Gold – A Portfolio Diversifier Counter-Cyclical Attributes Frank E. Holmes, Chief Investment Officer U.S. Global Investors, Inc.

Gold – A Portfolio DiversifierCounter-Cyclical Attributes

Frank E. Holmes, Chief Investment OfficerU.S. Global Investors, Inc.

2

PageWhy invest in Gold?

3Critical Drivers

4Reversion to the Mean

5Compare Change Since 9/11

6Seasonal Demand for Gold

7Seasonal Response of Gold Stocks

8Cash Flow Valuation

9Counter-Cyclical Investment

10“Currency Without a Country”

11Unhedged North Americans Have Generated Superior

Performance

12Exploration Expenditure for Gold has Fallen Sharply

13Mine Supply to Contract Rapidly from 2002

14Less Hedging Reduces Supply Pressure

15Aggregate Producer Hedge Book to Fall

16Aggregate Central Bank Holdings 1950-2001

17Opportunity vs. Risk

18Mergers and Acquisitions

19Important Reason for Diversification XAU Index vs. S&P 500 Index

20XAU Index vs. Nasdaq Index

21Philadelphia Gold and Silver Index (XAU) and its Components

22

www.usfunds.com1-800-US-FUNDS

Table of Contents

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Important factors helping gold prices are:

1. Under-performing equity markets‒gold is negatively correlated with the S&P 500.

2. Deficit spending and zero real rates of return on T-Bills trigger a weaker dollar.

3. Gold mining companies have announced a continued reduction of hedge programs.

4. Continued presence of physical demand despite real price rises.

5. Renewed fund interest has seen hedge fund position on COMEX rise to levels seen in 1996.

6. Investment demand in Japan has risen five fold over the past year.

7. Changes in the supply side due to falling new gold mine production are bullish for bullion prices. www.usfunds.com1-800-US-FUNDS

Why invest in Gold?

4

War on Terrorism

Deficit Spending $450B

Weaker U.S. Currency

Higher Gold Prices

Possible RamificationsEffectCause

Weak Economy

Low Interest Rates

Low Gold Prices

Cuts in Exploration

Higher Gold Prices

Weaker U.S. Currency

40-year Low in Interest Rates

Falling Production

Hedging Curtailed Less Supply Higher Gold

Prices

Higher Gold Prices

Mergers RationalizationDecreasing Production

Higher Gold Prices

We have a unique situation where all the critical drivers for gold are pointing in the same direction.


Critical Drivers

5

Reversion to the Mean

Will Equities Move Down to Their Mean . .

Will Gold Move Up?

January 1970 – January 1999Source: World Gold Council

1


6

*Data as of 9/5/02


Price on9/10/01

Price on9/10/02 $

Change

%Chan

ge

Gold Bullion $271.75 $317.75 $46.00 16.93%

XAU Gold & Silver Index3 55.50 72.00

16.50 29.73%

Gold Shares Fund5 $ 2.69 $ 4.79 $ 2.10 78.07%

World Precious Minerals Fund5

$ 5.07 $ 8.93 $ 3.86 76.13%

DXY Trade Weighted Dollar Index

114.66 107.52

-7.14 -6.23%

3-Month T-bill 3.26 1.68

-1.59 -48.62%

Dow Jones Industrial Average Index9

9,605.51 8,602.61 -1,002.9

0

-10.44%

S&P 500 Stock Index1 1,092.54 909.58 -182.96 -16.75%

Nasdaq Composite Index4 1,695.38 1,320.09 -375.29 -22.14%

M3 Supply* 7.90%

Data as of 9/13/02

Compare ChangeSince 9/11

7

Seasonal Demand for Gold

Source: RBC Capital Markets through Martin Murenbeeld & Associates Inc.; from US Bureau of Census Program

The first three months of the year tend to be the best period for the year for gold demand.

Key demand factors are post-holiday jewelry restocking, post-Ramadan demand, the Chinese New Year and the wedding season after the harvest period in the Indian sub-continent.

After weak seasonal demand for gold in Q2 and Q3, October was the strongest month as pre-holiday season inventory buildups usually helps gold demand.


8

Seasonal Response of Gold Stocks

Gold equities tend to lag the movement of gold in January and show seasonal strength in February and March.

A mixed response from gold stocks in the summer months is often followed by a rally in September in anticipation of stronger pre-holiday demand for the commodity.

Gold stocks are often the victims of tax-loss selling in the fourth quarter of the year.


Source: RBC Capital Markets through Martin Murenbeeld & Associates Inc.; from US Bureau of Census Program

9

Cash Flow Valuation

Source: RBC Capital Markets

At a sub-$300 gold price, the Tier I producers tend to trade up to a 13x cash flow multiple.

As gold trades above $300, cash flow multiples should expand to 16x.

As the Tier I companies dwindle, the high quality Tier II companies are trading in line or ahead of the Tier I companies due to internal growth prospects.


FORWARD CASH FLOW MULIPLE PEAKS

40

19

17

23

2728

34

2725

16

1213 14

10

Counter-Cyclical Investment

Source: BNP Paribas

1 2

Gold and gold stocks have traditionally offered counter-cyclical investment opportunities relative to the general stock market.

In the early 1990’s, gold stocks tripled in value over a three-year period.

Over the past year*, gold indices are up 50% against an S&P 5001 loss of 30%

*May 2001 – May 2002

Gold vs. S&P 5001


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Not dependent on any corporation or government’s “promise to pay”.

Hedges against: bank failures foreign-exchange controls currency devaluation

Particularly relevant to emerging markets.


“Currency Without a Country”

12

Unhedged North Americans Have Generated Superior Performance

Source: BNP Paribas

Investment bias to unhedged producers has resulted in significant stock outperformance.

Hedged vs. Unhedged


13

Exploration Expenditure for Gold has Fallen Sharply

Source: UBS Warburg

Exploration Expenditure and Average Gold Price Declining gold prices

combined with low rates of return and an increasing cost of equity discouraged gold producers from spending on exploration and new project development—this tightens future supply.


14

Mine Supply to Contract Rapidly from 2002

Source: UBS Warburg

Year-on-year Percentage Change in New Mine Supply

The concentration of ownership and convergence of larger companies make tighter investment spending hurdles.

Limited exploration reduces the potential of new discoveries.


15

Less Hedging Reduces Supply Pressure

Source: BNP Paribas

As the gold price fell, gold hedging increased.

The trend is now reversing.

Newmont acquires Normandy and Franco Nevada to become the world’s largest gold producer, and gold rises.8

A growing trend for producers to curtail or trim hedging.


16

Aggregate Producer Hedge Book to Fall

Source: UBS Warburg

Aggregate Industry Hedge Book Positive for the gold

price. The trend is now reversing.

Growing trend for producers to curtail or trim gold hedging practices.


17

Aggregate Central Bank Holdings 1950-2001

Source: UBS Warburg

Almost Back Where We Started in 1950


18

Opportunity vs. Risk

Opportunities Consolidation Low Real Interest Rates Japanese Buyers Unwinding Hedge Positions Cash Flow Multiples

Remain Low Purchasing Parity Implies

US$330/oz. to US $360/oz. Gold Stocks Offer 3 to 1

Leverage Over Bullion Price

Risks Central Bank Sales Rising U.S. Dollar Economy Fails to

Rebound U.S. Government Stops

Deficit Spending Real Interest Rates Rise


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Mergers and Acquisitions8

Franco Nevada / Normandy / NewmontLargest Gold Producer in the World

Barrick / Homestake

Delta Gold / Gold Fields Australia

Harmony / Hill 50 Gold

Kinross / TVX / Echo Bay Mines

Placer Dome / OrionWaiting shareholder approval

Anglogold / GoldfieldsYet to Find a Bride


20

Source: Bloomberg

Compare the 43% difference . . .

XAU Gold Index

+23%

S&P 500 Index

-20%


Important Reason for Diversification

XAU Index3 vs. S&P 500 Index1

September 28, 2001 — September 30, 2002

21

XAU Index3 vs. Nasdaq Index4

Source: Bloomberg

Compare the 45% difference . . .

XAU Gold Index

+23%

Nasdaq Index

-22%


September 28, 2001 — September 30, 2002

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Philadelphia Gold and

Silver Index (XAU)3

Source: Bloomberg


Newmont Mining

25.12%Barrick Gold

19.65%Gold Fields Ltd.

13.18%Anglogold Ltd.

12.99%Placer Dome

7.19% Harmony Gold

5.77%Goldcorp Inc.

4.41%Freeport McMoran

4.28%Meridian Gold

3.89%Agnico-Eagle Mines

2.44%Apex Silver Mines Ltd.

1.09%

Data as of 9/30/02

XAU Index3,8 Components

40

50

60

70

80

90

100

110

120

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For more information on the Gold Shares Fund5 and World Precious Minerals Fund,5

Please call 1-800-US-FUNDS

Or visit our website: www.usfunds.com1. The S&P 500 Stock Index is a widely recognized index of common stock prices in U.S. companies. 2. The Toronto Stock Exchange Gold and Precious Minerals Index is a capitalization-weighted index designed to measure the performance of the gold and precious

minerals sector of the TSX 300 Index. 3. The Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. 4. The Nasdaq Composite Index is a market value-weighted index that measures all domestic and non-U.S.-based securities listed on the Nasdaq Stock

Market.5. The fund may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is 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 3% to 5% of your portfolio in gold or gold stocks

6. Performance data quoted represent past performance and investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

7. For more complete information about any U.S. Global fund, including charges and expenses, obtain a prospectus by visiting us at www.usfunds.com or call 1-800-US-FUNDS. Read it carefully before you invest or send money. Distributed by U.S. Global Brokerage, Inc.

8. This article should not be considered a recommendation for the securities of any company mentioned.9. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

Gold – A Portfolio Diversifier Counter-Cyclical Attributes Frank E. Holmes, Chief Investment Officer U.S. Global Investors, Inc.

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