Second Quarter 2017

For the quarter ended June 30, 2017, the World Precious Minerals Fund declined 6.87 percent, underperforming the fund's benchmark, the NYSE Arca Gold Miners Index, which fell 2.93 percent. The Gold and Precious Metals Fund declined 5.12 percent, underperforming its benchmark, the FTSE Gold Mines Index, which fell 4.65 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

  • Gold demand is rising in the world's two biggest gold markets, India and China. In India, gold imports increased more than four-fold in April and May, reports Bloomberg. Sberbank, Russia's largest bank, is looking to finance the direct import of gold to India, according to Aleksei Kechko, managing director of the company's Indian subsidiary. India is the world's second largest importer of gold, and a direct trade between India and Russia would be beneficial to both countries. Russian officials have already signaled their desire to conduct transactions with BRICS nations using gold, writes Russia Insider. Meanwhile in China, gold demand may rise to the highest level in four years in 2017. Consumption could surpass 1,000 metric tons compared to 975 tons last year, driven by slowing property prices and tensions with North Korea. Bank of China International led a $29 million capital raise for an online trading platform, G-banker. G-banker allows users to buy, sell, deposit and withdraw gold on its digital platform and mobile app.
  • Amid unease over a congressional hearing on possible links between Russia and the Trump campaign, holdings in the world's largest gold-backed ETF climbed to the highest this year on the back of safe-haven demand, reports Bloomberg. In the two weeks through the end of May, hedge funds and other large speculators boosted their bullish bets on the precious metal by 37 percent, notes another Bloomberg article, the most since 2007.
  • Eldorado Gold will "gain an operating foothold in its own country with a deal to take full control of Integra Gold," reports Bloomberg, offering the equivalent of C$1.2125 for each Integra share. That is a 52 percent premium to Integra's closing price on May 12, according to a statement from Eldorado. The proposed acquisition provides Eldorado with its first operating mine in Canada, offering general and administrative (G&A) and income tax benefits, along with exposure to a lower political risk project, notes an Eight Capital report.

Weaknesses

  • Data from the People's Bank of China show that the Asian nation kept its gold reserves unchanged for the eighth straight month in June. Holdings stand at 59.24 million ounces for the end of June, the same level since the end of October.
  • Barrick Gold, the largest gold miner in the world, tumbled after missing estimates on earnings and production following increased expenses at its mines in Argentina and Nevada. Shares fell as much as 11 percent in Toronto. This is only the company's second earnings miss in seven consecutive quarters. Barrick Gold reached an agreement with the Dominican Republic government (where it operates its Pueblo Viejo mine), outlining new financial terms and tax rates, reports Bloomberg. The new terms show the government is projected to receive an additional $181 million from Barrick between 2017 and 2019, according to a statement from the Dominican President's office. The new terms are based on a gold price of $1,275 per ounce. The ongoing ban on exports of mineral concentrate from Tanzania could cut Barrick Gold's gold production by up to 6 percent this year, as Barrick's equity interest in Acacia accounts for around 10 percent of its gold production.
  • Perhaps the biggest gold miner story of the second quarter was the reorganization of the index methodology for the VanEck Vectors Junior Gold Miners ETF (GDXJ). The ETF's holdings in many of the junior names were approaching 20 percent of the outstanding shares, so fund managers chose to downsize weightings in existing holdings by about 50 percent and reinvest the proceeds in more mid-tiered gold producers. This triggered a wave of price weakness throughout the junior gold stocks universe as much as $3.0 billion dollars of the $5.5 billion fund was projected to be sold in the June rebalancing.

Opportunities

  • In a recent research note on the gold sector, Paradigm Capital writes that its analysis "highlights two daunting trends in the global discovery for major new deposits." First, the rate of discovery has significantly declined from 1990-1999 relative to 2010-2015, and second, the cost of a new discovery has increased more than an order of magnitude, from $11 and ounce to $147 an ounce. According to Paradigm, "majors can acquire advanced development-stage projects for a significant discount to what it would cost to explore and discover on their own ticket." Although the pace of acquisitions has not picked up yet, the group believes it will, noting specifically that a new up-cycle appears to be slowly taking root. The group sees an opportunity for investors to take advantage of the "development discount" by adding a basket of quality development-stage and advanced exploration projects as a portion of gold portfolios.
  • Klondex is still finding silver linings in recent months. The company reported just less than 300,000 ounces at 16.8 grams per tonne of initial gold resource at the Gloria zone of the Hollister mine. But investors have more interest in the Hatter Graben vein system, where drilling has just been initiated. Klondex's stock price had been knocked down earlier this year as a result of the dramatic rebalance of the GDXJ. Now the stock has rallied 23 percent over the last three weeks as of the end of June, with the index rebalancing out of the way. Management has an excellent track record and is one of a small handful of gold stocks that have delivered a positive return on invested capital (ROIC) since going into production.
  • There are two major developments that have emerged in the capital markets, writes Drew Mason of St. Joseph Partners. First, the dollar has broken its long-term major uptrend of more than a decade. Second, we're seeing pressure on bonds, and long-term rates in particular are rising. And despite these trends capping gold's performance, gold has still outperformed the stock market since 2000 at a ratio of almost 2:1. DoubleLine Capital's Jeffrey Gundlach believes that now is "not the time to give up on gold," reports Bloomberg. In a webcast, Gundlach said that gold prices are likely to head higher and also noted his secular bear view on oil prices because of improving fracking technology that cut costs.

Threats

  • In its Global Precious Metals Comment, UBS points out that European diesel share decline accelerated in March, supporting its view on platinum group metals (PGMs). Diesel share in the top five European auto markets declined, bringing the share of diesel vehicles to a multi-year low of 40.6 percent. The UBS Global Autos team expects this trend to accelerate further out, resulting in falling platinum demand. The platinum price is down 15 percent for the 12-month period as of June 30, largely due to poor demand for diesel vehicles.
  • Mexico's tax agency owes Canadian mining companies over $360 million in tax rebates, reports Reuters and Bloomberg. The sum includes $230 million owed to Goldcorp and $66.5 million to Torex Gold Resources, just to name a few. The situation proves even more difficult for smaller, cash-strapped miners and explorers.
  • Tanzanian Mines Minister Sospeter Muhongo was fired after an audit revealed that mineral exports had been understated. Acacia Mining has been investigated by a presidential committee, showing that Acacia reported certain containers held 26,000 ounces of gold, while the committee found those containers to hold 250,000 ounces. The magnitude of the discrepancy implies that the source mines, Bulyanhulu and Buzwagi, would actually be the world's two largest gold producers. Those familiar with the events have called for an independent review. Acacia stock tumbled around 40 percent on this revelation.

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.

BRICS refers to the emerging market countries Brazil, Russia, India, China and South Africa.

Return on invested capital (ROIC), is a ratio used in finance, valuation and accounting, as a measure of the profitability and value-creating potential of companies after taking into account the

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 6/30/2017: Sberbank of Russia PJSC 0.00%; Eldorado Gold Corp. 0.80% in Gold and Precious Metals Fund; Integra Gold Corp. 0.00%; Barrick Gold Corp. 0.81% in Gold and Precious Metals Fund; VanEck Vectors Junior Gold Miners ETF 0.00%; Klondex Mines Ltd. 16.90% in Gold and Precious Metals Fund, 15.50% in World Precious Minerals Fund; Goldcorp Inc. 0.00%; Torex Gold Resources Inc. 0.00%; Aracia Mining PLC 0.00%.

Net Asset Value
as of 08/22/2017

Global Resources Fund PSPFX $5.47 0.03 Gold and Precious Metals Fund USERX $7.38 -0.04 World Precious Minerals Fund UNWPX $6.46 -0.04 China Region Fund USCOX $10.37 0.15 Emerging Europe Fund EUROX $6.84 0.03 All American Equity Fund GBTFX $23.79 0.19 Holmes Macro Trends Fund MEGAX $19.51 0.15 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change