Shareholder Report2010 Vol. 3

Inside: China Can’t Get Enough Gold | Urbanization Increases Appetite for Resources

The Seasonality of Gold

U.S. Global Investors2 Shareholder Report /2010 Vol. 3

I’m a big believer in globalization, urbanization and major technological breakthroughs as key drivers of change in the world. These factors have an enormous impact on infrastructure creation around the world, which in turn greatly affects commodities demand.

A New York Times columnist is calling for another depression, the “double-dip” recession debate is escalating, and one well-known technical analyst

is predicting a 90 percent plunge for the Dow Jones Industrial Average.

Markets are certainly volatile these days, and it doesn’t help that ambitious doom-and-gloomers are working overtime to think up the worst worst-case scenarios. In this environment, it’s not surprising to see so many investors are confused and afraid.

We don’t share the despair. I’ve lived through many market cycles and have learned that there are always opportunities in global markets, and we’re working harder to find them. As active managers, we use sophisticated investment processes, and we play to win.

On the macro side, we believe in cycles and seasonal patterns, and that government policies are precursors to change, both domestically and internationally. We also believe that each asset class has its own DNA when it comes to volatility.

If you don’t pay attention to volatility, you risk being herded into buying at the top and then getting upset and selling at a loss after the market corrects. It’s really important for people to understand that there are peaks and troughs in life and in markets, and you have to be humble when you’re at the peak and hopeful when you’re in the trough.

The image below is a familiar one to many investors — it shows the sequence of emotions during a market cycle. It’s increasingly

positive on the way up to the peak, and then progressively negative on the way down to the trough before starting back up again.

The irony, of course, is that investors feel happiest when they are at the highest market peril, and they want to jump out a window when their potential upside is the greatest.

These peaks and troughs don’t correspond just to markets or to the good and bad events in your life — they’re also how you feel inside and how you respond to outside events.

Dear Shareholder, Understanding market volatility helps us manage our emotions and seek financial opportunities.

Optimism

Excitement

Thrill

EuphoriaAnxiety

DenialFear

DesperationPanic

Capitulation

Despondency Depression

HopeRelief

Optimism

Point of MaximumFinancial Risk

Point of MaximumFinancial Opportunity

“Wow, am I smart.”“Temporary set back —I’m a long-term investor.”

“How could I havebeen so wrong?”

Source: FIM Group

The Cycle of Market Emotions

Shareholder Report /2010 Vol. 3 3www.usfunds.com

How you feel depends on how you see your situation. Do you have hope and confi-dence, or are you paralyzed by negativity and despair?

I believe the key is to separate the events in your life from how you feel about yourself as a person. If you don’t, your emotions can take control and, as an investor, you end up buying at the top and selling at the bottom.

Not long ago, I had the chance to listen to a prominent MIT finance professor talk about how market participants make their decisions, and I came away thinking that his ideas validate the approach that we’ve been using for years.

Professor Andrew Lo has developed what he calls the “adaptive markets hypothesis” (AMH) as a more sophisticated framework than the long-standing “efficient markets hypothesis” (EMH).

I won’t get too technical, but the EMH assumes that all market participants act rationally at all times, and that all available information is immediately reflected in market prices.

In Lo’s AMH, market participants are not always perfectly rational — they often make bad decisions. They learn from those bad decisions and, driven by competition, the survivors constantly innovate. Those who don’t adapt don’t last.

At U.S. Global, we have long viewed markets as “complex adaptive systems” made up of many moving parts interconnected across a global network, and with the ability to learn from experiences and change accordingly.

In our case, we use a matrix of top-down macro models that take into account political, economic and currency trends, and combine that with bottom-up stock selection models to determine weighting in countries, sectors and individual securities. We believe govern-ment policies are a precursor to change, and as a result, we keep track of the fiscal and monetary policies of the G-7 and what we call the “E-7” — the world’s largest developing nations by population.

We also focus on historical and socioeconomic cycles, and we apply both statistical and fundamental models to identify companies with superior growth and value metrics. We overlay these explicit knowledge models

with the tacit knowledge obtained by domestic and global travel for first-hand observation of local and geopolitical conditions, as well as specific companies and projects. This is part of our strategy to create alpha for our fund shareholders.

I’m a big believer in globalization, urbaniza-tion and major technological breakthroughs as key drivers of change in the world. These factors have an enormous impact on infra-structure creation around the world, which in turn greatly affects commodities demand.

Back in the early 1970s, when gold resumed free-trading status in the U.S., China and India were both inward-looking and had very small economic footprints — now their economic engines are lifting tens of millions of people into middle-class prosperity each year.

Most of the middle class are urban dwellers, and they are far more productive than their rural counterparts. The urban GDP growth chart, based on research and analysis by McKinsey, shows how that productivity pays off over time — the real GDP per capita for urban Chinese is expected to increase fourfold and in India more than threefold over the two decades ending in 2025.

Global markets present tremendous opportunities to those who are able to sort out what’s meaningful from the background noise. That means going where others don’t to see promising projects. That means asking the right questions to get the best information out of company management. And it means

constantly fine-tuning our investment processes to ferret out market mispricing and other inefficiencies and moving quickly to capitalize on them.

“I’d be a bum on the street with a tin cup if the markets were always efficient,” Warren Buffett once said.

We believe actions should be shaped by knowledge, beliefs and values, not emotions. When investors understand volatility, they can manage market movements better and make better decisions. They can steer their financial ship with confidence, rather than sitting powerless and being pushed around by the market’s powerful tides.

Sincerely,

CEO and Chief Investment Officer U.S. Global Investors, Inc.

The Dow Jones Industrial Average is a price- weighted average of 30 blue chip stocks that are generally leaders in their industry. Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.

Urban GDP Growth Outpaces Rural

Source: India Urbanization Model: McKinsey Global Institute China All City Model, January 2010:McKinsey Global Institute analysis

India real GDP per capitaThousand rupees, 2005

China real GDP per capitaThousand renminbi, 2005

5.5% per yr

58110

1832

53

185

24

7

1519

52

99

2005 2015 2025 2005 2015 2025

2005 2015 20252005 2015 2025

Urban Urban

Rural Rural

6.0% per yr 7.3% per yr

5.1% per yr

• www.usfunds.com Read Frank’s latest insights in the Frank Talk blog.

U.S. Global Investors4 Shareholder Report /2010 Vol. 3

Another sign of emerging markets growth —  global oil demand growth has risen above its level in the second quarter of 2008, prior to the financial crisis that dragged much of the world into recession.

The accompanying chart shows that demand growth in emerging Asia remained fairly steady, while the U.S., Western Europe and Japan experienced substantial contractions.

Oil-industry analyst PIRA predicts global demand growth will rise about 2 million barrels per day in 2010. More than 60 percent of this growth is predicted to come from China, India and other developing areas of the world. The U.S. is expected to account for 20 percent of the demand growth.

The demand growth pace may slow down next year. The International Energy Agency sees world oil demand increasing by 1.3 million barrels a day in 2011. While a slowdown from 2010, that rate is close to the average annual growth rate from 2000 through 2007.

Portfolio manager Evan Smith was recently profiled by Investment News. In the interview, Evan discusses how the fund is managed and how the fund’s portfolio was adjusted to take advantage of changing conditions in the natural resources sector.

Global Oil Demand Growth Has Returned; Total Now Exceeds Pre-Recession Levels

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

Rest of WorldEmerging Asia

JapanW. Europe

U.S.Total vs 2007

Source: PIRA

Demand Growth, Million Barrels/Day YOY

Forecast

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

Some prominent voices on Wall Street say the best days of natural resources investing are behind us. No one can know whether or not that’s true, but it’s worth pointing out that many also called a top for gold at $500 an ounce back in 2005 and at every $100 increment since. These forecasters are still waiting to be right.

After a sharp drop in 2008, natural resources saw a broad recovery starting last year that lifted oil from around $35 a barrel to the $70 to $80 range. Copper fell from more than $4 per pound to less than $1.70 by late 2008, but since it has bounced back strong. This July, copper was up 12 percent for the month.

The global growth theme remains the most powerful economic force at work in the world, and while there may be short-term gyrations, we don’t believe that the long-term story will change any time soon.

The so-called BRIC nations — Brazil, Russia, India and China – may be leading the way, but this theme is also being played out in Indonesia, Turkey, Vietnam and many other rapidly growing emerging markets.

These populous nations are rapidly urban-izing – soon more than half of the world’s population will live in cities. As they make that move from rural to urban, the new urbanites will demand more roads, more schools and other basic infrastructure. And as more of them become prosperous, they will want better and roomier homes, more modern conveniences and more cars so they can get around faster.

We believe this rising desire for essential infrastructure and big-ticket consumer goods will propel demand for natural resources for years to come.

Urbanization Increases Appetite for Resources

Emerging Economies Rising Oil Consumption Competition for Oil Resources Higher Oil Prices

Low Oil Prices in ’80s and ’90s Cuts in Exploration Falling Production/

Reserves Higher Oil Prices

OPEC Governments Depend on Oil Income Cartel Restricts Supply Higher Oil Prices

Geopolitical Issues Production Disruption/Threat of Disruption

Lower Global Spare Capacity Higher Oil Prices

Green Movement Higher Barriers to Entry — More Costly

Limited Drilling Access and New Refineries Higher Oil Prices

Peak Oil Theory Declining Oil Production Less Supply Higher Oil Prices

Cause Effect Possible Ramifications

What’s Driving Energy?

Oil Demand is Back

• www.usfunds.com Read the Investment News profile.

Shareholder Report /2010 Vol. 3 5www.usfunds.com

Over the past four decades, September has been the best month of the year for gold and gold stocks.

The clear trend can be seen on the chart be-low. In a typical year, the spot price of gold in September rises 2.5 percent above its August price. And to make the case even more compelling, the gold price has risen in 17 of the 21 Septembers since 1989, by far the best success ratio of any month of the year.

In September 2009, the gold price jumped nearly 6 percent, well above the long-term average.

Important holidays in major gold-consuming countries around the world are one of the key drivers for this seasonal trend, as jewelers stock up to be ready for buyers acquiring gifts.

September is historically an even better month for gold stocks as measured by the NYSE Arca Gold Miners Index (GDM).

The historic average increase for gold stocks in September is about 8.3 percent. In Sep-tember 2009, the jump was 14.5 percent. Since 1993, the GDM has been up 12 times in September and down just five times.

There is a strong correlation between the gold price and the value of gold-mining stocks, so that alone helps explain the “September effect.” Another consistent correlation for gold is its inverse relationship with the U.S. dollar.

The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this year will follow the well-established trend.

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

China Can’t Get Enough GoldYou can add gold to the list of items that China can’t get enough of.

The state-controlled China National Gold Group, the country’s largest gold company, recently signed a long-term contract to buy gold concentrates from the large Kensington Mine in Alaska.

China is the world’s leading gold producer and it has the sixth-largest reserves. The Alaska deal reflects that the Chinese government wants even more gold and it has the ready cash to buy it. A deal sweetener: China agreed to pay for the gold within days of delivery, much quicker than the industry standard of three months.

Gold demand in China has seen a significant shift in direction in recent years. The government, which used to restrict how much citizens could own, now runs ads on state television encouraging its rapidly growing middle class to own gold.

As a result, gold demand has increased 13 percent annually for the past five years. Retail investment demand jumped 57 percent during the first quarter of 2010 despite prices hovering near all-time records. At this pace, the World Gold Council says that China will run out of its own gold in the next six years.

This helps explain why agreements like the one with the Kensington Mine are pursued.

• www.usfunds.com Watch an interview on how investors should approach gold.

Seasonality: Spot Gold Average Monthly Returns (Jan 1969 - July 2010)

Seasonality: GDM Index (NYSE Arca Gold Miners)Average Monthly Returns (Oct 1993 -July 2010)

-0.5%

0%

0.5%

1%

1.5%

2%

2.5%

3%

Janu

ary

Febr

uary

Mar

ch

April

May

June

July

Augu

st

Sept

embe

r

Octo

ber

Nov

embe

r

Dece

mbe

r -8%-6%-4%-2%0%2%4%6%8%

10%

Janu

ary

Febr

uary

Mar

ch

April

May

June

July

Augu

st

Sept

embe

r

Octo

ber

Nov

embe

r

Dece

mbe

r

Source: Bloomberg

Gold and the “September Effect”

U.S. Global Investors6 Shareholder Report /2010 Vol. 3

One of the best reasons for emerging markets investing is growth potential, but this growth must come at a reasonable price.

Heading into the second half of 2010, emerging market stocks look like bargains. The MSCI Emerging Markets Index has a 12-month forward price-to-earnings ratio of 10.8x, which was 15 percent below that of the MSCI World Index. The chart follows the P/E ratio for nearly two decades, and rarely has valuation been more attractive.

We expect strong sales growth in global emerging markets — 15 percent and 10 percent, respectively, for 2010 and 2011. Turkey is one of the stars as we expect nearly 30 percent sales growth this year and 17 percent in 2011. Other standouts in expected sales growth: Taiwan, Russia and India.

Sales growth and margin expansion drive earnings growth — UBS predicts a 34 percent jump in earnings for emerging-market equities this year and another 12 percent in 2011. Emerging market companies also tend to have cleaner balance sheets and lower corporate debt than global peers.

The same debt trend is often seen nation-ally — public debt-to-GDP levels of key emerging markets like China (19 percent), Indonesia (32 percent) and Turkey (49 percent) are far lower than in the developed world and they are growing at a much slower rate.

This represents a major reversal from the past, when investors in developing economies often had to live with large sovereign debt loads and high default risk. Government policy changes have

contributed to stronger economic funda-mentals in many emerging nations, while policy moves by governments have been a source of weakness and uncertainty in the developed world.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Emerging Markets Look Like Bargains

4.0x6.0x8.0x

10.0x12.0x14.0x16.0x18.0x20.0x22.0x24.0x

12-M

onth

For

war

d P/

E fo

r MSC

I EM

Dec-

93

Dec-

94

Dec-

95

Dec-

96

Dec-

97

Dec-

98

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

10.8x

15.9x

9.5x

Average

+1 Standard Deviation

-1 Standard Deviation

Source: MSCI, IBES, Morgan Stanley Research, Data as of July 13, 2010

0.42

0.28

0.56

0.73

0.00.1

0.20.30.4

0.50.6

0.70.8

(%)

Average Pace of RMB Appreciation Against the Dollar

2005 2006 2007 Jun/21/2010 to Jul/7/2010

Source: CLSA Sinology

The Chinese government’s decision to allow appre-ciation of its currency looks like a successful move.

The renminbi gained 0.70 percent against the U.S. dollar in the first couple of weeks after it was unpegged from the dollar. This appreciation is far higher than the average monthly rate seen in the 2005-2007 period (chart), when the renminbi’s exchange rate was last allowed to float.

The soft U.S. job market has been focusing blame on China for the decline of American industry — the currency peg to the dollar was seen as giving Chinese manufacturers an unfair price advantage.

But CLSA’s Andy Rothman reminds us that the U.S. manufacturing sector shriveled from 23

percent of American workers in 1949 to 16 percent in 1989, a period during which Chinese imports were still “insignificant.” Today less than one in 10 American workers is in manufacturing.

The Chinese government has much higher aspirations than being the world’s cheap-goods factory. This year we’ve seen the government raise minimum wage requirements across the country and move to improve labor conditions.

This is all part of a longer-term plan to move up the manufacturing food chain and build a stronger base for domestic consumption. A stronger renminbi that enhances the purchasing power of both Chinese importers and the average citizen fits well into that vision.

China’s Successful Money Move

The Case for

MarketsEmerging

Shareholder Report /2010 Vol. 3 7www.usfunds.com

Q. What is the investment objective for the funds?

Both the Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX) seek capital appreciation while protecting against inflation and monetary instability. The Gold and Precious Metals Fund also pursues current income as a secondary objective.

Q. How are the two funds different?

The Gold and Precious Metals Fund, the first no-load gold mutual fund in the U.S., focuses on “senior” producers — large companies currently mining gold or other precious metals. Many of these companies also produce copper, lead and other valuable metals. The World Precious Minerals Fund gives investors increased exposure to the growth potential of intermediate mining companies. The fund also invests in “junior” exploration companies that are searching for deposits or developing mines, but have not reached the point of production.

Q. Why invest in a gold company that may not have any gold?

The key reason for investing in junior gold miners is their potential. When one of these companies makes a significant discovery or starts production, its share price can shoot up dramatically. Promising juniors can also be bought out at a premium by other gold companies. Investing in juniors is not without risks. Many of them never discover enough gold to develop, and even fewer reach production. They can also be subject to management issues, insufficient capital and regulatory delays.

Q. What is your outlook for the gold sector?

In 2009, investment demand for gold jumped to more than 1,400 tons (more than 45 million troy ounces), up 500 percent from 2008. Investment appeal is expected to continue as investors seek a store of value in the face of massive deficit spending and

the dangerously high government debt burdens in the developed world.

Gold equities have not fully participated in the recent run-up in the gold price, and some industry analysts say the equities appear inexpensive compared to bullion. CIBC pointed out in late summer that, for the first time, some of the major gold producers were trading below the average price-earnings ratio of the S&P 500 Index.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors. The FTSE Gold Mines Index Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

Q&A: U.S. Global Gold Funds

The chart illustrates the performance of a hypothetical $10,000 investment made in the funds during the depicted time frame, compared to their indices benchmark. Figures include reinvestment of capital gains and dividends, but the performance does not include the effect of any direct fees described in the fund’s prospectus (e.g.,short-term trading fees) which, if applicable, would lower your total returns.

Ten-Year Growth of $10,000

$0

$20,000

$40,000

$60,000

$80,000

$100,000

Jun-10Jun-08Jun-06Jun-04Jun-02Jun-00

Gold and Precious Metals Fund (USERX)

World Precious Minerals Fund (UNWPX)

FTSE Gold Mines Index

NYSE Arca Miners Index$73,617$68,040$56,380

$42,214

Gross expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. 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. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.50%) which, if applicable, would lower your total returns. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS. High double-digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future.

“This fund has delivered strong long-term returns … You need to stick with U.S. Global Investors World Precious Minerals to benefit from its high-octane approach.”

This is part of Morningstar’s recent analysis of our World Precious Minerals Fund. The analysis reviews the fund’s investment focus and it also discusses the fund’s volatility and the risks for those investors who try to time the market.

• www.usfunds.com Read the full Morningstar® analysis.

Average Annual Returns as of June 30, 20101-year 5-year 10-year Gross Expense Ratio

Gold and Precious Metals Fund (USERX) 33.72% 22.62% 22.06% 1.70%

World Precious Minerals Fund (UNWPX) 44.13% 18.86% 21.13% 1.74%

NYSE Arca Gold Miners Index 38.59% 17.87% 18.87% n/a

FTSE Gold Mines Index 31.04% 16.38% 15.48% n/a

Shareholder Report U.S. Global Investors P.O. Box 659405 San Antonio, TX 78265-9604

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U.S. Global Investors

On the cover: Diwali, or the Festival of Lights, is an important festival in India and other countries.All opinions expressed and data provided in this publication are subject to change without notice. Some of these opinions may not be appropriate to every investor. 10-521

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