Palladium Was the Winner in 2014January 17, 2015by Frank Holmes

of U.S. Global InvestorsNear the beginning of every year, we update and publish what can safely be called our most popular piece: the PeriodicTable of Commodities Returns.

Below are the latest year-end results, which show the historical performance of commodities from best to worst. A larger,high-definition version of the table is available for download.

click to enlarge

Last year we experienced one of the biggest commodity corrections in recent memory—the biggest since 1986, in fact—and we’re happy to put it in our rearview mirrors.

Base Metals Boasted MettleAlthough it came in second overall, right behind palladium, nickel was the realstandout of 2014. With a shabby 10-year annualized track record of -1.8percent, the metal gained nearly 7 percent on the back of supply scares afterIndonesia, the world’s largest producer, unexpectedly banned all nickelexports last January to meet domestic demand. By May, the metal hadrocketed up more than 50 percent before cooling to 37 percent in July, when itwas then the best-performing commodity.

Aluminum also managed to beat its 10-year annualized performance by closeto 3 percentage points, owing to global production cuts and increasedindustrial usage of the metal in automobiles and aeronautics. The 2015 F-150, for example, is the first mass-producedtruck in its class to feature an aluminum-alloy body. Because of these developments, Texas-based aluminum-producerAlcoa, which we own in our Global Resources Fund (PSPFX), enjoyed its best year since 2008, delivering 50 percent.

Precious Metals PressuredPalladium, 2014’s top commodity, performed relatively according to script. For the year it was up 11.35 percent, comparedto its 10-year annualized returns of 14 percent. Much like nickel, palladium was spurred by extenuating circumstances.Between January and June, a labor strike in South Africa, the world’s second-largest producer of the metal followingRussia, halted production, which depleted reserves and sent palladium to a three-year high of $850 an ounce.

Page 1, © 2020 Advisor Perspectives, Inc. All rights reserved.

Although nickel doesn’t have an exchange-traded fund (ETF), we manage to capture growth through a palladium ETF.

The South African labor strike, however, didn’t seem to help palladium’s sistermetal, platinum, which ended the year down 11.79 percent. To combat andfind solutions to years’ worth of flat sales, six South African platinumproducers launched the World Platinum Investment Council in December.CEO Paul Wilson summed up the group’s mission:

To date, the investment potential of platinum has been largely

overlooked. We believe that presenting the platinum investment

proposition to a wider range of investors will result in it rightfully

being considered favorably as an investment.

Silver had its second straight down year, falling 19 percent, despite record sales of Silver Eagle coins. According to theU.S. Mint, 44 million ounces were sold in 2014, outpacing Gold Eagle sales by 59 percent. The U.S. Mint’s stock of bullioncompletely dried up on Christmas Eve.

However, silver mining also accelerated to record highs last year. This, coupled with weak industrial use of silver in the firsthalf of 2014, led to falling prices.

And then there’s gold, which also fell (slightly) for the second consecutive year. As I’ve already reported, even though theyellow metal dropped 1.72, it still remained a more reliable form of currency than any other globally, excluding the U.S.dollar.

click to enlarge

Energy Feeling SluggishBesides crude oil, the biggest loser was natural gas. A particularly brutal winter in late 2013 helped make it the topperformer for that year. But even though the polar vortex—remember that?—dragged frigid temperatures into the beginningof the new year, natural gas couldn’t quite manage to ignite the flame in 2014, which turned out to be one of the warmestyears on record.

Natural gas remains the worst-performing commodity for the 10-year period, down 3.73 percent.

All three energy-related commodities—coal, natural gas and crude oil—showed up in the bottom five, their first time to doso since 2006.

Weighed down by crude oil, which tanked 46 percent in 2014, the energy component of the S&P Goldman SachsCommodities Index (GSCI) lost 44 percent for the year.

Page 2, © 2020 Advisor Perspectives, Inc. All rights reserved.

click to enlarge

By all accounts, crude oil’s collapse was both unexpected and swift—and it looks as if the bottom has not yet beenreached. Goldman Sachs recently reduced its six- and 12-month West Texas Intermediate (WTI) crude forecasts to $39 perbarrel.

It’s disconcerting to recall that as recently as July, Brent oil set a record for trading between $107 and $112 per barrel for 12consecutive months. It now trades for less than half that, at approximately $50 per barrel.

click to enlarge

The selloff is so extended now that crude’s weekly relative strength index (RSI) is at 8.5, which is even lower than its RSIduring the 2008-2009 crisis.

Page 3, © 2020 Advisor Perspectives, Inc. All rights reserved.

click to enlarge

Where’s the Global Demand?In response to unraveling crude prices, several companies, from the small caps to the majors, announced they would belaying off workers in huge numbers. Schlumberger, the world’s largest oilfield-services company, will reportedly be lettinggo of 9,000 of its workers, or 7 percent of its workforce; Suncor Energy, Canada’s largest, will cut 1,000 members of itsstaff and slashed $1 billion in capital spending.

Many more companies have had no other choice than to cut costs by halting exploration and production. The U.S. oil rigcount saw its largest one-week drop in six years, losing 74 this week alone. As disconcerting as all this might sound—especially the job losses—these decisions are necessary to rebalance supply and demand and stabilize prices.

After peaking at $10 per 1,000 cubic feet in 2008, prices for natural gas—remember, it’s the worst-performing commodity ofthe last 10 years—plummeted and never fully recovered, which is why you see a gradually diminishing number of gas rigsin the chart below.

click to enlarge

When the shale oil revolution began in 2009, the number of rigs steeply ramped up, adding approximately 200 new rigseach year. And not just any rigs, but much more efficient, technologically-advanced pieces of machinery, capable ofextracting crude from places that until now were inaccessible.

That’s what American ingenuity has given the world: cheap oil and cheap fuel. Speaking on CNBC this week, Nobel Prize-winning economist Robert Shiller praised the U.S.’s drive and innovative spirit: “This country is proud of our oil technologyand it’s been boosting our spirit, our animal spirits.”

Page 4, © 2020 Advisor Perspectives, Inc. All rights reserved.

But just as the U.S. has provided the world with plentiful oil, the rest of theglobal economy has cooled, especially Europe, choking demand.

“The global economy today is much larger than what it used to be,” WorldBank Chief Economist Kaushik Basu recently stated, “so it’s a case of a largertrain being pulled by a single engine, the American one.”

Tough Times Don’t Last ForeverSpeaking to Fox Business on Monday, PSPFX portfolio manager Brian Hicksexplained where we continue to see opportunity and value in this low-priceenvironment:

Certainly the [oil] selloff is getting long in the tooth and we're

actually becoming more and more constructive as [it] continues... These prices are not sustainable [and]

not high enough to replace production going down a few years from now. We think the stocks look very

attractive here, and if you look at their performance to crude oil, they've actually been outperforming

since mid-December.

click to enlarge

Michael Waring, CEO and Chief Investment Officer of Toronto-based Galileo Global Equity Advisors, visited our office thisweek and reminded our team of the cyclical nature of the energy sector. We’ve been through similar downturns in crude oil,Michael noted—in 1986 and 2008-2009, most recently.

“I’ve seen this movie so many times, I already know the ending,” Michael said, suggesting that oil has tended to move backto its mean eventually.

The chart below shows the inverse relationship between crude and the dollar, going back to 1984. The current standarddeviation spread between the two is clearly widening to 1985 and 2008-2009 levels. But as strong as the dollar or asdepressed as oil got, both eventually reverted back to their means.

Page 5, © 2020 Advisor Perspectives, Inc. All rights reserved.

click to enlarge

For the past 30 years, the 12-month rolling sigma or volatility for oil, 70 percent of the time, is ±30 percent; the dollar’s is ±9percent. Today the odds are high that the dollar will correct and oil will rise. In 30 years, this is the third-widest gapbetween oil falling and dollar rising. But if you look over the same 30 years, you’ll see that oil has historically bottomed inFebruary and subsequently rallied.

I cannot stress enough how greatly low gasoline prices have benefited consumers. They might also contribute to non-oil-services employment. According to BCA Research:

In the U.S., the decline in gasoline prices should boost household disposable incomes by around $150

billion this year, with an additional $30 billion coming from lower heating bills [and] decreased airline

fares... The money spent, in turn, will generate additional demand for goods and services. This will lead

to faster employment growth, translating into more income and spending.

Index SummaryEven with a strong rally on Friday, major market indices finished lower this week. The Dow Jones Industrial Averagefell 1.27 percent. The S&P 500 Stock Index dropped 1.24 percent, while the Nasdaq Composite declined 1.48percent. The Russell 2000 small capitalization index fell 0.76 percent this week.The Hang Seng Composite rose 0.01 percent; Taiwan fell 0.84 percent and the KOSPI declined 1.90 percent.The 10-year Treasury bond yield fell 12 basis points to 1.83 percent.

Domestic Equity MarketThe S&P 500 pulled back 1.24 percent in a volatile week. Financial stocks came under pressure as earnings seasonbegan, with large financial companies among the earliest to report. The market was disappointed by fourth-quarter tradingresults that came in below expectations.

Page 6, © 2020 Advisor Perspectives, Inc. All rights reserved.

click to enlarge

Strengths

Utility stocks resumed leadership this week as bond yields dropped and defensive areas outperformed. It was abroad-based, macro-driven rally for the entire sector.The telecommunication services sector was also a beneficiary of a weak market in which defensive, non-cyclicalsoutperformed. GameStop was the best performing company this week, rising 12.64 percent. The company reaffirmed its earningsforecast for the fourth quarter and full-year 2015, reassuring investors.

Weaknesses

The financial sector was the worst performer this week as Bank of America, Citigroup, JP Morgan and GoldmanSachs all disappointed the market with earnings.The technology sector also underperformed this week as data-storage chip makers came under pressure afterSanDisk reported preliminary quarterly revenue that was below expectations. This news also dragged down MicronTechnology and Western Digital. Apple was among the worst performers this week as well, falling by more than 5percent in what appeared to be general market skittishness.The worst performing company this week was SanDisk, which fell 18.67 percent. The company reported preliminaryquarterly revenue that was below expectations as mentioned above, driven specifically by weakness in mobile data-storage memory chips for tablets and smartphones.

Opportunities

After outperforming in 2014, defensive stocks may be poised to continue that outperformance. The Federal Reserveappears intent on normalizing monetary policy and the bond market is responding by sending long-term yields lower. This implies that the market believes a tighter Fed policy will materially slow the economy.Earnings season will kick into high gear next week with some key companies to watch including Johnson & Johnson,Starbucks and General Electric.If oil can find a bottom and move higher, small and mid-cap energy stocks would be among the first beneficiaries.

Threats

The rally in U.S. energy producers may be short lived as OPEC countries seem to be acting individually rather thanas a collective cartel, making predictions of future actions more difficult. This could be positive, however, for theinverse-beneficiary companies in sectors such as airlines and consumer discretionary.The European Central Bank (ECB) is widely expected to announce a substantial quantitative easing (QE) programnext week. If the ECB fails to follow through in meeting these lofty expectations the market could sell off.Earnings season got off to a rough start this week with large-cap financials disappointing and the market reactingaccordingly. If the market is looking for an excuse after such steady performance over the past year, a lacklusterearnings season may be the catalyst for that 10-percent correction it’s been bracing for, but that has not materializedfor more than two years now.

Page 7, © 2020 Advisor Perspectives, Inc. All rights reserved.

The Economy and Bond MarketU.S.U.S. Treasury bonds rallied strongly this week, sending yields lower across the curve. Earlier in the week Treasuryyields were moving lower, as the equity posted five consecutive days of losses beginning last Friday paired with a risk-offfeel to the financial markets. The real fireworks occurred on Thursday, when the Swiss National Bank (SNB) scrapped itsexchange-rate cap with the euro, causing significant volatility in the foreign exchange markets. This action by the SNBincreased investors’ confidence that the ECB would implement quantitative easing (QE) next week, further pressuringyields in Europe and making U.S. fixed income one of the best relative values in the world.

click to enlarge

Strengths

A combination of the European Court of Justice backing the legality of the ECB buying sovereign bonds along withthe removal of the currency cap by the SNB led to a big rally in the U.S. fixed-income markets this week. Consumer prices fell 0.4 percent in December, reinforcing the idea that inflation is very low, inflation expectations arevery low and bond yields may stay low for even longer.The January University of Michigan Consumer Confidence survey rose to the highest level since January 2004, withsentiment improving for both the current situation as well as for future prospects.

Weaknesses

December retail sales fell 0.9 percent, much worse than expected and ultimately raising questions about the strengthof the consumer.Industrial production fell 0.1 percent in December, in line with expectations but still negative.Copper fell to a five-year low this week, implying weakness in global industrial-manufacturing activity.

Opportunities

The European Central Bank meets on January 22 and needs to show the market it is willing to act on implementingan aggressive form of QE.Housing starts and building permits for December will be released next week. After cautious comments from thehomebuilders this week, this could be another sign that housing has stalled and will not be a positive catalyst for theeconomy any time soon.Municipal bonds continue to look like an attractive alternative in the broad, fixed-income universe.

Threats

Greece is generating negative headlines again, and while this appears to be an isolated political event, it doesreinforce the idea of the potentially fragile nature of the euro currency. Greek elections are Sunday, January 25.Oil prices look extremely oversold and even a bounce in oil could change the mood in the market, with bonds sellingoff in reaction. The Federal Reserve’s next meeting is January 28 and a continued hawkish tone could spook the market.

Page 8, © 2020 Advisor Perspectives, Inc. All rights reserved.

Gold MarketGold Surges on Currency Volatility

Gold and gold stocks are on the move after the surprise move from the Swiss National bank to remove its currency capversus the euro this week. This highlights gold’s valuable role as a store of value when currency volatility destroyspurchasing power as it has in many parts of the world over the past year.

As you can see in the chart below, gold in euros has rocketed higher.

click to enlarge

Similar moves can be witnessed in other countries’ currencies as well, such as the South African rand, the Japanese yenand the Canadian dollar.

click to enlarge

Page 9, © 2020 Advisor Perspectives, Inc. All rights reserved.

click to enlarge

click to enlarge

For the week, spot gold closed at $1,278.85 up $56.33 per ounce, or 4.61 percent. Gold stocks, as measured by the NYSEArca Gold Miners Index, gained 6.93 percent. The U.S. Trade-Weighted Dollar Index gained 0.77 percent for the week.

Page 10, © 2020 Advisor Perspectives, Inc. All rights reserved.

Date Event Survey Actual PriorJan 15 U.S. PPI final

Demand YoY1.00% 1.10% 1.40%

Jan 15 U.S. InitialJoblessClaims

290K 316K 294K

Jan 16 German CPIYoY

0.20% 0.20% 0.20%

Jan 16 Euro CPI coreYoY

0.80% 0.70% 0.80%

Jan 16 U.S. CPI YoY 0.70% 0.80% 1.30%Jan 19 China Retail

Sales YoY11.70% - 11.70%

Jan 20 German ZEWSurveyCurrentSituation

13 - 10

Jan 20 German ZEWSurveyExpectations

40 - 34.9

Jan 21 U.S. HousingStarts

1040K - 1028k

Jan 22 Euro ECBMainRefinancingRate

0.05% - 0.05%

Jan 22 HSBC ChinaManufacturingPMI

49.5 - 49.6

Strengths

Gold traders are bullish for the seventh week in a row, citing the potential for stimulus in Europe along withspeculation that the Federal Reserve will move slowly on raising rates. Moreover, one trader made a huge bullish betearlier in the week by purchasing 40,000 March 2015 SPDR Gold Shares ETF calls worth upwards of $10 million.The Swiss National Bank’s surprise move to abandon the franc’s cap against the euro currency sent investorsflocking to gold as a safe haven from currency swings. The SPDR Gold Shares ETF, the largest of the physically-backed ETFs, saw an inflow of almost 10 tonnes on Thursday, the largest single-day inflow since August 2012.The World Gold Council signed a memorandum of understanding with the Shanghai Gold Exchange on acomprehensive strategic gold cooperation agreement. This further marks the shift in the gold market from West toEast, as the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency andefficiency. The agreement underpins the development of gold investment products within the Shanghai Free TradeZone and the international trading of gold in the Chinese renminbi currency.

Weaknesses

Goldcorp announced it will take an impairment charge of up to $2.7 billion on its new Cerro Negro mine in Argentina.The company said this resulted from restrictions on importing goods and services into the country, convertingArgentine pesos into U.S. dollars and high inflation.U.S. retail sales fell the most in nearly a year last month, fueling speculation of weakness in the economy.Average hourly earnings for all U.S. employees fell in December by the most since comparable records began in2006, showing signs of slack in the labor market.

Opportunities

Sharps Pixley sees gold averaging $1,321 per ounce in 2015, citing the potential for investors to seek protection fromcurrency debasement as well as a strong physical demand for the metal. Carter Worth of Sterne Agee said the NewYork gold futures drop in October-November was a “head fake,” since gold has been stabilizing as the U.S. dollar

Page 11, © 2020 Advisor Perspectives, Inc. All rights reserved.

rallies.Although the U.S. producer price index declined 0.3% percent month-over-month in December, the drop was almostentirely attributable to food and energy. Excluding these components, core producer prices actually rose 0.3 percent.This counters the deflationary pressures arguments.

click to enlarge

The Swiss franc soared as much as 38 percent on the news of its euro-cap rate abandonment, a currency move thatnormally takes years to accomplish. The markets interpreted the move as a preemptive action ahead of the EuropeanCentral Bank's QE next week. It also suggests that after six years of unprecedented intervention, central banks arelosing control of markets and events. An unraveling of the markets would send investors rushing towards safe-havenassets such as gold.

Threats

Along with the euro-cap rate abandonment, the Swiss National Bank lowered the negative interest rate on sightdeposits to -0.75 percent from a previous -0.25 percent, as well as moving the three-month Libor target to between -0.25 percent and -0.75 percent. This came as a complete surprise to the market as most observers forecasted thecap to remain in place for years.Goldman Sachs reiterated its bearish outlook on gold, saying stronger U.S. growth should support higher real rates,thereby raising the opportunity cost of holding gold. Moreover, many of the fears that drove investors toward gold as astore of value, such as U.S. dollar debasement and high inflation, are now seen as moving in the opposite direction.With the failure of rate hikes and substantial interventions to prop up the ruble, any further decline in the currencycould force the Russian central bank to begin liquidating its gold reserves. As the major accumulator of bullion inrecent years, this could put downward pressure on prices.

Energy and Natural Resources MarketStrengths

The intensifying deflationary environment in Europe, as well as the pessimistic outlook for global growth put forth bythe World Bank, boosted the legitimacy of precious metals as a safe haven this week. The NYSE Arca Gold MinersIndex and the Global X Silver Miners ETF rose 6.97 and 4.26 percent, respectively. Randgold Resources rose 9.31percent this week.Major integrated oils bounced back this week despite no clear change in the trend of oil prices. BP rose 3.69 percentthis week after a favorable ruling regarding the size of the Macondo offshore oil spill in 2010.Paper and forest stocks continued an uptrend with the dollar this week. International Paper closed up 1.92 percentthis week.

Page 12, © 2020 Advisor Perspectives, Inc. All rights reserved.

Weaknesses

Metals and mining stocks suffered this week after the World Bank released a report lowering its 2015 global growthoutlook to 3 percent from 3.4 percent. The S&P/TSX Capped Diversified Metals and Mining Index plummeted 15.4percent this week.Refining stocks underperformed this week as the spread between WTI and Brent continued to narrow. The S&PSupercomposite Oil & Gas Refining & Marketing Index fell 8.99 percent this week.Coal stocks fell once again this week as global growth concerns and regulatory burdens weigh on the industrial metal.The Market Vectors Global Coal Index fell 3.61 percent this week.

Opportunities

United States drilling permits have fallen from October highs amid the rapid decline in oil prices. The removal ofexcess production should help stabilize the imbalance between supply and demand.Many major oil companies are cutting costs to weather the current collapse in crude. Although this is a negativeconsequence of the decline in oil prices, it is also a sign that the structural imbalance is correcting itself.As Chinese smelters close and other operations reduce capacity, the copper surplus is set to decline this year. Theindustrial metal declined substantially in 2014 and is due for some relief.

Threats

click to enlarge

High leverage in the oil and gas industry is surfacing as a potential catalyst for a wider shock to the energy space.Between 2009 and 2014 the High Yield E&P Index has risen by $74 billion in market value. Over-leveraging hasbecome an even greater risk given the decline in profits expected to accompany the slump in oil prices.The dollar remains the imposing negative indicator for the global commodities space. With the European CentralBank meeting on the horizon, the risk remains that inaction could fuel a further appreciation of the greenback.

China Region Fund - USCOX • Emerging Europe Fund - EUROX

Emerging MarketsStrengths

Chinese stocks continued to rally this week, posting the longest weekly winning streak in nearly eight years. Chineseequities continue to get a bounce on the prospects that the government will implement further easing policies. TheShanghai Stock Exchange Composite Index rose 2.77 percent this week.After the central bank unexpectedly cut its benchmark interest rate, Indian equities ended the week with solid gains.Importing 80 percent of its oil, India has seen relief from inflationary pressures, allowing the central bank to moreconfidently lower rates. The S&P BSE Sensex Index rose 2.42 percent this week.Another net importer of energy, Egypt has seen the resumption of its 2014 rally, which stalled in the back half of theyear due to growing global growth concerns. The Egyptian Exchange EGX 30 Price Index rose 6.81 percent thisweek.

Page 13, © 2020 Advisor Perspectives, Inc. All rights reserved.

Weaknesses

This week was particularly volatile for European currencies after the Swiss government unexpectedly removed itscurrency peg to the euro. The Hungarian forint and the Polish zloty declined against the dollar, with the former falling3.22 percent and the latter falling 3.36 percent.

click to enlarge

Peruvian markets struggled this week alongside a substantial decline in copper prices. Additionally, a report issued bythe World Bank lowered the global growth forecast for 2015 to 3.0 percent from 3.4 percent. Copper, a primaryPeruvian export, tumbled in response to the report, dragging down Peruvian equities with it. Thus, the Bolsa deValores de Lima General Sector Index fell 5.71 percent this week.

click to enlarge

Despite Russian equities posting a solid weekly gain, the ruble continues to decline. The stumbling currency is now

Page 14, © 2020 Advisor Perspectives, Inc. All rights reserved.

approaching the same levels it reached during the massive selloff in mid-December of last year. The ruble fell 4.94percent against the dollar this week.

Opportunities

Deflation is spreading through Eastern Europe as the eurozone struggles to spur economic growth. Given the recentdeclines in inflation figures, it appears both Poland and Hungary have much more room, and justification, to stimulatetheir economies through rate cuts. Such a policy move could have positive repercussions.

click to enlarge

India’s recent rate cut should prove beneficial for the country’s investment, according to Finance Minister Arun Jaitley.Furthermore, both Deutsche Bank and Macquarie Bank forecast a further decline in rates of 75 basis points for 2015.

This week’s plummet in copper prices reinforces the deflationary pressure on the Chinese economy, which still hasone of the highest real interest rates in the world even after the November cut. Indeed, Chinese monetary data forDecember missed market expectations, the latest reflection of anemic economic activity. This should keep marketexpectations alive for further policy easing in China going forward, which bodes well for the Chinese H-share bankingsector (still trading at modestly below book value, around 6-percent dividend yield and 22-percent price discount to itsA-share counterpart).

click to enlarge

Threats

Macau’s disappointing gross gaming revenue growth in December, together with Chinese President Xi Jinping’s

Page 15, © 2020 Advisor Perspectives, Inc. All rights reserved.

recent advice for Macau’s economic diversification beyond casino gaming, may continue to weigh on the city’s casinooperators.

With Greek elections right around the corner, it is worth mentioning the volatility that has surrounded the event, aswell as the potential volatility the outcome could bring to the country. If the popular Syriza party should win, marketswill most likely respond negatively to the news given the wild speculation of a Greek exit from the eurozone. Theshort-term volatility that is most likely to occur in the upcoming weeks should be monitored carefully.Russia remains a threat to stability for Europe and other global markets. The Russian ruble has continued its steadyand steep decline, while the government continues to be confronted with low oil prices, rising inflation and intolerableborrowing costs. With many analysts all but guaranteeing a contraction this year, Russia remains a market to avoid.

© US Global Investors

www.usfunds.com

Page 16, © 2020 Advisor Perspectives, Inc. All rights reserved.