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U.S. Global Investors Reports Second Quarter Results

February 16, 2014

U.S. Global Investors, Inc., a boutique registered investment advisory firm specializing in natural resources, emerging markets, and domestic equities and municipal bonds, recorded a net loss of $1,165,207, or $0.08 per share loss, on operating revenues of $2.74 million for the quarter ended December 31, 2013.

In a release on February 7, the firm noted net income for the same quarter of the previous year was $165,985, or $0.01 per share, on operating revenues of $4.97 million.

Average assets under management were $1.11 billion for the quarter ended December 31, 2013, compared to an average of $1.68 billion for the same quarter a year ago, a decrease of about 34 percent. Period-end assets under management stood at $0.97 billion as of December 31, 2013, versus $1.61 billion under management as of December 31, 2012.

"A big external pressure affecting assets under management has been the fact that global gold equities declined three years in a row," says Frank Holmes, U.S. Global Investors CEO. "Additionally, the close-to-zero federal funds rate created an industry-wide financial burden to support the yield of money market funds."

In this challenging environment, the company has been focused on reducing costs and streamlining its products and services in the second fiscal quarter of 2014. Changes included converting a money market fund to an ultra-short government bond fund, closing the U.S. Treasury Securities Cash Fund and the Global Emerging Markets Fund, merging the Tax Free Fund into the Near-Term Tax Free Fund, reorganizing the MegaTrends Fund into the Holmes Growth Fund, and partnering with U.S. Bancorp for transfer agency services.

"Accomplishing these strategic changes was expensive and time- consuming. Time is money and the length of time associated with the legal and regulatory processes increased one-time costs," says Holmes. "Moving forward from our period of transitioning, general and administrative expenses have been decreasing significantly in January 2014. The organization is leaner, now with less than 50 employees, and in a stronger financial position, especially as gold and resources look to rebound."

During 2013, commodities experienced a turbulent year, with gold posting its first annual decline since 2000 and gold equities declining for a third year in a row.

"In the last three decades, a losing streak of three years has only happened three times for the Philadelphia Gold & Silver Index," says Holmes. "This most recent three-year decline has negatively affected GROW's revenues."

In addition, in the continued low interest rate environment, mutual fund companies have been hurt by voluntary money market fund fee waivers. According to Ignites, in 2013, fee waivers for the industry rose to a record high of $5.8 billion.

"By converting the U.S. Government Securities Savings Fund from a money market fund to an ultra-short government bond fund, the cash drain from the fund's fee waivers has significantly improved," says Holmes.

"We're pleased shareholders approved the conversion. Investors are thirsty for higher yields but do not want the risk of a long- term bond fund," says Holmes. "The U.S. Government Securities Ultra- Short Bond Fund is designed as an investment that takes advantage of the security of U.S. Government bonds and obligations, while simultaneously pursuing a higher level of income compared to money market funds. And a distinctive feature of the fund is the floating $2 share price, which reduces the penny-move volatility in a portfolio."

Additional Investment in Galileo Global Equity Advisors

On January 17, Toronto-based Galileo Global Equity Advisors, of which U.S. Global owns 50 percent, agreed to sell an additional 15 percent of the company. U.S. Global plans to proceed with the purchase in the third fiscal quarter. After this purchase, the company will own 65 percent of the outstanding shares of Galileo.

"I'm pleased with the partnership that's developed between U.S. Global and Galileo and I'm looking forward to Galileo's continued growth," says Holmes. "Its flagship fund continues to be highly rated by Morningstar and pays dividends, both of which are very attractive to Canadian investors."

Share Repurchase Program, Continued Strong Balance Sheet, and Monthly Dividends

The company continued repurchasing outstanding stock in the second fiscal quarter totaling 28,227 class A shares using cash of $72,528. The company is using an algorithm to purchase shares on down days, following the rules and regulations that restrict the amounts and times when shares can be purchased on any given day, such as at the opening of the day and in the last half-hour of trading. The share repurchase plan is set to expire at the end of calendar year 2014 but may be suspended or discontinued at any time.

As of December 31, 2013, the company had net working capital of approximately $23.5 million. Cash and cash equivalents totaled $4.6 million and marketable securities totaled $26.0 million as of the end of the quarter.

The change in cash and cash equivalents compared to last quarter was due to the company's investment in the U.S. Government Securities Ultra-Short Bond Fund. This is the fund that converted in December from a money market fund to an ultra-short bond fund. Therefore, on the balance sheet, the amount invested in this fund in December 2013, approximately $14 million, was transferred from cash and cash equivalents to trading securities.

In addition, the company has had no long-term debt since 2004 and owns its headquarters building.

Market Commentary

The global synchronized easing cycle continues, particularly in China, Japan and the U.S., which bodes well for global equities.

"Throughout my travels, I often tell investors to follow where the money is going. Too often people get caught up in their political allegiance or parties, focus on the negative and lose confidence in stocks," says Holmes. "One example from 2013 is all the pessimism surrounding Obamacare, yet S&P 500 health care companies benefited, as the sector was the second-best performer.

"One opportunity we are seeing for 2014 is in gold stocks. Following three years of straight losses in the gold mining industry, miners are approaching the historical limits of multi- year declines," says Holmes.

"Ralph Aldis, portfolio manager of the Gold and Precious Metals Fund and World Precious Minerals Fund, believes the best time to buy gold is when the market hates it. Pessimism has reached a maximum level and historically, when consensus is this strong, it has been a turning point in the market," says Holmes. "We have always advocated that shareholders allocate 5 to 10 percent of an overall portfolio to gold and gold stocks and rebalance annually.

"Investors have seen significant gains in domestic markets, and while there may be short-term corrections, we continue to see opportunities in U.S. stocks," says Holmes. "For the remainder of 2014, we believe the market will continue to favor high-quality, growth-at-a-reasonable price stocks. This trend bodes well for U.S. Global's domestic equity funds."

In 2013, the All American Equity Fund (GBTFX) outperformed its benchmark S&P 500 Index, climbing 35.6 percent while the index rose 32.4 percent. The fund commits a portion of its assets to stocks with superior shareholder yield metrics, seeking companies that pay cash dividends, repurchase stock and reduce their debt.

In the last calendar year, the Holmes Macro Trends Fund (ACBGX) also outperformed its benchmark, rising 39.4 percent, while the S&P 1500 Composite Index returned 32.8 percent.

"We believe the Holmes Macro Trends Fund has a recipe for success for shareholders. It combines a bottom-up approach to find great, fast-growing and shareholder-focused companies while seeking the best stocks in the sectors experiencing positive momentum," says Holmes.

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