Fourth Quarter 2016

For the quarter ended December 31, 2016, the World Precious Minerals Fund fell 28.79 percent, underperforming the fund’s benchmark, the NYSE Arca Gold Miners Index, which fell 20.24 percent. The Gold and Precious Metals declined 25.33 percent, underperforming its benchmark, the FTSE Gold Mines Index, which fell 19.06 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

  • In the final quarter of the year, with the impending rate hike looming as we approached yearend, gold prices started to fall similar to the yearend rate hike scenario of 2015. But the price correction did bring the natural buyers back to the market. After gold price discounts hit a record high of $100 an ounce in July, prices in India swung to a premium for the first time in October, reports Reuters, around $2 an ounce. Bloomberg reports that gold imports by India climbed 10 percent in November, to the highest of 2016.
  • China’s gold withdrawals surged in November as prices fell too, according to the monthly report from the Shanghai Gold Exchange. The increase of 214.72 tonnes was a 40 percent rise over the October figure. According to Bloomberg Intelligence, the five-year average gold premium is typically around $5.50 an ounce in China, but it soared to almost $40 an ounce, as falling prices invite “bargain buying” among the Chinese. This level of demand puts China on track to potentially maintain its position as the world’s largest gold consumer. Rumors and reports indicate that international banks are having difficulties with their imports, as the People’s Bank of China is taking longer to approve each importing transactions. The central bank may be trying to unofficially restrict gold imports to curb high capital outflows from China’s investors.
  • Precious metal prices did not rally until the last week of the year, with gold rising above $1,150 per ounce, snapping a three-year losing streak with an 8.56 percent gain. As shown in the chart below, gold prices track very closely with real interest rates. What turned out to be a test of wills a couple days after the Federal Reserve’s interest rate hike in December, real rates jumped to 71 basis points, yet gold held on at $1,130 support, and real rates finally backed off below 50 basis points by yearend. At the start of the year, 71 basis points of positive yield had gold pinned down almost $90 lower.

Gold Prices and Inflation

Weaknesses

  • MarketWatch writer Nigam Arora believes the real reason behind the crash in gold price is India, not Donald Trump. Citigroup analysts predicted that a Trump victory would push gold to $1,400, while a Hillary Clinton victory would send prices down to $1,250.  However, India’s Prime Minister Narendra Modi directed that 500 and 1,000 rupee notes be banned; these represent 20 percent of the cash value in circulation and 80 percent of cash outstanding. The impact of demonetization in India is still being felt in gold demand. Gold imports in India for 2016 were much lower than the annual average of 1,000 metric tons, with just over 600 tons this year. Analysts anticipate that demand will be similarly low in 2017. Market observers in India say demand for gold is at rock bottom, despite the wedding season.
  • According to Bloomberg, China said its consumption of non-ferrous metals will expand through the year 2020 at less than half the pace seen in the first five years of the decade. The Ministry of Industry and Information Technology said the nation’s economy is “entering a new normal” in which demand growth for metals will slow to a medium-low pace from a high-speed one. Overseas, China reported that its gold reserves remained unchanged in November from a month earlier, at 59.24 million troy ounces. According to Bloomberg, this marks only the second time the country has paused monthly buying after disclosing a 57 percent increase in holdings since 2009, as of June 2015.
  • The Bloomberg Dollar Spot Index is heading for its best quarter since 2008, reports Bloomberg, on the back of Donald Trump’s election and the boost in interest rates by the Federal Reserve. Gold prices tumbled for seven consecutive weeks only to rise in the last week of the year.  Holdings in gold-backed ETFs contracted for 33 days before catching a lift on the second to last day of the year.

Opportunities

  • Mark Mobius, executive chairman of Templeton Emerging Markets Group, says he thinks gold will gain as much as 15 percent through 2017, as the Fed increases rates slowly and the dollar remains subdued. “The U.S. dollar is not that strong and may even decline,” said Mobius. Goldman has reiterated its view that any sell-off substantially below $1,250 an ounce should be seen as a buying opportunity. Gold demand may be spurred by weakness in China’s currency and concerns over the nation’s property market. In addition, global inflation expectations have risen to the highest level since May 2015. Investors anticipate annual consumer inflation of 1.4 percent. Gold has traditionally been used as a hedge against inflation.

Price Growth Shows Signs of LIfe in the U.S., U.K. and Eurozone

  • Bank Credit Analyst (BCA) points out that realistically, it will take time for the incoming Trump administration to draft legislation that deploys fiscal stimulus--at least six months. It will then take time to see if it works. Given this reality, BCA’s team notes that the U.S. dollar and real rates “have moved too far too fast, and likely will correct.” Where BCA differs from consensus is that the rising inflation expectations it measures in the forward markets are probably warranted for 2017. If growth materializes with stimulus, overlaid on a labor market that is close to full employment, the low inflation consensus could shift higher. This could depress real rates and provide a more attractive outlook for gold in 2017. Portfolio manager Terence Kooyker at Blenheim says he is bullish on gold too. Kooyker says faster U.S. inflation and low interest rates will support gold, adding that “gold always performs best when nobody thinks you should own it.”
  • U.S. debt dynamics are set to turn positive for gold in 2017, writes ICBC Standard Bank in a recent note, highlighting that the costs of higher yields are being overlooked. The Congressional Budget Office (CBO) calculates that net interest payments on the $14 trillion of U.S. debt will amount to around $250 billion in 2017 (around 1.4 percent of U.S. GDP). “If we apply an 80 basis point increase to the CBO’s net interest forecasts and keep the other variables unchanged, then by 2026 the Treasury would be paying an additional $185 billion in interest annually, and interest will have increased to 3.3 percent of GDP,” the report continues.  In the note, Tom Kendall stresses the key point is that the financing costs for the U.S. have already jumped, whereas the Trump administration’s policies may or may not have a positive impact on U.S. growth and the effects will be lagged.  Thus any disappointments on the growth front combined with higher interest costs and contentious negotiations on raising the debt ceiling in the first quarter, could well result in a more bullish scenario for gold. 

Price Growth Shows Signs of LIfe in the U.S., U.K. and Eurozone

Threats

  • Two top gold forecasters see further losses for the yellow metal in 2017, reports Bloomberg. Both Oversea-Chinese Banking and ABN Amro see gold slipping to $1,100 an ounce by the end of next year. “From an investor point of view, there is little reason to own gold,” Georgette Boele, a currency and commodity analyst with ABN Amro, said. In a parallel vein to India’s demonetization, Goldcore reported that Citibank will make all Australian branches cashless, and UBS proposes that Australia eliminate $100 and $50 bills.
  • Earlier this year, it was reported that California’s Public Employees’ Retirement System (Calpers), the largest in the U.S., earned only 0.6 percent on its investments last fiscal year, reports Financial Sense. In order to meet its long-term goal, however, the pension needs to be returning over 12 times that amount. Calpers’ Chief Investment Officer Ted Eliopoulus writes that it is a significant policy issue and the system must average at least 7.5 percent a year to match its assumed rate of return or turn to taxpayers to make up the difference. Calpers has subsequently announced it is looking to pare back its global equity and private equity exposure by 5 percentage points in favor of a larger allocation to real assets, inflation and liquidity asset classes.
  • Hedge fund manager Stanley Druckenmiller told CNBC that he sold all of his gold on the night of President-elect Trump’s victory, saying that “All the reasons I owned it for the last couple of years seen to be ending.” Druckenmiller stated that he now has a “large bet on economic growth.

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 Gold Mines Index Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The Bloomberg Dollar Spot Index (BBDXY) tracks the performance of a basket of 10 leading global currencies versus the U.S. Dollar.

Net Asset Value
as of 02/23/2017

Global Resources Fund PSPFX $5.81 0.08 Gold and Precious Metals Fund USERX $8.78 0.07 World Precious Minerals Fund UNWPX $7.55 0.05 China Region Fund USCOX $8.21 -0.02 Emerging Europe Fund EUROX $6.20 0.02 All American Equity Fund GBTFX $24.59 No Change Holmes Macro Trends Fund MEGAX $19.06 0.06 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change