the entrepreneur has created for others, and indeed, the largest profits accrue to those firms that have supplied valuable goods and services to the masses.

Google, for instance, has made co-founders Larry Page and Sergey Brin billionaires many times over. But how much capital would you say it’s generated for the world? The amount is unfathomable. On top of that, Google employs about 55,000 people across the globe and each year hires an additional 6,000. The company’s success benefits not just its bottom line but also the lives of millions upon millions of people, from its employees to the users of its many services.

Calpians-Money-on-mobile-Payment-Service-Indians-make-transactions

I’m grateful to live in a society that monetarily rewards such innovation and problem-solving, in addition to the intrinsic rewards entrepreneurs receive for improving the lives of others.

 

 

This week we were visited by the management team of Calpian, including Chairman and CEO Harold Montgomery, President Craig Jessen and Chief Financial Officer Scott Arey. You might not have heard of Calpian before now, but the company is already changing people’s lives for the better by facilitating electronic and mobile payments, especially in India, the world’s second-largest cell phone market. In many parts of India, there’s poor to nonexistent point-of-sale payment mechanisms, and even though most transactions are done with cash, the ATM machines are often very spotty. Calpian’s Money on Mobile service allows Indians of all classes to make transactions using their cell phones, thereby eliminating the need to carry cash or stand in hour-long lines to pay their water bills. Two years after its launch, Money on Mobile is used by approximately 112 million Indians.

I’m also thankful to be blessed with 1,440 minutes each day. So much can be achieved in this short amount of time—whether it’s staying active or helping others—so long as you have the will to put it to good use. I asked our portfolio managers what they were most thankful for this season, with regard to a fund they manage. Here’s how they responded:

John Derrick

John Derrick – Near-Term Tax Free Fund (NEARX)

 

I’m most thankful that our fund received the 5-star overall rating from Morningstar, among 164 Municipal National Short-Term funds as of October 31, 2014, based on risk-adjusted return. Despite the global slowdown and decline in gold and oil prices, the municipal bond market this year has been up every month through October. I’m grateful that we have continued to perform well and deliver solid risk-adjusted returns for our investors to meet their high expectations of what a municipal bond fund is supposed to do.

 

Aside from that, I’m incredibly fortunate to work with such a dedicated team of portfolio managers, analysts and other investment professionals. Their support and camaraderie are greatly appreciated.

 

 

Xian Liang

Xian Liang – China Region Fund (USCOX)

I would say I’m most grateful that China’s leadership appears to be delivering on the promises it made last November at the Third Plenary Session, specifically the liberalization of the financial sector and reform of the role capital markets play in allocating resources. Just as there was in the 1990s, there’s going to be some bullet-biting in the face of reforms, but short-term discomfort is often necessary for long-term growth. This leadership is determined and committed to putting China on the right path.

 

I also want to thank my fellow investment team members. We cross-pollinate our ideas and are always looking for ways to strengthen what we do.

 

Ralph Aldis – World Precious Minerals Fund (UNWPX) and Gold and Precious Metals Fund (USERX)

Ralph Aldis

I’m going to have to go with Klondex Mines. It’s the largest holding in both funds, and it’s performed exactly how the management team said it would. In December of last year, Klondex raised the money to buy Midas Mine and Mill from Newmont Mining, and since then it’s been a steady grower. It looks as if it’ll conclude the year with $45 million in cash, which is even more remarkable when you recall that in the first quarter of 2014, it had just $6.8 million. Institutional investors tend to be reluctant about buying a new name in gold mining, but I think Klondex will prove to be too compelling to pass up much longer.

 

Brian Hicks – Global Resources Fund (PSPFX)

Ralph Aldis

Even though commodity prices are in a slump right now, I’m grateful for quite a few things. I’m thankful for our five-factor model, which is designed to identify only the best-of-the-best stocks—I’m looking forward to using it when commodities recover. We’ve weathered this storm well, and I believe we’re in a good position to catch the upswing. Two very recent events have boded well for the fund: the Baker Hughes takeout and China’s rate cut, which will help stabilize commodity demand and improve market sentiment.

 

 

Commodities Update

Crude Oil
Yesterday the Organization of the Petroleum Exporting Countries (OPEC) unveiled its decision to keep oil production levels where they’ve been for the last three years, “in the interest of restoring market equilibrium.” Soon after this announcement, Brent and West Texas Intermediate (WTI) crude prices dropped to $72 and $68 per barrel, their lowest levels since May 2010.

 

Another significant consequence is that the Russian ruble immediately fell to an all-time low of 49.90 versus the dollar. Since half of Russia’s budget revenue comes from oil and gas exports, OPEC’s decision to maintain current production levels is likely to hobble the country’s already fragile economy even further. We’ve been out of Russia since August, and this economic activity justifies our decision.

Precious Metals
This Sunday, Switzerland will vote on whether its central bank should hold more gold reserves. In its own OPEC moment, the metal slid today to $1,181.90 an ounce, as the referendum appears unlikely to pass.
At the same time that spot prices are falling, more money is being pulled out of gold exchange-traded products (ETPs), suggesting that the market believes this decline to be long-term.

S&P 500 Economic Sectors
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We’re seeing the opposite behavior when it comes to platinum, palladium and silver. Even as prices dip, more money is being placed into ETPs.

As-Commodity-Prices-Fall-ETP-Holdings-Rise
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Although gold has many industrial applications, it’s seen more as currency. With the dollar still very strong, investors might be choosing to keep their wealth in cash instead.

The other metals, on the other hand, have well-known industrial uses—platinum and palladium in automobile production and silver in film, surgical instruments and solar panels. Some investors might be willing to risk short-term losses for long-term gain.

 

I wish to conclude by giving thanks to our loyal Investor Alert readers as well as investors. Visit us onFacebook or Twitter and let us know what you’re thankful for this season!

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Index Summary

  • Major market indices finished higher this week.  The Dow Jones Industrial Average rose 0.10 percent. The S&P 500 Stock Index gained 0.20 percent, while the Nasdaq Composite advanced 1.67 percent. The Russell 2000 small capitalization index rose 0.07 percent this week.
  • The Hang Seng Composite advanced 2.35
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