US Global Investors Inc (GROW) 2013 Q4 法說會逐字稿

Welcome to U.S. Global Investors webcasts U.S. Global Investors earnings announcement for fiscal year 2013. Please note that the slides you see on your screen are controlled by the presenters. (Operator instructions). We would like to begin by introducing Susan Filyk, investor relations at U.S. Global Investors.

Thank you. Welcome, everyone, to our webcast announcing results for the fiscal year ended June 30, 2013. The presenters for today's program are Frank Holmes, U.S. Global Investors CEO and Chief Investment Officer; Susan McGee, President and General Counsel; and Lisa Callicotte, Chief Financial Officer. During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don't pertain to historical facts are subject to risk and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-K filing for more details on factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today and U.S. Global Investors accepts no obligation to update them in the future.

If you have a question for us, you can submit it at any time during the webcast. Simply type your question in the dialog box at the bottom of the screen and click submit. If we are not able to answer your question during the live presentation, we will follow up with you individually.

Now let's go to Frank Holmes, CEO and CIO, for an overview of the year. Frank?

Thank you, Susan. Good morning, everyone. As we said in the headline, we reported results, and they weren't as pretty. And I'm going to try to explain what takes place in simple terms. But the Company is in a full-court press of streamlining costs and repositioning products and services. We feel still confident during this trough in the market that we can continue to pay dividends and buy back our stock at an opportunistic price.

But let's go on and take a look at the numbers. We are a boutique registered investment advisory specializing in natural resources and emerging markets. And we reported a net loss of $0.01 per share on revenue of $18.7 million for the fiscal year ended June 30. In the fourth quarter of fiscal 2013, the Company had a net loss of $450,000. That works out to $0.02 per share. What is important to recognize is that in that second quarter of this year -- but, however, it's our last quarter of the year -- there was a huge drop in emerging markets in resources. I'm going to highlight that impact and what we are doing to try to respond as quickly and readily as possible.

So as I mentioned in the press release that assets were down and a big decline took place in the second quarter of this year when you compare the snapshot from the previous year. The decline appears to be approximately $500 million of assets where we went from having $1.62 billion to $1.16 billion. The bulk of this did take place in this quarter as we saw the meltdown in April, the first decline in bullion ETF, and that triggered gold stocks to decline, and that triggered, then, gold-mining companies having massive write-offs and also BHP, etc., Anglo. And this impacted -- because we basically are money managers that get a revenue of 100 basis points on the assets we manage, and those assets all declined.

And then, as we went into June, the concern that rates would start to rise, the taper in the QE3 punch bowl would be taken away by Bernanke had a huge rippling effect around the world and that impacted bonds, the emerging markets. But sadly enough, as I'm going to show you in the presentation, money market funds did not rise. That has been a big drain because historically we have seen these declines but never have we seen a continuous decline. And it has been very, very costly to be able to support money market funds and continue to see nothing but redemptions in this space as people have sought higher yields or FDIC-insured products.

So we were repositioning our products and services to the shareholders, and our big position is to streamline fixed costs. Now, let me just go on with the presentation and give you some visuals to put things in context, what I've had to say.

But I also want to welcome Lisa Callicotte as our new CFO, who has many, many years of experience, as we put in the press release. She will take care of more detailed financial questions and answer any thoughts you have, and she will highlight some of the financial issues.

But we are a boutique company and we are going to continue to be a boutique company. On slide 5, we like to say that we are a go-to stock for exposure to emerging markets and resources. And I will show you this -- in the past few months, as resources have popped higher and you see the response in growth stock. We are debt-free. We have a strong balance sheet with a reflexive cost structure, monthly dividends and return-on-equity discipline. But this reflexive cost structure which I've talked about before still has delays. And what we saw in that last quarter -- it was just difficult to adjust as quickly as we have in previous quarters. And that's why we are reassessing our products and our services, and I will go on in further detail.

I would like to also point out that our institutional shareholders -- Royce and Associates, Financial Investment Management Group, Perritt Capital Management, the Vanguard Group, Blackrock Fund Advisors -- we would like to thank them all for their loyal support as investors in our Company.

We continue, as I show you the six years of consistently paying dividends. The yield is currently 2.8%. A share repurchase program is in motion on slide 8. The Board approved a repurchase up to $2.75 million of its outstanding common stock on the open market through the calendar year of 2013. And as of June 30, the Company repurchased 55,000 class A shares at an average price of $3.15 using cash of $173,000. We use an algorithm that is used to buy back shares on down days in accordance with all applicable rules and regulations that restrict amounts and times of repurchases. This model of buying back stock to pay dividends can be canceled at any time, and the Board on a regular basis reviews it. And we have hearty discussion on what is the benefits of doing this on an ongoing basis. And at this stage, we do feel a tremendous benefit to be able to buy back our stock at a very attractive price, especially when we take a look and see some recent acquisitions in the space of small-cap companies being purchased at 3% of assets and a huge multiple to cash flow and earnings.

Now let's go on and take a look at slide 9, please, the strategic partnership with Galileo. We completed the investment in Galileo, a global equity advisor, by purchasing 50% of the issued and outstanding shares. Michael Waring, the CEO and chief investment officer, has done a great job. He has a five star fund, Lipper awards, also has Morningstar awards. I think this is all very important in this thesis of small-cap specialists that are able to have income with growth. So we look forward, going into the next year in particular, as expanding his product line and beefing up what he is doing in the market space today.

Looking over the next slide, you can see we have included 50% of Galileo's assets in our overall complex. And with that, I would like to go to the next page. You can see our asset breakdown. What is important is that we do have a high percentage of the shareholders with our complex. There is benefits to this. It's a loyalty factor, and further to that it is also easier when we want to streamline funds that we can contact, to reach out to shareholders to explain why we are doing it and what is the benefit for them in this process of making shifts and changes in product line and services.

The next visual is on 12, and it shows you that the balance sheet remains very healthy and strong. The next is showing you the earnings. This is the first time we have had a dip, back to 2009 in the first quarter, which basically marks the bottom that took place in the super market in the S&P 500. And we have had some erratic times since then as the world has changed and we have not had this sort of unanimous across-the-board rise in emerging markets resources. One country, one commodity runs for about nine months and there's a rotation that takes place.

And so the next visual -- I would like to point out that our annual pretax profit margin is also showing you that dip. But the difference here is that in 2009, we just weathered the storm and did not expect QE 1, 2 and 3 -- what they would do to the money market fund space. And what is important for investors to recognize and grow is that this has always been an important product for us because of our strong shareholder base that is directly with us, so that they could move into our money funds or go back into the equity funds, however they deemed, to rebalance their portfolios, etc.

The difference is that the rates have been artificially kept low. And it basically cost you around 30 basis points for a fund to exist for a fund to exist excluding our management fee. When you have a $100 million fund, you have to have $300,000 minimum basically just for it to be open. And what you are seeing is at interest rates still maintain at 1 basis point, it has become a real distraction on our cost, a distraction, and seeing that shareholders themselves are frustrated with such a low yield and have been shifting money. We have unfortunately seen money move into our Near-Term Tax Free Fund, and I'll comment a little bit more on that sort of product realignment. And we are seeing that people go out (inaudible) that took place back in 2008-2009, going to FDIC-insured products for one-year lockups or three-year lockup term deposits.

So that -- overall assets have been declining and it has been costing a tremendous amount of resources to support that. And that is why we are making a strategic shift to say, that's not our core competence and we do not know how long these rates will rise. But we have seen a tremendous, a substantial rise in the long-term five-year, 10-year, 30-year mortgages -- however, nothing in repo market. Especially since Frank Dodd -- there has been articles written that the capital markets are broken for brokers that come out and basically borrow cheaply to use the repo market. So repo rates will basically remain at 3 basis points. 90-day treasury bills are 4 basis points.

But as I mentioned earlier, the basic economics is you need 30 basis points to breakeven. So we do have $100 million, $200 million, $300 million funds and you are aiding and supporting them, it's just a tremendous distraction of both human resources and financial resources. So that's why we are making that shift as we go forward.

But let's go on page 15, and I will come back and just show you, on a relative basis, I mentioned the growth for us. It's important to take a look at our returns on our equity. And they've declined, and they have declined predominantly because of the resources and emerging market decline. And our income, our dividend shows here as 1.9. The other numbers are still slightly different. But it all has to do with price fluctuations. And the stock has had a nice rebound from year end, and I'm going to comment on that.

But when we go back since June of -- the past decade, we still will perform in the small-cap marketplace, the Russell 2000, on an annualized basis but with tremendous more volatility. This is looking at the end of June. However, when you take a look where the price is now, it has outperformed the Russell 2000 even more so.

As you can see, it looks pretty nasty on slide number 17. Over 12 months GROW has a huge pop as resources start to pop in the seasonal gold cycle, and then they start to decline, especially as you saw going into this last quarter. And I think it's important to see the correlation that goes with gold assets, as it is substantially high and higher now than what was in emerging markets.

The next visual is showing you what the pop recently, this past quarter, in oil prices and gold prices and copper prices and the PMI -- global PMI turning positive. It has shown up in growth. The responsiveness of how much our stock has popped, it's almost 50% in the past few months. So we do correlate these assets and we are in position for a lot of I call boutique asset managers that tell me that we are their play on gold assets -- in addition that they have always got a decent yield for this past six years.

Now I would like to show you what really drives us, on slide number 18. The massive liquidation in financial gold had a huge impact. And this is showing you that the SPDR gold ETF was the leader of the pack in April, how much decline. And then we had another drop in June. But the big, big liquidation basically took place in the second quarter of this year, which is our fourth quarter as our fiscal year.

Now, going on to the next visual, trying to put it in context, is even though the price of gold declined with their liquidation in ETFs, bullion prices, gold coins, spike to record numbers -- same thing for silver. And this doesn't seem to have abated. This sort of enthusiasm and opportunistic buying of buying gold coins, gold jewelry, has been very robust and strong.

Now, the next visual, 29, is trying to give you an idea of the domino effect that is taking place. The gold companies are getting leaner and they are -- now you are seeing massive write-downs of $23 billion. However, during this process it impacted all gold equities during the quarter. And you saw, as you see big companies -- Barrick, Newcrest, Anglo, Kinross, Newmont and Goldcorp -- these write-downs basically, and lower gold prices, create falling gold equity prices, which for us is lower revenue.

The next visual is showing you that fears of QE 3 being pulled out in the second quarter of this year slowly triggered massive outflows in funds. You can just see the numbers of all funds and more so when you look at the gold end of it. Although yields on long-term bonds and mortgages rose, money market funds remained unchanged. This is the frustrating part that for our money market fund, while we have finally said okay, we are throwing in the towel, we are no longer going to be able to support this. The funds are smaller but the fixed costs of maintaining it are just unattractive.

What this visual is trying to show you, that since April -- and you can see particularly in June and July, particularly June -- this rise that took place in the 30-year mortgages. And you can see here treasuries. So you could take a look at treasury bills -- unchanged, in fact slightly lower. But the cost never went away.

And then the other factor that has really been important to us is the formation of capital models changing. Fund flows and growth in assets -- it's going to ETFs. We get beautiful recommendations, hundreds of thousands of recommendations. And you go to these websites and all you see is advertisements of gold ETFs, resource ETFs, emerging market ETFs. So that investor out there -- there's a huge shift taking place. I still think it's early in that context. We are late, I feel, because I always like to try to be ahead of the curve. But it's still -- you take a look at the benefits that you are seeing with the ETF space that the investors perceive as their benefits is the key factor. And the RIA space is looking at that they want to charge 125 basis points to manage money. So they are really caught up with trying to find ETFs that are under 100 basis points to provide some type of attractive return so that they can charge their fees. And that is the big shift for looking at marketing and fund flows, the RIA space, the brokerage space that is using ETFs as a proxy to be able to charge their fees.

So the growth strategy for 2013, as I mentioned earlier, was to acquire assets, streamline costs in products and service and reposition products with a suite of ETFs. We have filed for the ETFs. And as Susan McGee, our present General Counsel, will comment more in the presentation on that process.

So let's go to 26. What is most important to investors is what are we doing to maintain margins and cash flow. And this is also the most important thing to us and me, being a large shareholder. And I continue to buy, in addition to GROW buying back its stock, I myself and during open periods have been buyers on down days. So I am also concerned with cash flow and where we are going with the Company.

So what I want to point out to here investors -- the cost for the advisors to maintain the gap on fund expenses for small funds and money market funds are becoming a financial burden and, most important, a distraction for the advisor. Costs are now at an annualized rate of $600,000 or $50,000 per month. And when we take a look at a key factor we like to look at, on number 27, is the revenue per employee.

Now, the industry as a whole, asset management companies, pushes something like $900,000 of revenue per employee. And many of these other fund groups have outsourced their TA, which we are in the process of doing. And we have seen at T. Rowe Price, I believe, that had those in-house -- but when you take a look at T. Rowe Price or Janus Funds, they are pushing between $600,000 and $700,000 of revenue per employee and U.S. Global is down to $280,000.

So either we acquire more assets or we become leaner in our cost structure. And that is what we are doing at this stage because the process of due diligence, acquiring a company, is much longer than anyone would ever expect in the process of cutting costs, streamlining products, is slightly faster. And that's what we must do in this sort of economic environment.

The next visual, 28, is additional considerations (inaudible) took place to streamlining reposition products and services are most important the customer needs. And then the 1940 act, which is basically the deal with the SEC's regulations and -- rules and regulations and being a money manager with open-ended mutual funds and ETFs, for that sake.

And then we have to look at state law. There's different factors to consider as a public company in public mutual funds. And then what are the costs and what are the benefits?

So in that process, in that analysis, it's a streamlining and reorganizing our products and services on page 29, we made a determination to liquidate the U.S. Treasury cash fund and give an alternative money market fund to our shareholders and convert the US government savings fund to and ultrashort government bond fund and price that fund, like we have done at near-term, at a $2 NAV. It's $1 NAV -- there's no yield. But at $2, we are able to lower the penny volatility substantially to like $10 or $25 bond fund, at the same time to be able to provide a very attractive yield. If rates to continue to rise, this yield will adjust very much more rapidly than a long-term bond fund. And this is better interest.

We have done detailed analysis for -- we call it couch potato of showing investors of rebalancing, owning a portion of their assets in the near-term, and it has been a great way to diversify your portfolio and lower your volatility.

One of the factors to take a look at our near-term, which is basically an ultrashort tax-free fund, is merging with our tax-free fund. And that saves us money because we have to support both these funds and we dropped the cost of capping the expenses so that we are price competitive in the marketplace to attract the assets through that critical number. So basically, if you are charging 30 basis points, you need $100 million to break even. And that's the key factor that when we look at all these funds in these product lines.

The other significant change is to partner with U.S. Bancorp, their transfer agency. They are able to get substantial massive -- I would call economies of scale. And it is actually a saving for our investors now to get those economies of scale. The employees in our transfer agency are great employees. They have done a spectacular job. But going forward with all the regulations and rules, from money laundering rules, etc., has just become very, very costly for any small investment advisor. And to partner and outsource with U.S. Bancorp, we think, is a significant strategic decision for us. And U.S. Bancorp is a substantial bank and it does have an expertise in the transfer agency and also into this whole space of understanding mutual funds.

And then it's to increase our administrative fee. One of the things we do charge is an 8 basis points administrative fee. But because we cap funds and support and guarantee cost structures, etc., we have never really earned that 8 basis points; it has been effectively 6. And the same thing is now outsourcing and managing that relationship, that the quality of the customer service is at the highest end that is possible requires services to be able to manage that additional responsibility. And that is where the trustees, as Susan will comment, approved increasing that administration fee.

Now let's go to slide number 30, costs and cash flow benefit for the advisor. By streamlining products and services, it will take a hit of $620,000, and the estimated cash flow going downstream is about $1.2 million. Just the cost now to set up a fund, as I mentioned, and maintain it is just hundreds of thousands of dollars. And to reposition a product, to exit the product also costs you hundreds of thousands of dollars. And the best part is that it will be behind us.

The next visual is important in this process of our product line, is the consistent track record and achievements of near-term tax-free not only Morningstar rankings and ratings but Lipper for preservation of capital and very tax efficient because of the low turnover. What we are showing to investors is a growth in [new rocks]. It has been steady, it has not had a down year, as you can see -- touch wood -- in the past since 2001. And I think that that's really quite significant for investors looking for stable yields.

And when you do a $2 NAV, what you are seeing here on slide number 34 is that there's hardly any penny volatility. The yield is the same and for shareholders that are really conscientious where they are parking their money, having lots of short-term volatility with the interest rates that they have had the past few months, this is a great place for investors to put their money.

As you can see, hardly any movement even though there's a tremendous change in the three-year, five-year, 10-year bond market. New rocks is still -- credit quality is important. That's the same thing that is going to take place with our new ultrashort government bond fund. It will be at the highest quality when it comes to a credit rating of the US government agencies and government bonds.

The next visual is showing you the benefits of [nerocs] when you compare and discover opportunities to improve your yield. What we were so impressed with is that, on the tax-equivalent basis, having a bond fund with less than what a three-year average maturity was giving a yield of what a 10-year government bond was taking, was offering investors. So we feel that only the structure and the element of what we are doing is of a great benefit to shareholders. And the other one is communicating and educating like the couch potato, showing -- having 50% in short-term tax rate and short-term and long-term All American Equity Fund, which basically is the S&P 500. That's the model, benchmark is to beat. And by having 50% in each and rebalancing each year, a tremendous drop in volatility and a nice increase in overall performance for investors, especially those investors that are looking at retirement dollars.

So now I would like to turn the presentation -- I hope I have tried to address what we have taking place at U.S. Global to cut fixed costs, to streamline product lines and reposition product lines. And now I would like to turn it over to our new CFO, Lisa Callicotte.

Thank you, Frank. Good morning. Now I would like to summarize our results of operations for fiscal year ended June 30, 2013. Beginning on page 39, we recorded total operating revenues of $18.7 million for the year, which is down 22% from $24 million we reported last year.

The decrease is primarily due to the following reasons. Mutual fund advisory fees declines $2.7 million or 19%. And there are two main components -- management fees and performance fees. Management fees decreased $4.8 million due to decrease in assets under management related to market depreciation and shareholder redemptions, mainly in the natural resources and emerging market funds.

This was offset by the Company paying out $2.1 million less in performance fees adjustments in fiscal year 2013 versus 2012. Transfer agency fee revenues decreased $976,000, or 27%, as a result of a decline in the number of shareholder accounts and transactions. Distribution fee revenues declined $1.3 million, or 31%. And admin service fees revenues declined $329,000 or 30%, both as a result of lower average assets under management.

Moving on to page 40, total expenses for the year were $19.1 million, a decrease of $2.2 million or 11%. The decrease was primarily for the following reasons. Employee compensation and benefits decreased $671,000 or 7% due to lower performance-based fee bonuses and fewer employees. Platform fees decreased $1.3 million or 33% as a result of lower assets held through the broker-dealer platform. And advertising decreased $320,000 or 27% as a result of decreased sales and marketing costs.

And on page 41, we see our operating results for fiscal year 2013. We have an operating loss of $442,000 in the current year, down $3.1 million from prior year. Other income, which is income or loss related to our investments including our equity method investments, increased $439,000 compared to prior year. The increase is due to increased investment income related to changes in trading securities and our equity earnings in Galileo. Net loss after taxes for the year is $184,000 or $0.01 per share compared to $0.10 earnings per share reported last year.

Moving on to the balance sheet on page 42, you can see that we still have a high level of cash. Cash and securities combine to make up 82% of our total assets. And on page 43, you notice we still have no long-term debt and we have a net working capital of $23.3 million, a current ratio of 13.6 to 1.

With that, I would like to turn it over to Susan McGee.

Thank you, Lisa, and good morning. For the next few minutes I would like to highlight just a few key points with you today. As you know, one of our values at U.S. Global is to be performance and results oriented. We are pleased to say that our funds continue to deliver long-term solid results to shareholders. The next few slides will highlight these accolades.

Since 2000, our funds have received 29 Lipper performance awards, certificates and top rankings. And as of June 30, we had two funds, the Global Resources Fund and the Emerging Europe Fund, were in the top 12% of the entire mutual fund universe for the 10-year period. Two additional funds hold the top Lipper leader rating. The Global Emerging Markets Fund rates a 5 for tax efficiency for the three- and five-year and overall time periods. The Near-Term Tax Free Fund rates a 5 for preservation and tax efficiency for the 3, 5 and 10-year and overall time periods. Funds that rate a 5 by the Lipper leader rating system are in the top 20% of the category.

And as you can see on the next slide, four of our funds have an overall rating of 3 or 4 stars according to Morningstar. We believe that this outstanding historical performance has helped U.S. Global attract attention from many investment advisory firms looking for companies that have experience in our niche market.

We have one new strategic relationship that I am pleased to share with you, and that is with Transamerica, which added the Global Resources Fund to its premier provider list. This list is used by more than 1000 registered reps at Transamerica. U.S. Global's fund is the only resources fund offering on the firm's list, and we believe that this will offer considerable potential for fund flows through the Transamerica system.

U.S. Global's marketing and investment teams continue to be recognized for excellence in our communications to our investors and our advisor clients. This focus on educating investors is one primary way we proactively brand and market our funds, as we believe a key to building assets is through reaching out to curious investors and building awareness about investing in natural resources, gold and emerging markets.

Syndication of content continues to gain traction. One recent example, Business Insider posted Frank's world of gold presentation, and through yesterday the webpage has received over 200,000 page views. There was considerable public relations activity over the quarter as well. Our investment team conducted nearly 40 interviews via TV, web, radio and webcast. And in addition, U.S. Global has received more than 1000 web mentions and 124 newsletter recommendations.

We have an example of the viral marketing that we believe helps build the U.S. Global brand. After our Dow then and now in photographic was featured in the Investor Alert, a reader tweeted the infographic to Mad Money Jim Cramer on twitter. Jim Cramer quickly re-tweeted the link to his loyal 600,000 followers.

Finally, to help our sales team reach new prospects and build relationships this fall, we have lined up a few national events, including the Financial Planning Association's experience in October and our Schwab national impact conference in November. This is in addition to our systematic and strategic approach that we use to contact our advisor clients offering timely special commodities reports to help them explain to their investors how commodities perform in a rising interest rate environment.

As Frank mentioned earlier, we have filed an exemptive application with the SEC to be able to sponsor ETFs. The initial registration and listing process can be quite lengthy and we are anticipating coming out with our first ETF in 2014.

Now I would like to turn it back over to Frank, who will lead you through what investors should expect from global markets over the next several months. Frank?

Thank you, Susan. Thank you, Lisa.

Slide 54 is managing expectations, and we always try to help investors anticipate before you participate. Before you go buy growth stock, recognize it has tremendous volatility. It has -- investors are looking at gold and as investors are looking at emerging markets as an indirect way of playing it, people look at our capacity and our ability as a brand that we have done. So we have value investors, growth investors, gold investors. So you see that they come and go at different reasons, etc. And it just adds to that volatility because, when you look at gold stocks you can see that this plus or minus 35% is the annual volatility. That means 70% of the time it is a nonevent for gold stocks to go plus or minus 35%, oil to go plus or minus 35%, emerging markets to go plus or minus 30%. And the S&P is 17%. Interestingly enough, bullion is less than all of them. However, the most volatile of them all is US gold investors. And this is another reason why, in our model to buy back stock, it has been on down days because of the success of volatility and to be able to try to capture that opportunity as we have basically approached our price to book value.

Now I would like to go on to the next visuals to try to put this in another way of looking at volatility to anticipate, before you participate, how often in the course of over a 20-day rolling period has GROW gone plus 10% or down 10%. So this has happened 50% of the time. It can be tremendously volatile and that is another reason why we have bought and have a model, and myself included, that I buy stock only on down periods.

The next visual is showing you that where the opportunity is, is that you can see on a global asset positioning compared to historical data that emerging markets, energy, commodities and materials are under loved and under owned. And historically, when it becomes such a swing of being under owned, you get these rallies like seeing oil rally and seeing the price of gold rally through the summer.

The other visual that makes us important, but we like to try to comment on trying to understand volatility to use it to your favor, is that gold as an asset class will become extremely overbought and it will also decline and become extremely oversold. There will be fundamentals on stocks versus the sentiment of markets. The same thing happens with gold. And it has to do with currencies and movement of currencies and real interest rates; that is, what do you earn on a treasury bill versus inflation.

Interesting enough that right now, on a 90-day treasury bill in America, you earn 4 basis points. That means you are losing money. Anyone buying a 90-day treasury bill is losing money when you compare it to what the CPI number is. And this is an important factor in trying to understand fundamentals versus the emotional sentiment. And the liquidation that took place by large hedge funds getting out of gold in April, did have a big impact on a relative basis that I think sets it up that the bottom almost took place at the beginning of the annual 30 five-year seasonal pattern of -- we see what we call all a love trade, where 50% of all gold demand is for jewelry, and it starts off every summer with Ramadan. Exactly again this year, it has taken place. So we are seeing a rebound and gold stocks still have another 35% capacity here to get back to just the mean, not to become overbought.

So with that, we would like to point to investors that we have always advocated that investors have a 5% weighting to gold, up to 10% weighting to gold stocks. We have advocated 5% gold and gold jewelry, 5% gold stocks, but a maximum overall -- if you didn't have jewelry, you bought 10% in gold stocks and you had the other portion in the S&P 500 equipment type of funds. And by that rebalancing your performance did well.

And what this visual is showing you, that even with a two-year decline in gold stocks, you outperformed, over the long period of time, owning gold stocks. And now, with this recent rally in the past couple of months, this gap has widened because the S&P has declined and gold stocks as a whole are up something like 28% for the past couple of months.

So I think it's important for investors to appreciate you don't run out and put all your money in gold. Gold is basically portfolio insurance and the key factor is to rebalance your holdings.

The next is to remind investors when it comes to gold, because I would point out to you that we have been so highly correlated, particularly this past year, to gold is to understand the fear trade and the love trade. The fear trade has to do with interest rates and monetization of debt. And the love trade has to do with jewelry demand. They are both 50-50 at the equation, and what we've seen is that still follow the money, this unprecedented cash injections from central banks, it appears the US is pulling out of that. But it doesn't stop the other countries that are still maintaining, particularly in Japan, massive monetization of debt just trying to stimulate their economies.

When we look at the great rollover of debt we saw last year over $8 trillion in the US has rolled over at negative real interest rates. Sorry -- $8 trillion when you combine Japan, Europe and the US. It was $8 trillion was rolled over, all offering investors a negative real rate of return. Long-term, this has always been an attractive portion or a rational reason to have exposure to gold.

This is a visual showing what the five-year treasury bill yield is, 1.57%. Relation it to minus 43 basis points on your money.

The next is showing that central banks remain net buyers of gold. Even with the big decline, central banks continue to buy gold, and the same with investors. Retail investors out of nowhere started buying gold at maximum amounts all around the world when the first big break took place in April. What would make us really concerned about gold as an asset class from the fear trade position is looking at real interest rates. The magic melting point -- we have made many presentations. You can go to our website at usfunds.com to get a more detailed explanation -- but basically, whenever the government and the US is paying you to percent over the inflationary rate, commodities start to take it on the chin. In particular, gold and silver lose their attraction as money.

The next visual is showing you gold's accent. The rising gold doesn't look like a bubble when you compare it to what happened to oil and you look at -- this is going back to Brent in 1998. You can go back to -- sorry, Brent -- that has got to be the bubble that has taken place for oil is 1980. NASDAQ was 1990. And this is (inaudible) comparing the previous bubbles. And if you look at the bubble in oil, and how many months later, and you do a relative analysis -- and what you see is that we are far from an exponential move. We have had exponential moves in oil. We have had exponential moves in NASDAQ. But we have really not had an exponential move in gold.

Now, corrections -- in the 1970s we had some substantial corrections in gold when gold used to be pegged at basically $35 under President Nixon. The convertibility of gold in dollars was removed and you had gold run to $100. You had it correct before, by the end of the decade, it climbed to $850. During that whole period, you had substantial corrections, and at one period you had a 44% decline. So this recent correction, even though it was so painful to us and for investors, is not of the magnitude that took place in the 1970s.

And I believe it is because of the love trade because, when you look at the map, in the 1970s, in 1972 and 1973, Chindia, China and India, affectionately known as Chindia, is 40% of the world's population. But back in the 1970s, they only had 2% of the global GDP. And now they are over 22%. But they are 40% of the world's population and they continue to buy gold for the love trade, as I like to call it, for jewelry. I think that this is a significant different factor that is taking place from the 1970s is this demand. That's one reason why gold is way above $850 is because of this jewelry demand equation.

An author that has been out talking about the currency wars and the devaluation like we are seeing right now in the rupee, gold is hitting all-time highs when you compare gold in rupee terms, and it is interesting the government is doing everything this year with adding taxes from 6% to 8% to 10% to try to stop gold imports. But it is unable to stop the love trade. The power of the heart is much more important, and also Indian people as a whole really don't trust the government, the politics and the corruption.

And the last factor that's taking place in India -- India has been on this huge election cycle that they are in, and welfare, doing everything by giving away money, free money, free money, free money, just go out and capture boats. And any time a country has these programs rather than solid infrastructure of creating jobs versus giving away free benefits, it seems to devalue a country's currency. It sounds good to be able to help the poor, but it's much better, rather than give them something free, is to give them a job. Give them a pick and a shovel and give them job opportunities to have that pride of ownership of being able to come home with a paycheck. And I think that that is what is taking place in India as the politics is going through that election cycle.

Now, currency wars believes that the only way to reset all these debt deficits and monetization of debt to gold ratio of the amount of gold that's outstanding is approximately $7900. So I think it's smart to take a look at it in that context. We are not saying gold is going to $7000 over this period of time, in a short period of time; we have never done that. But we do believe it's just prudent to have some gold in your portfolio. And two is to rebalance it.

Now the love trade -- what drives the love trade are rising incomes and a cultural affinity. So we have seen a high correlation of GDP per capita in emerging markets, and GDP per capita has basically gone flat. What has taken place in India and China in the past 18 months has not been this steady 45 degree growth in GDP per capita. And that shows up in the consumption of gold. Even though the consumption of gold remains robust and strong, it has not had that 45 degree angle tilt, and that does impact -- because when we looked at gold hitting $1900 an ounce, we had the love trade and the fear trade show up to the door at the same time. It was where the stars were aligned. The fear -- the US dollar had been downgraded by ratings services. Obama was fighting Congress to increase the debt ceiling. And it was in the summer and you had the beginning of the love trade season and it was the beginning of Ramadan. And you had rising GDP per capita in India, the Middle East and China. It was very robust two years ago, and that is what took gold to $1900.

So here I would like to point out that Ramadan started a little earlier this year, almost at the bottom of the inflection point of the rally in gold that we are witnessing. The next visual is showing you the rush, China's rush to buy gold on lower prices.

The left-hand chart is showing the Comex. You see the Comex trades the gold. They trade. But Shanghai's percentage of trading is very low. However, Shanghai takes delivery and the Comex doesn't take delivery. One is a financial trade. One is jumping in, jumping out, hedging short-term, correcting it, whereas what we are witnessing in China is actually taking delivery of the gold. And you are seeing that the consumption of gold by investors and by people who are buying jewelry, etc., increases substantially in the second quarter of this year.

The next visual is showing that gold stocks got pounded down so great that the yield on gold stocks surpassed the 10-year government note. I have never seen this before. That has been how depressed these stocks were. Many of these gold stocks -- some of them cut their dividends. But the majority of them slashed their CapEx dramatically and selling assets. We are seeing as it's being sold in Australia by Goldfields -- Barrick, etc. And they, too, are cutting fixed cost, streamlining. And they are slowing back on their idea of supply coming into the marketplace.

And we think that over the next several years the supply from the new gold mines is actually going to decline. But the world is going to continue to have babies, and the love trade is not going to go away, and governments are going to wrestle with not managing their economies properly. So I think the demand for gold will stay healthy.

The next visual is showing you that the Chinese stocks looked so cheap last year when we took a look at -- when we wrote a report October 22. They went through a spectacular rally. The PMI numbers started to slow down. And what U.S. Global -- and we publish it on a regular basis. We like to look at the PMI one month versus three months as a reflection because in our data point analysis it's usually a precursor for demand for copper, for iron ore. And recent numbers, where you are seeing Germany, the PMI turned positive. France has turned positive. The global PMI is positive. The US is positive. In China it just turned positive.

And I also think it's very important to recognize the new leadership, the new Camelot. This is so different, that China -- when the leaders traveled around they never traveled with their wife. There was never photo ops with their wife. And President Xi -- his wife is basically a paparazzi star, as a musical star in China. She is beautiful, she is talented and she has a huge following. So this creates a complete different look.

And as you can see, the president, when he came up and he was waving at all of his citizens, his suit sold out. It's never happened before in China. It's just the same happened in America that if anyone is a media star, all of a sudden whatever they are wearing, as we see especially in the UK with women's clothing with the princes -- whatever she wears sells off the racks. The same thing you are seeing is the phenomenon in China. It is changing, and it's hard for people to recognize what is taking place with it. And he himself follows, and he has commented on it, we have commented on it, five major -- three major economic data points in helping him make decisions.

So he looks at railway traffic and he is looking at electrical demand, and he is also looking at the significance of job creation, what's important for China. So what you have seen now is global imports have been rising.

But what investors don't realize is that the growth of Europe is more significant to manufacturing for China because Europe buys more from China than America does. We export more. And in that whole trade, yes, we import many things, but nothing compared on a relative basis to other countries and the trading bloc of Europe. So as Europe, in particular Germany and France, starts to turn up, this is more positive. And we now see, a couple months later, the PMI turning up in China. And we see the PMI staying strong in the US. So we think we are due for a modest upturn. We are seeing Baltic shipping rates also turning up. And I think that that's another significant factor.

And here are showing oil imports -- they continue to surge to new highs in China. And then China's changing urban consumption -- you read Business Insider and it's interesting how much coverage they have on China tourism. And when you are in Europe now you are seeing many signs now in Chinese. You never saw that before. Even locally at the outlet mall I mentioned here in San Antonio, there's a fantastic substantial outlet mall, two of them, between Austin and San Antonio. And they used to have signs in Spanish because, in particular, the huge Mexican tourist trade that came up to shop. You now see trades for credit cards in Chinese. And you see many of the stores filled with Chinese tourists that are shopping, the same thing you are seeing in Vegas.

So the rise of the middle class in China, even though it looks small -- when you have 1.4 billion people and you have over 1.3 billion, 1.2 billion people in India, Chindia is 40% of the world's population, all you need is 100 million people making $100,000 a year. And what do you see? Ferragamo stock making 52-week highs, Prada stock making 52-week highs. Michael Kors, which we own in our portfolio, is making 52-week highs. So the rise of the middle class is very, very important, and also gold consumption. There's a tracking system -- I'm looking at the consumption of gold in grams as you compare Hong Kong to mainland China, overall GDP per capita, and you can see that Hong Kong is substantially greater than mainland China, but in mainland China the rise of the middle class continues to grow.

Now, another thing that the average investor is not aware of -- is that an old facet of communism is to have two Social Security numbers. And basically it says that if you live in the rural area, you have one Social Security number; and if you live in an urban area, you have another. And if you move from the rural area to the city centers, you cannot get free education and free healthcare. And if you are in an urban area, vice a versa; you can't move to the country and all of a sudden get medical care and education. So you have many of the migrant workers that live in the rural areas that are building out the city centers. They cannot move their families there to basically have a new life, but there's this huge macro tsunami of urbanization taking place. So the only way for China to serve an old legacy bureaucracy, is to get rid of what's called the [huco]. And the huco is to say, get rid of two different types of Social Security numbers and make them one.

And that is what is thought with the new populist political leader. Also, the corruption is now making television. This never happened before with a corrupt leader that's on television every day and how they are trying to cleanse and create transparency for corruption. So there is a change taking place. And I think, in talking to analysts and our own Chinese connection internally believe that one third of China's population, when it becomes one Social Security number, you will see a huge economic boom taking place, especially in city centers. We think that this will be the legacy of the new leadership and we think that's very positive.

We've published a case in commodities in a rising rate environment to try to educate investors not to be threatened by it. And please feel free to connect with us at usfunds.com from Twitter to Facebook to LinkedIn, and I think the best way is to sign up for Frank Talk and for the Investor Alert.

And now I hope I've tried to cover all the issues that we've had to deal with and being in the resource sector and the financial sector and with the changes we are doing, and open it up to Q&A.

Thank you, Frank. We have time for a few questions. (Operator instructions).

I will start with two questions for Susan McGee. First one, if you liquidate the treasury cash fund and change the strategy of the government security savings fund, will you still have a money market fund available for U.S. Global shareholders?

Yes, we will be offering a third-party money market fund as an exchange vehicle for our fund shareholders. And we expect all these transactions, the two -- our two money market fund transactions to be completed in December, and at that point the third-party money market fund will be available.

I think what is important is the third-party money fund will also make it easy for investors, just like today, is to switch into our funds because the relationship is with U.S. Bancorp.

Thank you. You mentioned the fund restructuring is taking place by the end of the year. When will the TA change take place?

We are expecting that conversion to be completed also by December.

The next question is for Lisa. When do you expect the cost savings and increase in administrative fee revenue to take effect?

Since the initiatives related to the admin fee won't be fully implemented until December 2013, we think that there will be a positive effect beginning calendar year 2014.

The next question is for Frank. With regard to fund flows in Canada, have those mirrored the fund flows in the US? And how have those impacted Galileo's funds?

I think that, in looking at Gallo's five-star fund, it has been much more stable on a relative basis of money jumping in, jumping out. The trepidation and fear that takes place in America doesn't have an impact in Canada, and so the fund flows slowed down. But in looking at and talking to Michael Waring, they have not experienced the huge redemption that has taken place in the asset management business here in the US. And interestingly enough, some of the other large asset management companies have shared with me that their bond fund flows, which have been huge for the past five years -- four years, in particular -- have come to a halt and now they are experiencing net redemptions since May, June, July and August, in this threat and fear of rising interest rates.

Interestingly enough, his lineup has not experienced that.

Thank you. Thank you for the questions. This concludes U.S. Global Investors' earnings webcast for the fiscal year 2013. This presentation will be available for replay on our website at usfunds.com. Thank you all for your participation today.