Trends in Energy

 Trends in Energy and Base Metals Brian Hicks, CFA and Evan Smith, CFAGlobal Resources Fund (PSPFX)U.S. Global Investors, Inc.: 

U.S. Global Investors, Inc. 7900 Callaghan Rd. San Antonio, TX 78229 210.308.1234 Trends in Energy and Base Metals Brian Hicks, CFA and Evan Smith, CFA Global Resources Fund (PSPFX) U.S. Global Investors, Inc.

Sector Performance: 

*Performance data through November 22, 2005, **TSX Sector Performance

Commodity Performance: 

* LME, Bloomberg prices. Performance data through December 8, 2005.. Commodity Performance

Commodity Cycle History : 

Commodity Cycle History

Energy : 

Oil prices transition from inventories to spare capacity A demand led rally versus “supply shocks” in prior cycles Spare capacity under 2% of demand compared to a 10-year average of 9% From inventory led… … to capacity driven Source: Smith Barney, Bloomberg, CIR Energy

Energy : 

Natural Gas “Kat-Rita” disrupts as much as 15% of total production Mild weather saves winter storage Record rig count struggles to increase production Energy

Bulk Commodities: 

Growing demand for low sulfur Powder River Basin coal - PBR jumps from $6 per ton to $16 per ton Metallurgical Coal and Iron Ore surge on higher steel consumption. - Met Coal jumps 125% and Iron Ore increases by 70% Electric power demand for coal is expected to increase by 3.2 percent in 2005 and another 1.2 percent in 2006 Bulk Commodities

Bulk Commodities: 

Steel prices rebound following inventory de-stocking - Chinese steel production up 19% in October, down from 41% in May - China a net importer for the past 4-months - US inventories fall to 2.7x monthly sales - US pricing may weaken given that import prices are $50 to $100 per ton cheaper Bulk Commodities

Base Metals : 

Copper market deficit in 2005 Smelter/refinery bottlenecks, labor issues and rising capital costs restrain supply LME inventories at a 30-yr low this summer Aluminum has lagged in 2005 Chinese tax policies will slow exports Alumina capacity expanding but power costs continue to climb Base Metals

Base Metals: 

Nickel- first half consumption up 3.6%, Stainless steel production to increase in 2006 Zinc prices at a 10-yr high on growing demand for galvanized steel, Chinese imports at record levels Uranium market in chronic deficit… 29 new reactors are under construction worldwide Platinum Group Metals following Gold, Palladium at $286/oz and Platinum above $1000/oz Base Metals

Chemicals: 

Commodity Chemicals Inventory de-stocking and higher demand have improved pricing 4Q margins are now above $0.20/lb despite higher oil & gas prices $760/t gap exists between US spot prices and Asian ethylene prices Overseas shipments were constrained due to holiday port congestion Similar to Steel, imports are likely to close the gap Chemicals

Paper & Forest: 

Paper & Forest industry under pressure… -US housing starts on track for a record year, currently 6% above last year… but building permits drop to lowest level in 6 years -Lumber and panel prices spiked after “Kat-Rita”, but have returned to pre-hurricane levels. Paper prices remain weak. -Producers are attempting to create shareholder value through asset divestitures and timberland sales -Carl Icahn’s bid for Temple-Inland, IP’s $8-10b asset divestitures sales and Koch Industries $21b takeover of Georgia pacific Paper & Forest

Opportunities : 

Commodity demand/ consumption correlates better with industrial production (IP) than GDP. China’s IP growth rates far exceed other major economies. “By 2050, China and maybe India will overtake the U.S. economy in size.” – Jeffrey D. Sachs, Fortune Source: Bloomberg As of June 30, 2005 As of August 30, 2005 As of September 30, 2005 Opportunities

Opportunities: 

Demand for crude oil continues to rise despite higher prices IEA forecasts call for 2% growth in 2006 2.0% 1.3% 3.8% 1.9% .4% Opportunities

Opportunities: 

Rising costs imply higher oil prices Opportunities

Opportunities: 

Hurricanes Katrina & Rita – Gulf damage more extensive – supply constrained - 113 Platforms Destroyed (Ivan 7) - 46 Rigs adrift,damaged or destroyed (Ivan 10) - 98 Pipelines damaged (Ivan 102) - Nearly 3 months after Katrina, over 80 million barrels of production has been shut-in - By mid 2006, cumulative GOM shut-in production could total 160 mmbls vs. Ivan’s 50 mmbls. Opportunities

Opportunities: 

The goal of higher commodity prices is to spur new investment… Worldwide exploration and production expenditures are now forecast to rise by 15% in 2005 Higher commodity prices are leading to strong cash flows and higher capital spending Opportunities

Opportunities : 

High decline rates for Natural Gas ensure tight supplies and continued drilling activity Opportunities

Opportunities: 

“The Golden Age of Refining” Lack of global refining capacity a rapidly emerging issue No new refineries built in the US since 1976 Total world refining capacity surplus has declined from 7.5 million b/d in 1994 to 3.8 million b/d in 2004 Refineries in the US have 17 million b/d of capacity at 95% utilization, and must import 3.1 million b/d of refined product to meet demand Barriers to entry….According to a recent Shell study, it can take up to 10 years and $3 billion to build a 200,000 to 300,000 bbl/d refinery Very tight capacity leaves no room for error Opportunities

Threats: 

Rising interest rates …will the fed overshoot? - Delicate balance between the US housing market and the consumer - US consumption at risk given a negative savings rate and slow wage growth Can China continue to grow at 8-9% - 40% of China’s exports go to the US - 85% of China’s GDP is export related Threats

Threats: 

Rising costs may squeeze margins - Diesel fuel is up 20% from a year ago Oil and gas lifting costs up 20% in 3Q05 New mining trucks should increase 25-50% next year Equipment delays 12 to 18 month backlog for new mining equipment Trucks are being delivered without tires, which are in very short supply Labor strikes and shortages Shortage of engineers and skilled labor Labor unions are demanding higher wages Threats

Threats: 

Geopolitical Middle East Nigeria Venezuela Regulatory issues Permitting delays Environmental issues Reclamation liabilities Taxation “Windfall” profits tax proposal by congress Re-negotiation of govt royalties and production sharing contracts Threats

Global Resources Fund (PSPFX): 

Global Resources Fund’s (PSPFX) 3-Yr & 5-Yr Morningstar Rating™ Among 77, 77, 62, and 31 Specialty-Natural Resource funds, the Global Resources Fund earned 4 stars, 5 stars, 5 stars and 3 stars for the overall, 3-, 5- and 10-year periods ending 9/30/05. The Overall Morningstar Rating for a fund is derived from a weighted average of its 3-, 5- and 10-year (if applicable) performance figures. Global Resources Fund (PSPFX)

Investment Opportunities in Natural Resources: 

Investment Opportunities in Natural Resources U.S. Global Investors Global Resources Fund (PSPFX) vs S&P 500 Index 5 Year Performance (Dec 00 - Dec 05)

Disclosure: 

For more complete information about the Global Resources Fund (PSPFX) or any U.S. Global fund, including charges and expenses, obtain a funds prospectus by visiting us at www.usfunds.com or call 1-800-US-FUNDS (1-800-873-8637). Please consider carefully the fund’s investment objectives, risks, charges and expenses. Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc. 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. The CRB/Reuters Futures Price Index is an unweighted geometric average of commodity price levels relative to the base year average price. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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.) The award selection process began with Lipper calculating a Consistent Return score for each fund for the three-year time period as of December 31, 2004. Consistent Return is a quantitative metric that incorporates two characteristics: risk-adjusted return, and the strength of the fund's performance trend. The top-scoring Consistent Return fund within each classification received the awards. (Certificates are also awarded to the top funds over the 5-year and 10-year periods). Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user's own risk. This is not an offer to buy or sell securities. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Disclosure Please be advised, if you receive this document from someone other than a representative of U.S. Global Investors, please understand this document may have been sent to you without U.S. Global Investors’ prior knowledge. Therefore, U.S. Global Investors is not liable for any malicious intent upon the arrival of this material.