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June 2015

For the quarter ending June, spot gold closed at $1,172.42, down $11.26 per ounce, or 0.95 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 3.22 percent. The U.S. Trade-Weighted Dollar Index slid 2.92 percent. The Philadelphia Gold & Silver Index (XAU) fell 3.60 percent. The S&P/TSX Global Gold Index shed 3.50 percent, and the FTSE/JSE African Gold Mining Index tumbled 16.79 percent. See complete fund performance here.

Strengths

  • Speaking recently in London, Harriet Hunnable, executive director of precious metals markets at CME Group, said that the Shanghai Gold Exchange is the most successful challenger so far in terms of liquidity in the gold market versus trading houses in the West. She added that the CME Hong Kong kilobar gold contract is doing phenomenally well for such a new product. As the physical trading in London has come to a crawl due to fear of regulatory oversight, this is a positive move as it increases transparency and hopefully becomes the benchmark for gold price setting.
  • The Shanghai Gold Exchange is expected to receive approval from its central bank for a yuan-denominated gold fix soon, according to Reuters. If the yuan fix takes off, China could draw buyers in the mainland and foreign suppliers to pay the local price, making the London fix less relevant in the world’s biggest bullion market. Additionally, the Shanghai Gold Exchange is in discussions with the CME Group about listing each other’s contracts on their respective exchanges, according to the exchange’s vice-president.
  • Klondex Mines released drilling results at Fire Creek showing intercepts of 13.5 ounces per tonne (opt) over 11.5 feet on the Hui Wu Vein. These results provided further data that the initial grades reported are likely understating the grades and the additional infill results are pointing to overall higher grades. Dundee Capital Markets noted the new data increased its estimate to 3.45 opt versus 0.45 opt for the area in question, increasing its target net asset value (NAV) by 22 percent for Klondex Mines’ share price.

Weaknesses

  • Rallying Chinese stocks and a six-year U.S. bull market cut the appetite for gold in the first quarter, according to the World Gold Council. Global demand for jewelry, coins and bars fell 5 percent in the first quarter from a year earlier as shoppers in the Middle East, China and the U.S. reigned in purchases. Trading volumes in the global spot gold market have fallen to their lowest in a year, with shrinking liquidity and a slowdown in interbank trade, making customers reluctant to transact on a large scale.  Tighter regulatory oversight post the accusations of price manipulation has curtailed interbank activity.
  • Australia, an engine room of the decade-long global commodity boom, is forecasting a staggering 90-percent plunge in spending on projects, according to Mineweb. The fall in spending could portend more mergers in the future. The latest quarterly update of exploration spending from the Australian Bureau of Statistics shows spending on mineral exploration in the country hit a fresh, near-decade low.

  • Global coin demand this year will probably slump to the lowest since 2008, according to TD Securities. Some bloggers are using this and the gold ETF liquidations to support their disposition that gold should be avoided at this time. However, as the chart above shows, we are now approaching some of the longest timeframes without a 10 percent correction in the S&P 500 Index. In addition, apparently regulators care much more about manipulation of the stock market than gold. This is because the sentence handed down to Mirus Futures for allegedly spoofing the gold futures market in February 2014 was only $200,000, while Nav Sarao, the kid who allegedly spoofed the S&P 500 Index in 2010, could be sentenced to up to 380 years in jail.

Opportunities

  • Incrementum AG published its ninth rendition of “In Gold We Trust 2015” recently. The publication provides an encompassing analysis of the global gold market and its relationship to governmental monetary and debt policies around the world.  Seasonality was one topic touched on in the report. While we believe gold has a long-term role in a portfolio for diversification, we are now approaching what could be one of the most opportune times of the year to add gold and/or silver to your asset mix as July is historically a low point in the calendar year, in terms of prices.

  • This year has been a busy one for acquisitions as the value of gold deals jumped more than 150 percent in the first quarter compared to a year earlier. Producers are seizing on a wave of mine sales and tumbling asset valuations to expand output or secure growth projects. Low interest rates, private equity and some miners flush with cash while others are in need of major debt reduction, may cause a sharp increase in precious metals mergers and acquisitions (M&As) this year. Bloomberg shows that deals for gold mines reached a two-year high in the second quarter and the premium paid for public gold companies soared, which was the second highest over the past 12 years. This bodes well for further consolidation in the industry and highlights how cheap current valuations are.
  • China has announced the establishment of a new international gold fund with over 60 countries as members. The fund, which expects to raise 100 billion yuan ($16 billion), will develop gold mining projects across the economic region known as the New Silk Road. The project will facilitate the central banks of member states to acquire gold for their reserves more easily. A new research report by analyst Simona Gambarini of Capital Economics suggests official sector buying can take much of the credit for establishing something of a floor for gold this year. Central banks have upped their share of overall gold demand from around 2 percent in 2010 to as much as 14 percent last year. Gambarini expects this trend to strengthen, thereby pushing up the gold price. Capital Economics has a year-end gold forecast of $1,400 per ounce. 

Threats

  • Bank of America points out that U.S. equity funds have suffered $100 billion of outflows in 2015 while the S&P 500 Index has held steady and is currently flirting with all-time highs. The bank says the upcoming summer months offer a lose-lose proposition for risky assets: Either the macro improves and the Federal Reserve gets to hike rates, or it doesn’t and earnings per share downgrades drag risky assets lower. Thus, BoA advocates higher-than-normal cash levels and adding gold to portfolios. Further, summer starts the transition to seasonally stronger gold prices that in the past have remained into the fall. Bridgewater’s Ray Dalio announced that everyone should allocate some of their portfolio to gold, saying that those who don’t “either don’t know history or don’t know the economics of it.”

  • Mineweb featured a two-part piece written by Anthony Hart of the Perth Mint titled “12 Reasons to Own Gold Now.” One of the 12 reasons cited is “equity market valuations,” which is particularly pertinent at this time, considering the Federal Reserve is about to embark on ending a monetary experiment unlike any other ever attempted by a central bank. The policy of free money for investors with no risk of loss is coming to an end. And how do you suppose investors are prepared for the coming grand finale? Shown above is net free credit relative to the S&P 500 Index market cap and the absolute net free credit balance. As a reminder, net free credit is the free credit balances in cash and margin accounts net of the debit balances in margin accounts. Net free credit is a measure of cash available to meet margin calls. Unlike margin debt, net free credit is at an extreme reading in absolute terms and relative to market capitalization. In April, net free credit broke below the extreme lows relative to the S&P 500 market capitalization set in February 2000, just prior to the March 2000 peak and bursting of the Y2K tech bubble.
  • South Africa’s biggest gold-mining labor union demanded a pay package of more than 80 percent for entry-level underground workers. The union’s wage request far outstrips the country’s annual rate of inflation. Negotiations are set to start in June. Along these issues, AngloGold Ashanti’s CEO said that South Africa’s competitive position is deteriorating rapidly. He said that there cannot be a debate on wage increases without economic consequences. He also pointed out that South Africa used to be the number one gold producer in the world but is now ranked eighth.

Past performance does not guarantee future results.

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. 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. The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies. The FTSE/JSE African Gold Mining Index is a market capitalization weighted index.

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 06/30/2015: Klondex Mines Ltd. 16.18% in Gold and Precious Metals Fund, 17.34% in World Precious Minerals Fund; AngloGold Ashanti Ltd. 0.04% in Gold and Precious Metals Fund, 0.05% in World Precious Minerals Fund 0.05%, Incrementum AG 0.00%.

Net Asset Value
as of 08/04/2015

Global Resources Fund PSPFX $5.15 0.07 Gold and Precious Metals Fund USERX $4.74 0.02 World Precious Minerals Fund UNWPX $3.96 0.01 China Region Fund USCOX $7.96 0.04 Emerging Europe Fund EUROX $5.77 -0.02 All American Equity Fund GBTFX $27.88 -0.03 Holmes Macro Trends Fund MEGAX $21.17 -0.02 Near-Term Tax Free Fund NEARX $2.24 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 -0.01