China: Natural Resources The new driver behind the bull market Frank E. Holmes, Chief Investment Off

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China Natural ResourcesThe new driver behind
the bull marketFrank E. Holmes, Chief
Investment OfficerU.S. Global Investors, Inc.
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Synchronized Global Boom
Synchronicity leading indexes turning up
Canaccord Capital
With Chinas demand for raw materials remaining
strong and the composite of leading indexes
turning up, the sustainability of rising or
steady commodity prices remains constructive. The
world is reflating, while commodities in real
terms have fallen from 1980 to 2001 and appear to
be in a new secular bull market.
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Synchronized Global Boom
Source Bridgewater
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U.S. GDP Growth
Source Bridgewater
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Excess Liquidity
Record levels of excess liquidity suggests there
is further room for multiple growth.
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Comparison of 12-Month Growth Rates
Metal demand/ consumption correlates better with
industrial production (IP) than GDP. Chinas IP
growth rates far exceed other major economies.
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Industrial Production Commodity Price
Given the low level of inventory to shipments,
this commodity cycle appears to further grow.
Note the strong correlation between IP and
commodity trends. Commodity prices usually do
well when real rates are very low.
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Global Industrial Production vs. Industrial Metal
Prices
Based on historical cycles, we believe this cycle
still has momentum to rise. Credit Suisse First
Boston believes real rates at the short end of
the curve have to remain negative. We believe
this will remain at least through May of 2004.
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Oil Consumption Growth
Asia will revolutionize the geopolitics
surrounding the oil producing regions of the
world Dr. Marc Faber
Asia consumes 19 million barrels of oil daily
with a population of about 3 billion. By contrast
285 million Americans consume 22 million barrels
a day - a per capita consumption more than 10
times higher.
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Chinas Demand
A doubling of demand in Asia will lead to
significantly higher energy prices.
Source CEIC/Morgan Stanley
1 Metric Ton 7.33 bbls
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Chinas Demand
Crude demand increases 10 year 400 3Year
50
Source CEIC/Morgan Stanley
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Chinas Demand
10 year growth is up 400.
Source CEIC/Morgan Stanley E 2003 estimates are
extrapolations of the first eight months of data
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Chinas Demand
Chinas Demand
Chinese steel consumption is still low compared
to other developed economies. Korean and
Taiwanese per capita steel consumption is 4 to 5
times larger than Chinese. If China was to rise
to Korean steel consumption levels, the demand
would stay strong for 25 years at 5 growth.
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Chinas Demand
Strong GDP and IP and Money Supply growth have
seen a dramatic increase in steel consumption.
Since the Asian currency crisis, Chinas import
demand has increased 300.
Source CEIC/Morgan Stanley
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Chinas Consumption
The big swing factor is China, which is still an
under-consumer per capita of resources. Chinas
economic plans for rural China could easily
sustain a strong demand for commodities.
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Chinas Demand
The new Shanghai Gold Exchange and liberalization
of citizens to freely buy gold and a cultural
affinity towards gold, makes gold an attractive
asset class.
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Are Mining Stocks Overvalued?
Metals and Mining P/E relative (12m-forward)
This cycle appears not over, unless Asian demand
stalls.
Source I/B/E/S International, Datastream, CSFB
research
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Comparison of P/E Ratios Dividend Yield
Source FT December 6-7, 2003
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Reform for 800 Million Rural Chinese

• China has embarked on a series of significant
  policy and legal reforms involving rural land
  rights and reduced taxes on agricultural
  products.
• Analysts at CLSA believe this coming boom will
  dwarf earlier government programs.

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Rural Reform

• Will potentially create broad-based, grass-roots
  economic growth for 1/7 of the worlds
  population.
• Is a catalyst for renewed rural productivity and
  consumption for 800 million Chinese people. This
  is a massive number of consumers.

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Rural Reform

• 210 Million farm households will be earning the
  ownership rights to 130 million hectares of
  arable land. A land transfer valued at an
  estimated 500 billion.
• This wealth transfer will create numerous
  positive impacts on rural economic growth.
• This stimulus can drive a cycle of broadening the
  consumer base and demand.

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Potential Risks

• Potential new copper supply.
• Chinas economy slows.
• High level of speculation in commodities by hedge
  funds.
• Stocks continue performing well.
• US economy stalls and short-term interest rates
  rise.

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Resources Fund (PSPFX) or China Region
Opportunity Fund (USCOX), or any U.S. Global
fund, including charges and expenses, obtain a
prospectus by visiting us at www.usfunds.com or
call 1-800-US-FUNDS (1-800-873-8637). Read it
carefully before you invest or send money.
Distributed by U. S. Global Brokerage, Inc. The
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expected to be more volatile than those of funds
only invested in domestic securities. The fund
may invest in private placements and IPOs, which
may significantly affect performance. There is
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will have the same effect on the funds
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