The 2011 Gold Season is Just around the Corner

By Frank Holmes

CEO and Chief Investment Officer

U.S. Global Investors

The ongoing debate in Washington prompted increased Fear Trade activity in gold this week. The issue over raising the federal borrowing limit caused the yellow metal to remain around its all-time high of $1,600 per ounce this week.

Gold has now increased for 124 months straight, says Deutsche Bank. The rally is in its 11th year, lasting nearly three times as long as other historical rallies going back to 1971. If the metal rose to $2,100 an ounce, it would represent the most powerful percentage increase in history, according to Deutsche Bank.

I believe what’s happening in the market today is a short-term driver of gold prices spurred by ETF investments. While Deutsche Bank believes a “market friendly resolution to the U.S. debt ceiling may trigger a short-term correction in the gold price,” fundamentals seem to be place to keep gold prices elevated over the long run. Even in many economic scenarios today, Deutsche Bank believes gold prices “appear irreversible.”

A more important driver that will keep gold prices elevated over a longer time period is the Love Trade. Marcus Grubb, managing director of investment at the World Gold Council (WGC), highlighted the significant aspects of this trend in his interview with Andrew Bell on the Business News Network (BNN). He says investors need to consider the issues outside of the euro zone, the debt-ridden countries and fiscal deficits.

More important to him is what he calls the “transfer of wealth from west to east” and the accumulation of wealth, particularly in China and India. This is what is driving the longer term strength in the gold price.

He states that the demand for gold is particularly strong in China: The country has a $3 trillion surplus, with some of it in gold, and he estimates that household wealth will most likely rise by five times. China and India also share a strong cultural affinity for gold as an investment and jewelry. For these reasons, Grubb believes this will drive gold demand.

To see the interview in its entirety, click here.

Merrill Lynch has found that there is a positive correlation between gold jewelry demand and rising with increasing wealth. The chart below shows that as the GDP per capital rises so does demand for gold.

September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewelers are the busiest. The Muslim holy month of Ramadan begins in August and concludes with generous gift-giving in early September. Then it’s Diwali, known as “the festival of lights” in India, Christmas in the U.S., and Chinese New Year. The key to this seasonal strength over the past few years has been demand from China and India.

The spending spree has already begun in East Asia. In the WGC’s second quarter report, physical gold delivered at the Shanghai Gold Exchange was 14.65 percent higher than the previous year. Gold purchases also remained strong across East Asia, with tourists from mainland China buying gold in Hong Kong. In India, coin stocks, symbols of good fortune, were running low during the Akshaya Tritiya annual holiday in May.

Immediately following Marcus Grubb’s interview, I spoke with BNN’s Andrew Bell and expanded on the Love Trade season. We also discussed how today’s financial worries in the market place have caused a selloff in many equities and gold stocks. I talked about how many of these gold stocks are becoming extremely undervalued relative to the price of gold.

Click here to go to BNN’s website to see which stocks we discussed.

With approximately fifty percent of the world’s population controlling the Love Trade, we’re in for an exciting period. To kick off gold’s season, we invite you to join us on our upcoming gold webcast where we’ll discuss the themes above, as well as the opportunity in gold equities which we highlighted a few weeks ago.

Stay tuned for more details.

Index Summary

The major market indices were lower this week. The Dow Jones Industrial Average lost 4.24 percent. The S&P 500 Stock Index decreased 3.92 percent, while the Nasdaq Composite Index fell 3.58 percent.

Barra Growth outperformed Barra Value as Barra Value finished 4.24 percent lower while Barra Growth decreased 3.62 percent. The Russell 2000 Index closed the week with a loss of 5.32 percent.

The Hang Seng Composite Index finished lower by 0.47 percent, Taiwan fell 1.38 percent, and the KOSPI declined 1.75 percent.

The 10-year Treasury bond yield closed 17 basis points lower at 2.79 percent.

All American Equity Fund - GBTFX • Holmes Growth Fund - ACBGX • Global MegaTrends Fund - MEGAX

Domestic Equity Market

The figure below shows the performance of each sector in the S&P 500 Index for the week. All ten sectors declined. The best-performing sector for the week was utilities which decreased 2.13 percent. Other top-three sectors were consumer staples and technology. Industrials was the worst performer, down 6.01 percent. Other bottom-three performers were materials and energy.

Within the utility sector, the best-performing stock was Exelon which rose 0.85 percent. Other top-five performers were FirstEnergy, Public Service Enterprise, Constellation Energy, and PPL.

Strengths

The healthcare technology group was the best-performing group for the week, up 2 percent, led by its single member, Cerner. The firm reported second-quarter earnings and revenue in excess of the analysts’ consensus estimates.

The internet retail group outperformed, gaining 2 percent on strength in the stock of Amazon. and Expedia. Both companies reported quarterly earnings and revenues above the consensus estimates.

Two energy-related groups were among the top-ten outperformers. Oil & gas refining & marketing and oil & gas storage & transportation finished in third and fourth place, respectively. The former gained a fraction of one percent, and the latter lost a fraction of one percent.

Weaknesses

The healthcare facilities group was the worst-performing group, losing 11 percent on weakness in the stock of its single member, Tenet Healthcare. The weakness was probably related to earnings reports this week from two other hospital companies. HCA Holdings reported earnings and revenue below the consensus estimates. Health Management Associates beat the earnings consensus but revenue was below the consensus.

The electrical components & equipment group fell 10 percent, led down by its largest member, Emerson Electric. In a regulatory filing the company warned that it had seen a definite weakening of general business activity in June and July, and while industrial-related businesses are still strong, the company expects eventual softening due to the generally poor economic environment.

The tires & rubber group underperformed, down 10 percent, led by its single member, Goodyear Tire & Rubber. The company reported second-quarter earnings and revenue well in excess of the consensus estimates, but the stock sold off after the company warned of increasing raw material costs and uncertain economic conditions for the second half of the year.

Opportunities

There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

Failure to resolve the federal budget issue creates uncertainty, which is not helpful for markets.

U.S. Government Securities Savings Fund - UGSXX • U.S. Treasury Securities Cash Fund - USTXX

Near-Term Tax Free Fund - NEARX • Tax Free Fund - USUTX

The Economy and Bond Market

Treasury bond yields fell across the yield curve as the market reacted to weak economic data. Second quarter GDP grew 1.3 percent and first quarter GDP was revised down to a paltry 0.4 percent. With the exception of very short term treasury bills due in the next few weeks the market took all the debt ceiling/default talk in stride and focused on longer term economic fundamentals.

The chart below shows the deterioration in the University of Michigan Survey of Consumer Confidence which has been telegraphing how weak the economy is.

Strengths

On Friday, bonds rallied sharply on the weak GDP report. The current environment puts considerable pressure on the Fed to maintain its ultra easy monetary policies.

Initial jobless claims unexpectedly fell below 400,000 for the first time since early April.

Housing data was mixed this week but June pending home sales unexpectedly rose 2.4 percent.

Weaknesses

Durable goods orders fell 2.1 percent in June and many industrial companies have reported disappointing results in recent weeks.

Moody’s stated that odds are “virtually 100 percent” that Greece will be in default due to the recent European Union bailout package.

India raised interest rates by 50 basis points in a sign that emerging economies are still battling inflation.

Opportunities

Federal Reserve Chairman Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling from here.

Threats

The U.S. debt ceiling issue needs to be resolved soon as unintended consequences could be large.

World Precious Minerals Fund - UNWPX • Gold and Precious Metals Fund - USERX

Gold Market

For the week, spot gold closed at $1626.02, up $24.75 per ounce, or 1.5 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 6.6 percent. The U.S. Trade-Weighted Dollar Index slid 0.51 percent for the week.

Strengths

The gold price advanced to a record high of $1,632.80 per ounce on Friday morning after news that U.S. GDP rose at a 1.3 percent annualized pace in the second quarter, well below market expectations. The gold price was also boosted by the fact that President Obama and the House Republicans remain unable to forge an agreement to raise the debt ceiling.

India’s physical demand for gold remains high despite the spike in prices, wealth management firm UBS has said, adding that gold sales to India increased 23 percent from the start of the year until July. Also, gold sales rose 76 percent in May as compared to sales in April and a thumping 161 percent from a year ago, UBS said in a report.

Newmont Mining Corporation, the largest U.S. gold producer, boosted its dividend this quarter by 50 percent to 30 cents. The company raised the dividend as gold prices continue to reach record highs. Newmont said it will raise dividends by 5 cents for each $100 increase in the average price of gold during the previous quarter.

Weaknesses

South African gold mine workers and the major producers were due to meet on Friday for wage talks, in a bid to end a strike that could halt daily output worth up to $25 million at a time when the price of bullion is near record highs.

Goldcorp, the world’s second largest gold producer, cut its production guidance for the year to between 2.50 million and 2.55 million ounces, from 2.65 million to 2.75 million ounces, due to production problems at three mines.

Opportunities

Mining mergers and acquisitions transactional value in the first half of 2011 reached $96.3 billion, almost overtaking 2010’s value of $113.7 billion. Ernst & Young predicts that in the remainder of 2011 and in the whole of 2012 global mining merger activity will rise, with increases in transaction values.

Sovereign debt worries in Europe and in the United States could push the gold price up to $2,500 per ounce, and possibly even as high as $5,000 per ounce, according to research from Citigroup. “It is difficult to argue that gold is going to $5,000 an ounce on the basis of equivalence with the seventies bull market. However the drivers are the same—the debasement of fiat currencies as a store of value and fear over the outlook for the global economy,” Citigroup said.

Reuters' biannual poll of precious metals price forecasts found that over half of the respondents expect prices to average $1,500 an ounce or more this year. Analyst responses indicated that continued eurozone debt concerns, a weak dollar, and increased demand from emerging economies and central banks will support the gold price.

Threats

Barrick Gold, the world’s largest gold producer, raised its capital expenditure estimates for two of its main mines.

Barrick noted capital expenditures at the Pascua Lama mine could now cost $5 billion, compared to the previous $3.6 billion. Also, Pueblo Viejo will cost approximately $3.8 billion, exceeding the initial $3.3 billion estimate.

Rising capital costs is a threat to margin expansion for the miners. This has been a headwind to their price performance.

July 29, 2011

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July 25, 2011

Rev Up for Resources Boom in China

July 22, 2011

2011 Halftime Report: The Cues for Copper

Global Resources Fund - PSPFX • Global MegaTrends Fund - MEGAX

Energy and Natural Resources Market

Strengths

June global steel production rose 1.7 percent month-over-month to a daily record and an annualized 1.55 billion tonnes, with China's output up 2.8 percent month-over-month, according to WorldSteel data. Total global output rose 8 percent year-over-year in June to 127.7 billion tones.

Indian oil demand increased year-over-year by 57 thousand barrels per day (1.9 percent) in June to 3.146 thousand barrels per day while India's crude oil imports came in at a record high of 3.179 thousand barrels per day.

According to the China Coal Industry Association (CCIA), in the first half of the current year, China's coal output amounted to 1.77 billion tonnes, up 12.7 percent compared to the same period of 2010.

Chinese official (CSSC) stainless steel production hit an all-time high of 3.13 kilotonnes in the second quarter of this year, up 9 percent year-over-year. Total first-half output was 6.2 million tonnes, up 13.5 percent year-over-year. Meanwhile, U.S. stainless steel fell 25 percent quarter-over-quarter in April–June, with first-half output falling 1.8 percent year-over-year to 1.17 million tonnes.

Weaknesses

Analysts at Macquarie noted there remain little signs of life in the U.S. construction sector, with the American Institute of Architects Architecture Billings Index (ABI) falling for the third consecutive month. At 46.2, the index suggests a contraction in activity and has now hit the lowest point since June 2010. Historically, the ABI has been a key leading indicator for the non-residential construction sector, and the lack of design activity suggests little pickup in steel purchases in 2011.

Chilean copper production fell close to 9 percent year-over-year in June to 426.5 kilotonnes, bringing first-half output to 2.57 million tonnes, down 2.2 percent year-over-year. Meanwhile Peruvian output was 500 kilotonnes in the first half of 2011, down 2.4 percent year-over-year.

The latest International Air Transport Association (IATA) data for June pegs the growth of passenger air traffic at 4.4 percent, but freight traffic declined for the second straight month as the disruptions from the Japanese earthquake continue to weigh.

Norsk Hydro is cutting jobs and capacity at its operations in Spain and Portugal because of lower demand from builders, said CEO Svein Richard Brandtzaeg.

Opportunities

Bloomberg News reported that major power plants in China held a total of 65 million tonnes of coal stockpile, equivalent to 16 days of coal usage. The China Electricity Council has said that China’s power demand may grow by 12 percent this year to 4.7 trillion kilowatt hours.

Demand for physical gold in China may exceed consumption in India by the end of this year, said Chuck Jeannes, CEO of Goldcorp. While global demand is advancing on concerns about financial turmoil in the U.S. and some European countries, consumers in China are buying larger amounts of the metal as an inflation hedge, Jeannes said. Demand for gold in both China and India may help lift the price of gold to $1,700 an ounce by the end of the year, said Jeannes.

India may become the world’s second biggest steel producer in four to five years and may have an output capacity of 150 million tonnes by the year ending March 2018, the Steel Secretary said.

Hot weather in the U.S. corn belt is likely to reduce crop yields for the world's top exporter to as low as 155 bushels per acre, down from around 158 bushels estimated by the government, an industry official said.

Threats

Australia’s planned carbon tax may reduce the value of the coal industry by about A$8 billion as producers bear higher costs, according to Wood Mackenzie. “This is an average of a 4 percent reduction in NPV of coal companies’ Australian portfolios, said a researcher at Wood Mackenzie.

Namibia plans to raise the corporate tax rate on mining companies other than diamond producers in the next financial year, Finance Minister Saara Kuugongelwa-Amadhila said. The country plans to raise the tax on mines other than gem operations to 44 percent from 37.5 percent, Kuugongelwa-Amadhila said on state radio. Diamond mines are taxed at a 55 percent level, she said. A capital gains tax will also be imposed on the sale of mineral rights or operation.

South African coal miners who are members of the National Union of Mineworkers and Solidarity have gone on strike over current pay negotiations.

China Region Fund - USCOX  •  Eastern European Fund - EUROX

Global Emerging Markets Fund - GEMFX

Emerging Markets

Strengths

As part of fiscal stimulus in a generally tightening monetary environment, the China Ministry of Finance said in a statement on Thursday it will allocate more funds to the nation’s construction of water projects. Apparently, those projects will drive up demand for engineering and base materials.

Korea’s industrial production increased 6.4 percent year-over-year in June, lower than the consensus forecast of 7 percent. However, the absolute production level is 152, pointing to the second highest on record, which makes us continue to be bullish on Korean car makers and high-end industrial and chemical producers.

HTC, a Taiwan Android smart phone maker, said it expected revenue from China to quadruple in the second half of this year. This shows robust demand for high-end smart phones in China and the sector is expected to continue to do well. We are optimistic for the future of this Taiwan smart phone maker, along with parts suppliers to smart phone makers such as Apple.

Brazilians continue to show a penchant for talking on their mobile phones. In June, there were 2.3 million net additions bringing the total to 217 million users, or a 112 percent penetration rate in the country. Telecoms have been among the top performers this year in Brazil with TIM up 46 percent and VIVO gaining 30 percent year-to-date.

Liverpool, the Mexican retailer, reported strong results for the second quarter with sales growing by 12.6 percent and EBITDA increasing 25 percent on lower costs.

Despite headline risk, tourists are not abandoning Mexico—ASUR’s traffic (which includes the Cancun airport) in June grew by 2.9 percent.

Strong drilling numbers in the first half of the year suggest that the oil companies are relatively confident that tax rebalancing will eventually happen.

Weaknesses

The tragic Wenzhou high speed train crash last weekend triggered soul-searching among the Chinese people. Under attack from the media and the people for the accident and the high debt the train system has accumulated over the years, the Railway Ministry is said to be withdrawing some regional developments, which does not bode well for cement and railway equipment and devices. We have, for now, reduced or closed up exposures that are likely to be negatively impacted by decreases in railway spending.

China Shipping Container Lines on Thursday said it would swing to a net loss for the first half of 2011 from a profit a year ago, with the international container market adversely affected by the debt crisis in Europe. The firm said the market was also hit by the earthquake in Japan. In Japan, the Big Three shippers all revised down their current year operating forecasts. As a leading indicator, a shipping slump may foretell a slow growth in the world economy.

Taiwan’s second quarter GDP expanded 4.88 percent year-over-year, higher than the Bloomberg consensus estimate of 4.5 percent, however, it was a deceleration compared to the growth of 6.6 percent in the first quarter. Fixed investment was the major drag to the economy, while consumer spending is a solid support.

The sugar cane harvest in Brazil, the world’s largest producer, was down 7.2 percent in the first half of July. Lower crops have been supportive of the sugar prices that are up 22 percent this year and adding to inflationary pressures.

Chile’s industrial production in June expanded by 4 percent vs. 7 percent estimates year-over-year mainly due to a lower contribution from mining that declined by 5 percent.

The Turkish Statistical Institute announced foreign trade figures for June 2011. In June 2011, exports increased by 19.3 percent, imports increased by 41.7 percent and the trade deficit increased by 79.2 percent, compared to the same month of 2010. Between January and June 2011, total trade deficit increased by 88.2 percent compared to the same period of 2010.

In July, the Turkish central bank (CBT) maintained its year-end inflation forecast at 6.9 percent; above the 5.5 percent inflation target, but still within the two-percentage-point inflation band. According to the central bank’s latest inflation report, inflation is expected to stabilize around 5 percent in the medium term.

Opportunities

Historically, the Chinese banks enjoy long-term stable growth as they are relatively less prone to cyclical ups and downs. This occurs for a number of reasons. In a slowing economy, they are providing more loans to stimulate; in a tightening market environment, they enjoy higher net interest margin (NIM) as they are protected by the government to sustain their profits; mainland banks are organically growing intermediary business, or non-interest incomes. However, the market this year had been concerned with the debt exposure these banks had lent to the economy. This bearishness priced Chinese banks at a price-to-earnings multiple that was reached only at the worst time of the global financial crisis at the beginning of 2009 as we had discussed in the prior week’s Investor Alert. The figure below by Deutsch Bank elaborates the debt situation in China vis-à-vis other countries of the world. The Chinese government debts are 32 percent of China’s GDP, which is lower compared with all industrial countries; and total debt in China is 159 percent of GDP, also lower than industrial countries.

Mr. Ollanta Humala officially became the President of Peru on July 28, vowing to continue market-friendly policies and to deal with inequality issues in the country. There are more and more signs that investors are warming up to Mr. Humala—Lima’s stock exchange recouped earlier losses and although down 6 percent for the year, it is the best performing exchange in Latin America year-to-date.

BCA Research analysts observe a supporting factor for Russian equities’ relative performance: Russia is among the few with improving profit margin trends relative to the emerging market average.

Threats

The Wenzhou train crash exposed corruption in the Chinese government system, and it tarnished the reputation of the China-made high speed train system. The event will slow infrastructure investments in China, at least in railway system.

While most discussion of the U.S. debt ceiling debate focused on the potential upward effects on the U.S. bond yield, the realization of a default (or downgrade) would entail downward revisions to GDP growth. Renaissance Capital estimates that a 1 percent decline in U.S. GDP growth lowers Russia’s GDP growth by 2 percent.

A number of recent developments threaten to undermine the “reset” in relations between the U.S. and its allies. A U.S. administration banned Russian officials implicated in the death of an anti-corruption lawyer; U.S. intelligence agencies linked a Russian intelligence official to a series of bombings in Georgia, including one in September near the U.S. embassy; and Polish investigators rejected a Russian claim that the pilots of late President Lech Kaczynski’s plane were solely responsible for the deadly crash.

Leaders and Laggards

The tables show the performance of major equity and commodity market benchmarks of our family of funds.

Weekly Performance

IndexCloseWeekly

Change($)Weekly

Change(%)Natural Gas Futures

4.15

-0.25

-5.59%

10-Yr Treasury Bond

2.79

-0.17

-5.77%

Gold Futures

1,628.50

+24.80

+1.55%

Oil Futures

95.85

-4.02

-4.03%

S&P Basic Materials

237.59

-12.14

-4.86%

DJIA

12,143.24

-537.92

-4.24%

S&P BARRA Value

591.67

-26.21

-4.24%

S&P 500

1,292.28

-52.74

-3.92%

S&P BARRA Growth

693.28

-26.06

-3.62%

S&P Energy

563.02

-27.07

-4.59%

Hang Seng Composite Index

3,187.53

-1.45

-0.05%

Korean KOSPI Index

2,133.21

-38.02

-1.75%

Nasdaq

2,756.38

-102.45

-3.58%

Russell 2000

797.03

-44.79

-5.32%

XAU

205.81

-14.55

-6.60%

S&P/TSX Canadian Gold Index

376.21

+11.01

+3.01%

Monthly Performance

IndexCloseMonthly

Change($)Monthly

Change(%)Natural Gas Futures

4.15

-0.16

-3.75%

Gold Futures

1,628.50

+115.80

+7.66%

Oil Futures

95.85

+1.08

+1.14%

S&P/TSX Canadian Gold Index

376.21

+11.14

+3.05%

S&P Energy

563.02

+11.88

+2.16%

XAU

205.81

+6.37

+3.19%

S&P Basic Materials

237.59

-5.10

-2.10%

S&P BARRA Growth

693.28

+2.83

+0.41%

S&P 500

1,292.28

-15.13

-1.16%

DJIA

12,143.24

-118.18

-0.96%

S&P BARRA Value

591.67

-17.10

-2.81%

Korean KOSPI Index

2,133.21

+38.79

+1.85%

10-Yr Treasury Bond

2.79

-0.32

-10.31%

Nasdaq

2,756.38

+15.89

+0.58%

Russell 2000

797.03

-22.89

-2.79%

Hang Seng Composite Index

3,187.53

-332.01

-14.83%

Quarterly Performance

IndexCloseQuarterly

Change($)Quarterly

Change(%)Natural Gas Futures

4.15

-0.42

-9.14%

Gold Futures

1,628.50

+93.80

+6.11%

Korean KOSPI Index

2,133.21

-75.14

-3.40%

S&P Basic Materials

237.59

-16.32

-6.43%

DJIA

12,143.24

-620.07

-4.86%

S&P BARRA Growth

693.28

-17.60

-2.48%

S&P Energy

563.02

-26.08

-4.43%

S&P 500

1,292.28

-68.20

-5.01%

Nasdaq

2,756.38

-116.15

-4.04%

Russell 2000

797.03

-64.52

-7.49%

S&P BARRA Value

591.67

-48.87

-7.63%

Oil Futures

95.85

-17.01

-15.07%

Hang Seng Composite Index

3,187.53

-179.73

-5.34%

S&P/TSX Canadian Gold Index

376.21

-25.60

-6.37%

XAU

205.81

-14.58

-6.62%

10-Yr Treasury Bond

2.79

-0.52

-15.70%

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.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Eastern European Fund invests more than 25 percent of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

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 percent to 10 percent of your portfolio in these sectors. Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments