Third Quarter 2016

For the quarter ended September 30, 2016, the World Precious Minerals Fund rose 15.63 percent, outperforming the fund's benchmark, the NYSE Arca Gold Miners Index, which fell 4.37 percent. The Gold and Precious Metals returned 4.04 percent, outperforming its benchmark, the FTSE Gold Mines Index, which fell 6.00 percent. See complete fund performance here.

Past performance does not guarantee future results. 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.

Strengths

  • Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, says there is political risk building into the gold market, including the Italian referendum and U.S., French and German elections. Blanch adds that in the past, gold used to be driven more by the U.S. dollar and commodity market movements, but "in this day and age, it's a new world." He also mentions that one-third of government bonds are yielding negative. The chart below shows that $9.2 trillion of sovereign bonds are trading with negative yields.

There are Now More than $9 Trillion of Sovereign Bonds Outstanding With Negative Yields
click to enlarge

  • Platts reported that both Chinese and Russian banks increased their gold purchases during the month of June, after they had both slowed their gold purchases in May. Russia added around 18 metric tons, and China added around 15 metric tons. China is now the sixth-largest holder of gold reserves, and Russia is the seventh-largest. The two countries have accounted for over 95 percent of total central bank purchases of gold in the last two years, in their efforts to diversify away from foreign currency.
  • Gold investment in the first half of the year broke previous levels, as seen in the chart below, with both coin and bar demand, as well as ETF product demand, soaring to record levels. Gold demand will get another boost in India as wedding season starts to heat up, particularly with the metal currently trading at a $40 to $50 discount in the country, reports Bloomberg. Bullion traders noted persistent buying by jewelers at domestic markets to meet seasonal demand.

Gold investment in first half of 2016 broke previous levels
click to enlarge

Weaknesses

  • A surge in gold prices could cut Indian demand for the precious metal to the lowest in seven years, reports Bloomberg. "Price is a very important factor for Indians and if it remains at these levels then I don't see much recovery in demand," said Bachhraj Bamalwa, a director at the All India Gems & Jewelry Trade Federation. Weak demand since the start of 2016 has forced dealers to sell gold at a discount to clear inventories. In addition, India's gold imports dropped almost by half in June, compared to a year earlier. June imports of 32 tonnes were 43 percent less than June last year, at 55.7 tonnes.  This is a significant drop for India, which along with China, are the top two countries for gold consumption.
  • Anti-corruption measures in China have taken a toll on gold jewelry consumption, with demand falling 17.4 percent compared to last year. Meanwhile, the investment-related demand for gold has picked up, with gold bar and coin purchases up 25.3 percent and 17.3 percent, respectively. China's Ministry of Industry and Information Technology estimates that the country's gold consumption will increase to 1,200 tons by 2020 from 986 tons in 2015.
  • European banks have inundated the European Central Bank (ECB) with their largest request for dollar funding in four years.  Bloomberg reported recently that 12 banks sought $6.248 billion in liquidity.  What seemed obvious was this was driven by the continued troubles ts Deutsche Bank, but according to one source, there were no German bidders in the mix.  This could mean that the banks in Europe were simply taking precautionary measures in case there will be a crisis. 

Opportunities

  • Gold forecasts are coming in resoundingly bullish. ABN Amro, rated as the most accurate forecaster by Bloomberg, targets a gold price of $1,425 per ounce, according to analyst Georgette Boele. Boele cites prospects for accommodative central bank policies in Europe and elsewhere in the world. UBS also pronounced its target at $1,400, up from $1,250. UBS analyst Joni Teves sees gold reaching this level in the short term, writing that "gold has likely entered the early stages of the next bull run." Teves also sees prices averaging $1,340 in the second half of this year. State Street, meanwhile, sees a price range of $1,400 - $1,450. State Street also recommends that clients hold between 2 and 10 percent of their portfolio in gold.
  • David Haughton of CIBC says the gold rally we've experienced so far this year is sustainable. He points to three key factors: 1) Comparing this rally to five others over the past 40 years shows gold equities are still 40-50 percent off the previous high, while historical cycles reached around 20 percent of old highs in the same time frame. 2) Most companies are now demonstrating fiscal discipline that could support outperformance ahead. 3) Investors are mostly underweight gold equities and macro factors appear supportive.
  • More than 500 million people are living in a climate of negative central-bank interest rates, according to a study by Standard & Poor's and cited by HSBC. This represents around 25 percent of global GDP and is a clear sign of "economic and policy desperation" – a bullish factor for gold. Francisco Blanch of Bank of America agrees, stating that central banks "are very scared of hiking rates and that is a very good story for gold."

Threats

  • Will gold miners maintain their capital discipline? Bloomberg reports that since the price of gold rose to its best first half of the year in nearly four decades, earnings reports could indicate that miners are preparing to ease in terms of spending. "Historically there's been a very high correlation, almost a one-to-one correlation, between costs and the gold price, implying that with higher gold prices you will likely see costs rise at the same time," Josh Wolfson of Dundee Capital Markets said. Wolfson added that a majority of miners structured spending based on the assumption that gold will trade between $1,100 and $1,150 an ounce.  Let's hope the miners learned something over the prior three painful years of falling gold prices.
  • Some of South Africa's biggest mining companies are opposed to a government proposal that 1 percent of their annual revenue be spent on developing communities associated with their operations, reports Bloomberg. Some have countered with suggestions that they pay a share of profit instead. These companies already pay royalties to the government, differing by commodity. For example, gold producers pay around 3 percent of revenue, says Bloomberg.
  • Deutsche Bank's counterparties seem to have mounting concerns about doing business with Europe's largest investment bank, according to an article on Zero Hedge. Bloomberg data show a number of funds that clear derivatives trades with Deutsche Bank AG have withdrawn some excess cash and positions held at the lender. The bank is one of the most interconnected on the planet. Any type of unwinding of Deutsche Bank's assets would have major repercussions to the global banking system.  Perhaps that's why news stories have speculated that the U.S. Justice Department would assess a much smaller fine against the bank for past misdeeds.  Ironically, Wells Fargo and other U.S. banks have been in the news for creating accounts for the purpose of collecting higher fees from their customer base, lowering the threshold of trust. 

 

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. The FTSE/JSE African Gold Mining Index is a market capitalization weighted index. (Returns are quoted as price return in the home currencies of each index. For example, the S&P/TSX Canadian Global Gold Index is calculated using Canadian Dollars.)

Net Asset Value
as of 12/02/2016

Global Resources Fund PSPFX $5.50 0.06 Gold and Precious Metals Fund USERX $7.50 0.24 World Precious Minerals Fund UNWPX $6.72 0.25 China Region Fund USCOX $7.71 -0.09 Emerging Europe Fund EUROX $5.57 0.03 All American Equity Fund GBTFX $23.10 0.01 Holmes Macro Trends Fund MEGAX $19.81 -0.02 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change