Third Quarter 2017

For the quarter ended September 30, 2017, the World Precious Minerals Fund rose 3.69 percent, underperforming the fund’s benchmark, the NYSE Arca Gold Miners Index, which gained 4.44 percent. The Gold and Precious Metals Fund climbed 8.73 percent, outperforming its benchmark, the FTSE Gold Mines Index, which lifted 4.64 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 bullion finished the third quarter up 3.11 percent after giving up about half of its quarterly gains as we entered September.  This was led by 12 weeks of bullish outlook surveys of traders on bullion, but they turned somewhat pessimistic as President Donald Trump began actively pushing his tax overhaul plan as Congress retuned from the summer.  This in turn led to somewhat of a pick-up in the value of the U.S. dollar as it hit 11-month lows.
  • The Federal Reserve’s lack of consensus on when to shrink its balance sheet, along with how to approach policy strategy at a time of low inflation, signaled that the Fed was in no hurry to tighten monetary policy with monthly consumer prices growth falling short of the Fed’s target 2 percent. Similarly, a Bank of America Merrill Lynch survey shows fund managers are growing hesitant to buy U.S. equities. Dallas Federal Reserve Bank President Robert Kaplan spoke on Bloomberg TV, saying that a market correction wouldn’t necessarily hurt the economy, but instead could be healthy.
  • China’s purchase of bullion bars in the first half of the year rose 51 percent, reports Bloomberg. June imports of gold in India more than doubled compared to the same month last year, Bloomberg reports, as consumers rushed to act before the country’s new tax law went into effect. Demand rose to 72 metric tons in June, up from 31.8 tons a year earlier. North Korea fired a ballistic missile over Japan in August, sending gold to its highest level this year, reports Bloomberg. Ray Dalio, the manager of the world’s largest hedge fund at Bridgewater Associates, recommends that investors place 5 to 10 percent of their assets in gold. Dalio states that with current geopolitical risks, odds of Congress not raising the debt ceiling leading to a technical default and shutdown of the government, and the loss of faith in the effectiveness of our political processes, it would make sense to have a portion of a portfolio in gold as a hedge.

Weaknesses

  • The gold price responded negatively to Fed officials’ announcement that the central bank would begin unwinding its $4.5 trillion balance sheet as soon as October and also signaled additional rate hikes in 2018 following a December hike. This is the second year in a row that policy changes in India may have strained gold sales, reports Bloomberg. Consumption is seen between 650 and 750 metric tons this year, compared to the annual average of around 850 tons in the previous half decade. The Indian government’s push to boost financial transparency cut consumption this year as they enacted a new consumer tax system, the article continues.  Gold prices in India were at their widest discount to international prices in 11 months, reports the Times of India.
  • Bullion sales at Japan’s biggest retailer, Tanaka Kikinzoku Kogyo, fell a staggering 41 percent in the first half of 2017 compared to the same period last year, according to Bloomberg. Demand weakness also hit Japan’s southern neighbor Australia. The Perth Mint, the world’s number two gold refiner, recently saw sales of coins and bars fall to a five-year low. “With equities at near-record levels and greater economic confidence in the U.S. and throughout the world, there has been less interest in safe haven products,” remarked Neil Vance, the Perth Mint’s group manager of minted products. U.K. Royal Mint sales dropped in the second quarter by 62 percent compared with the previous three months, reports Bloomberg. Sales were down 41 percent from a year earlier. The world’s 20 leading gold producers’ share of metal output is expected to fall to its lowest level in a decade in 2019, according to Bloomberg industry analyst Eily Ong. The mining group’s share of world output fell from 47 percent in 2010 to 39 percent in 2016, and could fall even further by 2019. “As gold producers’ focus shifts from volume to profitable ounces, their existing gold mines’ life expectancies have also continued to declined,” Ong writes.
  • Tahoe Resources saw its share price decline nearly 40 percent on news out of a Guatemalan court that its mining license in the country had been suspended. President Jimmy Morales expressed dismay over how the opinion could hurt further investment in the country but told lawmakers if there is a law for such an activity as mining and we don’t want that activity, then change the law.

Opportunities

  • Gold miners have cut costs but trade at a fraction of peak valuations, reports Bloomberg Intelligence. Since peak levels in 2008, gold-miner valuations have fallen over 50 percent based on enterprise value to reserves and resources. Miners have cut staff, focused on shrinking debt and are using new technology to garner cost efficiencies, the article continues, and valuations don’t yet reflect these efforts. So do the miners see the value opportunity? Yes. In fact, the Canadian Imperial Bank of Commerce (CIBC) reports that gold miners invested around $290 million in exploration companies during the first six months of 2017, the highest level recorded in the past decade. In addition, nearly half of equity raised by junior gold stocks on the Toronto Stock Exchange (TSX) this year has been through direct investments—no previous year has exceeded 20 percent, CIBC continues.
  • As resentment mounts over central bank policies and negative interest rates, interest in untraditional investment vehicles has mounted—such as precious metals and cryptocurrencies (recently sparking comparisons of bitcoin to gold). According to Bloomberg, bankers and accomplished financiers are leaving lucrative careers and salaries to get into one of the hottest financial instruments around right now: initial coin offerings (ICOs). More than $3 billion has been raised this year through initial coin offerings (ICOs) as of October, and nearly 200 other ICOs are planned in the next four months. Interestingly enough, due to the increased popularity of ICOs, U.S. regulators are now stepping in. The Securities and Exchange Commission’s (SEC) Report of Investigation found that tokens offered and sold by a certain virtual organization were indeed securities and therefore subject to federal laws. China followed through by outlawed new initial coin offerings recently.  Both the People’s Bank of China and Russia are interested in cryptocurrencies as a means to bypass the dollar. China has done trial runs of its own prototype cryptocurrency,  taking it a step closer to being the first major central bank to issue digital money and Russia has issued a zero coupon bond that will be settled via Blockchain.
  • The president of Novo Resources, Quinton Todd Hennigh, has spent 13 years searching for clues that back a hunch that the Witwatersrand gold resource, the world’s single largest occurrence of gold, has lost siblings elsewhere on the planet. Now Hennigh thinks he may have found what he has been looking for near Australia’s northwest coast. In July, Novo zeroed in on a gold find that’s confounded geologists and sparked a 500-percent surge in the company’s share price, writes Bloomberg. Hennigh admits he isn’t 100 percent sure that this will turn into a mine, but the potential upside is seen by some as huge.

Threats

  • According to JP Morgan’s Chairman Jamie Dimon, the unwinding of quantitative easing might be more disruptive than you think, reports Bloomberg. Central banks are preparing to reverse massive asset purchases made after the financial crisis—the Fed, ECB and Bank of Japan bulked up their balance sheets to nearly $14 trillion, the article continues. An unwinding of this amount could influence a slew of markets. Dimon notes that all the main buyers of sovereign debt over the last 10 years will now be net sellers.  Government-issued liabilities monetized by the central banks are not high-quality assets, they are an IOU that is transferred to the next generations, and will be repaid in three ways: with massive inflation, with a series of financial crises, or with large unemployment.
  • Tim Price of Morgan Stanley notes in a research report this week that bitcoin’s value has lifted about five times since a period of relative stability pre-November 2016, to over $4,000 per bitcoin. As a commodity analyst, however, Price also notes that bitcoin is just another fiat money, not a commodity—so why flag it then? He says that beyond its ongoing price surge, some investors think bitcoin is better than gold as a hedge against inflation and uncertainty. He thinks that theory still needs to be tested, though. A bearish risk for bitcoin’s price is few barriers to entry. “Over millennia, gold has demonstrated its ability to endure and preserve value under all circumstances. By contrast, bitcoin’s global platform literally requires the lights to stay on,” the report reads.
  • China is preparing to launch a crude oil futures contract denominated in Chinese yuan and convertible into gold, the Nikkei Asian Review reports. This could potentially create the most important Asian oil benchmark and allow oil exporters to bypass the U.S.-dollar denominated benchmarks by trading in yuan. “To make the yuan-denominated contract more attractive, China plans the yuan to be fully convertible in gold on the Shanghai and Hong Kong exchanges,” the article continues. 

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 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.

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 9/30/2017: Tahoe Resources Inc. 0.00%, Novo Resources Corp. 0.00%.  

 

Net Asset Value
as of 12/14/2017

Global Resources Fund PSPFX $5.94 0.01 Gold and Precious Metals Fund USERX $7.33 No Change World Precious Minerals Fund UNWPX $5.72 0.08 China Region Fund USCOX $11.17 -0.11 Emerging Europe Fund EUROX $7.07 0.03 All American Equity Fund GBTFX $24.54 -0.07 Holmes Macro Trends Fund MEGAX $21.88 -0.17 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change