Chinas Demand for Commodities Frank Holmes, ChairmanCEO U.S. Global Investors, Inc.

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Chinas Demand for CommoditiesFrank Holmes,
Chairman/CEOU.S. Global Investors, Inc.
For more information or copies of this
presentation, please contact Rolf Gatlin at
210.308.1268 or rolf_at_usfunds.com.
J\PR\Presentations\China Conference Call - 120904
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USGI Investment Process

• We believe the essence of forecasting lies in a
  process that focuses on
• The current and historical inter-market dynamics
• Relationships among countries (GDPs),
  currencies, interest rates, commodities, bonds,
  earnings and equities at different stages in the
  economic cycle.

J\PR\Presentations\China Wealth Advisor Forum
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Investment Cycles

• Financial market relationships are characterized
  by cycles whose direction and amplitude change
  over time.
• Different asset classes have different cyclical
  patterns.
• It is important to understand the critical
  drivers for each security and asset class.

J\PR\Presentations\China Wealth Advisor Forum
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Wisdom of Diversification
Diversification does not protect an investor from
market risks and does not assure a profit.
J\PR\Presentations\China Wealth Advisor Forum
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Cycle Principle of Continuous Revolution
There is an interconnectivity of cycles and we
strive to manage our investment themes by
anticipating where we are in a cycle to manage
risks and opportunities.

• Our Macro Platform Where are we on the
• Presidential Election Cycle
• Seasonal Commodities Cycle
• Kuznet, Juglar, Product Life Cycle, etc.

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Four-Year Presidential Election Cycle
Source Ned Davis Research Ian McAvitys
Deliberations on World Markets
(J\PR\Presentations\IIC SF\Global Perspectives
for SF)
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Secular Bull Market in Commodities

• Demand Drivers
• 1. Global synchronicity of economies
• 2. Asias strong GDP IP growth rate
• Supply Drivers (Restrictions)
• 1. Higher barriers to entry due to global
  environmental and governmental regulations
• 2. Long lead time from exploration to production
• 3. Geopolitical events

J\PR\Presentations\China Wealth Advisor Forum
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No Bubble Bursting
Worry about a collapse in a country with a
balance of payments surplus and an undervalued
currency seems a bit odd. The big collapse of
recent decades came in countries with grossly
overvalued currencies - Don Coxe
Chief Strategist Harris Investment Management
China/Tibet Border
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No Bubble Bursting

• Resiliency Survived SARS, Asian Crisis, Western
  Recession
• No Overheating
• Political Strife The Most Likely
• Inertia Industrialization, Increased Investment
• Rural Reform for 800 million Chinese consumers

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Chinas Impact on Growth in 2004

• China is 4 of Global GDP
• China is 13 of Global GDP on PPP Basis
• China Accounts for 35 of Global Economic Growth

- According to CSFB
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Benefits of Globalization
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China Dominates FDI Flows
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Comparison of 12-Month Growth Rates
By 2050, China and maybe India will overtake the
U.S. economy in size. Jeffrey D. Sachs,
Fortune
Metal demand/ consumption correlates better with
industrial production (IP) than GDP. Chinas IP
growth rates far exceed other major economies.
1. Source Bloomberg as of September 30, 2004 2.
Source Bloomberg as of November 30, 2004 3.
Source Bloomberg as of October 31, 2004
(J\PR\Presentations\IIC SF\Why Gold)
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Chinas GDP
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Global GDP Scenarios
Source Datastream International Limited, CSFB
estimates
J\PR\Presentations\China Conference Call - 120904
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Global Industrial Production Scenarios
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Global Trade Scenarios
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Chinas M2 Money Supply
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Money Supply Credit
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China Growth
Source ISI Group
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Chinas Production vs. Consumption
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Chinas Oil Imports
J\PR\Presentations\China Conference Call - 120904
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Follow the Smart Money
vs.
2-Year Period
In the summer of 2002, Berkshire Hathaway became
the 3rd largest pipeline owner west of the
Mississippi. Then Warren Buffett accumulates a 7
position in PetroChina.
Warren Buffett Buys!
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Fueling Demand
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.
Asian Guzzling Crude Oil Demand
6
(m barrels/day, 12-month average)
5
4
3
2
1997
1989
1991
1993
1995
1997
1999
2001
2003
(est.)
Source Oil Market Intelligence, Ed Yardeni /
Prudential Securities, International Energy Agency
J\PR\Presentations\China Wealth Advisor Forum
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The (Mis)Behavior of Markets
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Relative Oil Prices
Oil at 44 is at the top of its 25-year trading
range. But in real terms, its still depressed.
REAL WTI Crude Oil Deflated by CPI Jun 20.1
WTI Crude Oil Aug 44.0
Source ISI Group
J\PR\Presentations\China Stalking the Worlds
Commodities 10.15.04
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Chinas Proportion of Global Demand
J\PR\Presentations\China Conference Call - 120904
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Chinas Steel Demand
Global Steel Consumption and GDP per Capita
China
Source IISI, The Economist, CSFB estimates
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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Copper!
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Chinas Gold 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.
Grams
J\PR\Presentations\China Wealth Advisor Forum
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Container Demand
Raw material and power shortages are starting to
constrain mainland production, which is positive
for global markets. Share prices are starting to
consider blue sky scenarios. These developments
indicate a shift in shipping rates top line
growth. CLSA believes container rates will
improve in 2004, while bulk rates remain flat. We
believe China remains the wildcard for bulk
demand growth.
New Dalian Chinas Largest Container Ship
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Baltic Shipping Rates
J\PR\Presentations\China Conference Call - 120904
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The Profit Cycle
The economic upswing in Asia has moved from Stage
1 to Stage 2. There is still movement for growth,
but costs are now rising as fast, if not faster
than revenues. In Stage 2, bank profitability
will improve, especially in the early stages of a
rising rate environment
Stage 3 Profits Collapsing
Stage 2 Profits Struggling
Stage 1 Profits Exploding
Stage 4 Profits Recovering
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Asian Operating Margin Trend
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Operating Cash Flow Growth
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Debt Dividends as a Share of Revenue
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Chinas Strengths

• Debt servicing costs are minimal
• Operating cashflow has doubled
• Capex discipline is being enforced
• Dividends can rise further yet

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Capital Flow to Asia/Pacific
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Foreign Investment
Foreign Official Holdings of U.S. Treasuries at
the Fed Dec. 1, 2004 1.06T
This keeps going up. No doubt it has been keeping
downward pressure on bond yields.
Source ISI Group
J\PR\Presentations\China Stalking the Worlds
Commodities 10.15.04
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Average Monthly Income
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Chinese Spending Over Next 10 Years
J\PR\Presentations\China Conference Call - 120904
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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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Mobile World
Source EMC, FT
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Chinas Favored Handset Brands
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Chinas Favored PC Brands
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Chinas Favored TV Brands
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Asian Renaissance
8 Megatrends

• From Nation-State to Networks
• From Tradition to Options
• From Export-Led to Consumer-Driven
• From Government-Controlled to Market-Driven
• From Farms to Super-Cities
• From Labor-Intensive to High Technology
• From Male Dominance to the Emergence of Women
• From West to East

Source John Naisbitt
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Overseas Chinese
Ethnic Chinese who live outside the mainland

• Dispersed among 60 countries globally
• 85 live in Southeast Asia
• 90 of the 57 million overseas Chinese are now
  naturalized citizens of their adopted countries
• 1 million live in California

Source John Naisbitt
Hong Kong
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Overseas Chinese
Compare overseas Chinese population to wealth
controlled.
Source John Naisbitt
The world is moving from a collection of
nation-states to a collection of networks.
Singapore
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Overseas Chinese
Tremendous Economic Power
Percentage of Listed Companies Owned by Overseas
Chinese
Source John Naisbitt
Hong Kong
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Overseas Chinese
The economy of the borderless overseas Chinese is
the 3rd largest in the world.

• Small and midsize Asian companies
• Employ half of the workforce in most Asian
  countries.
• Chinese own 90 of these companies.

Source John Naisbitt
Singapore
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Overseas Chinese
Account for 80 of all foreign investment in
China, the Motherland

• Ethnic Chinese not Japanese are the largest
  cross-border investors in Thailand, Malaysia,
  Indonesia, the Philippines and Vietnam.
• China has the fastest growing economy in the
  world. In 2002, China surpassed the U.S. as the
  largest recipient of direct foreign investment,an
  indicator that smart money is rushing into China

Hong Kong
Source John Naisbitt
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Emergence of Women
Women are represented in the Asian workforce in
percentage terms remarkably similar to Europe.
Source John Naisbitt
Women as entrepreneurs, consumers and voters are
now successfully participating in all aspects of
Asian life.
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Potential Risks

• Trade wars.
• 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 above the Consumer Price Index.

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Global Resources Third Party Ratings
Morningstar Rating 3-year Rating Among 73, 73,
61, and 23 Specialty-Natural Resource funds, the
Global Resources Fund earned 3 stars, 5 stars, 4
stars and 1 star for the overall, 3-, 5- and
10-year periods ending 9/30/04. The Overall
Morningstar Rating for a fund is derived from a
weighted average of its 3-, 5- and 10-year (if
applicable) performance figures. Standard
Poor's Fund Rating Overall Ranking Among 63
Equity Energy Sector funds. Based on 3-year
Sharpe Ratio.
                                   
        

                                   
For each fund with at least a three-year history,
Morningstar calculates a Morningstar Rating 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.) Standard Poor's proprietary
Fund Rankings on U.S.-Domiciled funds reflect
historical risk-adjusted performance as of
9/30/04 and are subject to change every month.
Funds are ranked based on their three-year Sharpe
Ratio, The Sharpe ratio is a measure of the
fund's return adjusted for the fund's risk. It is
calculated as Fund Return - Return on Treasury
Bills / Fund Standard Deviation. A STARS ranking
of 5 is assigned to the top 10 of funds using
the same investment style and that also
outperformed their benchmark over 3 years.
Approximately, the next 20 are ranked 4 40 are
ranked 3 20 are ranked 2 10 are ranked 1. For
a fund to be ranked higher than 3 Stars, it must
also outperform the three-month Treasury bill
over 3 years. SP's Fund Rankings do not take
into account sales charges or the effect of sales
charges on total returns.

J\PR\Presentations\China Conference Call - 120904
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Global Resources Fund Performance
Performance data quoted above is historical. Past
performance is no guarantee of future results.
Current performance may be higher or lower than
the performance data quoted. The principal value
and investment return of an investment will
fluctuate so that your shares, when redeemed, may
be worth more or less than their original cost.

J\PR\Presentations\China Conference Call - 120904
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Global Resources Funds Alpha
Source Morningstar, as of 10/31/04
According to Morningstar, alpha is a measure of
the difference between a funds actual returns
and its expected performance, given its level of
risk as measured by beta. A positive alpha
indicates the fund has performed better than its
beta would predict. In contrast, a negative alpha
indicates the funds underperformance, given the
expectations established by the funds beta. All
MPT statistics (alpha, beta, and R-squared) are
based on a least-squared regression of the funds
return over Treasury bills (called excess return)
and the excess returns of the funds benchmark
index.
(J\PR\Presentations\IIC SF\Why Gold)
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Disclosure
For more complete information about the Global
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). Please
consider carefully the funds investment
objectives, risks, charges and expenses. Read it
carefully before investing. Distributed by U.S.
Global Brokerage, Inc. Among 75, 75, 61 and 27
Specialty Natural Resources funds, the Global
Resources Fund earned 3, 5, 4 and 2 stars for the
overall, 1-, 5- and 10-year periods ending
11/30/04. The Overall ranking is derived from a
weighted average of performance figures
associated with its 3-, 5-year and 10-year (if
applicable) time periods. For each fund with at
least a three-year history, Morningstar
calculates a Morningstar Rating? based on a
Morningstar Risk-Adjusted Return measure that
accounts for variation in a funds 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.) Past performance is no guarantee of
future results.
J\PR\Presentations\China Wealth Advisor Forum
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Disclosure
The China Region Opportunity Funds share price
is 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 no guarantee that these high-risk investments
will have the same effect on the funds
performance if they are made in the future. All
opinions and estimates in this report constitutes
U.S. Global Investors judgment as of the date of
this report and are subject to change without
notice and provided in good faith, fairness and
reasonableness but without legal
responsibility. Foreign and emerging market
investing involves special risks such as currency
fluctuation and less public disclosure, as well
as economic and political risk. Holdings as a
percentage of net assets as of 9/30/04 China
Region Opportunity Fund China Mobile
(2.63) MegaTrends Fund PetroChina (3.34) All
American Equity Fund Verizon (1.04)  Although
mentioned none of the following companies are
held in any U.S. Global Investors' Fund as of
9/30/04 America Movil, China Unicom,
Cingular/ATT Wireless, Deutsche Telekom,
ExxonMobil, France Telecom, NTT DoCoMo,
Telefonica, Vodaphone.