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March 2015

For the quarter ending March, spot gold closed at $1,183.68 down $1.18 per ounce, or 0.10 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 0.93 percent. The U.S. Trade-Weighted Dollar Index surged 8.96 percent for the quarter. See complete fund performance here.

Strengths

  • The CME Group launched a one-kilogram gold physical delivery futures contract in Hong Kong on January 26. It is tied directly to .9999 gold prices in Hong Kong and is physically delivered in Hong Kong to provide access to around-the-clock price discovery for the Asian gold market. Asia is the top consumer of physical bullion in the form of jewelry, bars and coins, but there is growing disenchantment with benchmark prices set in the West, which tend to be influenced by speculators. This new futures contract market will establish a price reference in the top consuming region and better reflect Asian demand.
  • The U.S. dollar has lately broken a streak of positive gains and now appears to have run out of momentum. This pause in the currency is a welcome sign for gold. However, the greenback remains considerably strong and is a headwind for gold. Bank of America (BofA) believes the euro/dollar squeeze is not over, meaning the dollar should continue to correct lower. Given this outlook, BofA recommended buying any dips in the gold price and set a target of $1,307 per ounce.
  • HSBC analysts, some of the earliest adopters of a bullish view on the U.S. dollar back in 2013, now believe the dollar rally might be at or nearing its end too. The analysts point out that past dollar rallies of this type have mostly seen a dollar appreciation of around 20 percent and lasted under a year, meaning the current rally is already extended. Furthermore, they pointed out that disappointing U.S. economic data is mounting and being largely ignored. Valuations suggest that the U.S. dollar may now be the world’s most overvalued currency, only being overshadowed by the strength in the Swiss franc since its tie to the euro was cut.

Weaknesses

  • JPMorgan Chase, Barclays, Goldman Sachs, HSBC, Bank of Nova Scotia, Société Générale (SocGen) and UBS will be the participant banks in setting the LBMA Gold Price benchmark. Several of these banks have been involved in commodities price-fixing scandals. China, now a major player in the global gold trade, was not granted representation. Commentators have speculated that had Chinese banks been included, there would be less room for manipulation.
  • The precious metals analysis consultancy Metals Focus revealed that the world’s top ten gold miners had moved into a combined negative cash flow position during the last quarter of 2014. This is after three consecutive quarters in which they had recorded positive free cash flow. Perhaps most significant was a 9-percent quarter-over-quarter rise in capital spending, mostly sustaining capital expenditures. The consultancy notes that while sustaining capex accounted for less than 50 percent of total capex in 2010-2013, that figure had risen to around 70 percent in the fourth quarter of last year. Another factor highlighted by Metals Focus is the high level of net debt within the grouping. Cumulatively it stood at $27.5 billion at the end of 2014 and will take several years to pay off, based on earnings before interest and taxes. If the gold price remains weak or falls further, it could take even longer.
  • The Federal Reserve upgraded its U.S. economic assessment to “solid growth” from “moderate growth” on strong jobs gains. It also noted the lower unemployment rate and voiced expectations of labor market improvement. The Fed is choosing to ignore soft retail sales, disappointing income growth, the lowest labor force participation rate since 1978, dismal durable goods orders, collapsing industrial commodity prices and a negative S&P 500 Index earnings growth rate (-0.5 percent, excluding Apple).

Opportunities

  • Dundee Capital Markets initiated coverage of Klondex Mines with a "buy" rating. It highlighted that the company is positioned as a high-margin and growing producer, has no material capital requirements and is forecasted to generate sizable free cash flow. Furthermore, the company's assets host highly prospective exploration upside.
  • Big mining costs are expected to fall in the first quarter of 2015 as the collapse in oil prices will have a positive effect on operating costs at mines employing diesel-powered equipment and particularly those that rely on oil-fueled generators. Energy consumption can account for as much as 40 percent of some mines’ operating costs, particularly those in remote locations which have no access to grid power.
  • TD Securities published a precious metals outlook in which the firm questions the sustainability of the supply/demand balance in the gold market due to declining reserves. Last year marked the third straight year of reserve declines, with exploration spending being reduced as miners focused on capital preservation. Total reserves for the large-cap producers are down around 24 percent from their 2011 peak. The decline highlights that existing exploration budgets are not sufficient to keep pace with current mining depletion. In contrast, Integra Gold announced it recently intersected 14.8 grams per tonne (g/t) of gold over 10 meters and 11.5 g/t of gold over eight meters in a step-out drilling up to 330 meters from triangle. Discoveries such as this could make Integra a takeover target.  Dundee Capital Markets initiated coverage of Klondex Mines with a “buy” rating. It noted that the company is positioned as a growing high-margin producer, has no material capital requirements, and that the company is forecasted to generate sizable free cash flow. Furthermore, the company’s assets host highly prospective exploration upside.  RBC Capital Markets published a report highlighting Osisko Gold Royalties as being well-positioned to outperform in the current price environment. This is due to a strong balance sheet that could allow it to pursue accretive deals as well as positive optionality in its existing portfolio. This is yet another implication of the gold-royalty business model which has outperformed broader gold miner stocks in recent years

Threats

  • Analysts at SocGen published a report in which they forecast that the gold price, having given away all its early year gains, is headed sharply lower, as they see a continuation in the dollar’s strength. They see the price of gold falling to an average of $925 per ounce between 2016 and 2019. CPM Group sees gold falling for a third straight year in 2015 as concern eases that global economies will falter, curbing demand for the metal as a haven. CPM Group forecast gold will average $1,208 per ounce in 2015.
  • AngloGold Ashanti, Gold Fields, Sibanye Gold and Harmony Gold Mining have been trying unsuccessfully for at least a decade to link pay increases to efficiency gains. They will try again by lobbying for this in the wage negotiations with employees, set to begin in April. South Africa’s mining industry remains a highly complex space where aligning competing interests has proved difficult. Mining companies, the labor force and government all seem to have very different opinions on how things should be done, leading to instability. Justin Froneman, director of equity research at Credit Suisse, said that international investors want active leadership at both the corporate and country level in order to reduce uncertainty. As negotiations near, the Association of Mineworkers and Construction Union stated it will have solidified its demands by the end of March. The union, which was behind South Africa’s longest mining strike last year, emphasized its pessimism regarding the upcoming negotiations. The central banks of Switzerland, Sweden and Denmark are now imposing negative interest rates on bank deposits. Analysts at the Commonwealth Bank of Australia claim that almost a quarter of worldwide central bank reserves now carry a negative yield.

Past performance is no guarantee of future results.

Diversification does not protect an investor from market risks and does not assure a profit.

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 U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund and the World Precious Minerals Fund as a percentage of net assets as of 3/31/2015: CME Group 0.00%; JP Morgan Chase 0.00%; Barclays 0.00%; Goldman Sachs 0.00%; HSBC Holdings PLC 0.00%; Bank of Nova Scotia 0.00%; Société Générale S.A. 0.00%; UBS Financial Services Inc. 0.00%; Apple Inc. 0.00%; Integra Gold Corp. 0.53% World Precious Minerals Fund; Klondex Mines Ltd. 12.37% in Gold and Precious Metals Fund, 13.18% in World Precious Minerals Fund; Osisko Gold Royalties 7.13% in Gold and Precious Metals Fund, 10.29% in World Precious Minerals Fund; AngloGold Ashanti Ltd. 0.07% in Gold and Precious Metals Fund, 0.08% in World and Precious Minerals Fund; Gold Fields Ltd. 1.31% in Gold and Precious Metals Fund, 0.32% in World Precious Minerals Fund; Sibanye Gold Ltd. 0.00%; Harmony Gold Mining Co. Inc. 0.83% in Gold and Precious Metals Fund, 0.83% in World Precious Minerals Fund; Credit Suisse Group 0.00%.

Net Asset Value
as of 05/22/2015

Global Resources Fund PSPFX $6.09 -0.05 Gold and Precious Metals Fund USERX $5.90 No Change World Precious Minerals Fund UNWPX $4.88 -0.01 China Region Fund USCOX $9.97 0.10 Emerging Europe Fund EUROX $6.82 -0.05 All American Equity Fund GBTFX $28.66 -0.06 Holmes Macro Trends Fund MEGAX $21.20 -0.01 Near-Term Tax Free Fund NEARX $2.24 No Change China Region Fund USCOX $9.97 0.10