March 2016

For the quarter ended March 2016, spot gold closed at $1,232.71, up $171.29 per ounce, or 16.14 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 45.82 percent. The U.S. Trade-Weighted Dollar Index fell 4.10 percent for the quarter. Also for the quarter, the Philadelphia Gold & Silver Index (XAU) rose 53.45 percent. The S&P/TSX Global Gold Index returned 40.69 percent, and the FTSE/JSE African Gold Mining Index climbed 92.40 percent. The Gold and Precious Metals Fund was up 33.33 percent, and the World Precious Minerals Fund returned 39.84 percent. See complete fund performance here.

Strengths

  • Gold is had its best quarterly rally in 30 years, reports Bloomberg, as demand for haven assets continued to surge. The precious metal got a boost following Janet Yellen's remarks stating that the Federal Reserve will proceed "cautiously" with rate hikes this year. Gold investors have also poured money into gold ETFs at the fastest pace since 2009, with negative rates in Europe boosting its appeal.
  • Physical gold ETF holdings have increased by over 270 tonnes since reaching their cycle-low in early January, reports TD Securities, coinciding with an 18 percent rally in the gold price. In contrast, only three tonnes of gold have been collected so far in India's newly announced deposit plan. Macquarie raised its 2016 gold forecast for the precious metal by 4.8 percent, while Morgan Stanley announced its gold price outlook for the year up 8 percent to $1,173 per ounce.

2016 Inflows Into Bullion-Backed ETPs Top Total Outflows in 2015

  • We were the beneficiaries of two significant transactions over the course of the quarter. In the first major deal, Tahoe Resources announced its definitive agreement to acquire Lake Shore Gold for $678 million in an all-stock transaction. The premium paid was about 15 percent to the prior closing price of Lake Shore. In the second transaction, Silver Standard Resources announced its agreement to buy all the outstanding common shares of Claude Resources, with the offer valuing Claude at 337 million Canadian dollars. According to Bloomberg, the price is approximately a 25 percent premium to the 20-day weighted average price of Claude, and a 30 percent premium to Claude's closing price on March 4. Our funds held slightly more than 9 million shares of Claude, almost 5 percent of the company.

Weaknesses

  • Three companies announced gold hedging transactions recently. B2Gold announced its approval for Gold Prepaid Sales Financing Arrangement, or prepaid sales, of up to $120 million. As stated in the company's release, the prepaid sales allow B2Gold to deliver pre-determined volumes of gold on agreed future delivery dates in exchange for upfront cash pre-payment. These financing arrangements will help fully fund the Fekola Mine Construction. New Gold announced that it has entered into gold price option contracts covering 270,000 ounces of the company's remaining 2016 production. Similarly, Polyus Gold International hedged half of its expected output this year, reports Bloomberg. It's clear that many companies are unsure about the current gold price and are locking in profits.
  • Price sensitivity is showing up in the gold market. China reportedly raised its central bank gold reserves by the smallest amount since July 2015, reports Bloomberg. In India, February inbound shipments of gold fell to around 40 tonnes from 54.9 tonnes a year earlier, according to a group familiar with provisional Finance Ministry data.
  • The controversial Pebble Mine project, a proposed gold mine near Alaska's Bristol Bay, was deemed an environmental risk by the Environmental Protection Agency (EPA), which is moving toward a formal decision to bar mining operations there. The EPA, however, was questioned on its "misuse of authority," according to the Washington Post, and now the group's internal watchdog has announced there is "no evidence of bias in the agency's efforts." Critics who have followed the EPA's review process noted that the EPA investigator did not consider a significant body of publically available information brought to light by the Congressional Science Committee that demonstrates clear instances of bias and predetermination.

Opportunities

  • Research firm Metals Focus says that the bear market in gold is over, and sees the metal rallying to $1,350 an ounce. The group believes a changing investor sentiment in the first quarter will solidify the melt away in months ahead. Confidence in central banks has been shaken and there are mounting concerns towards the increasing number of negative policy rates around the world, with nearly a quarter of the world economy now experiencing negative rates. Gold bulls are thriving in reaction. Bloomberg reports that in Japan, negative interest rates are boosting gold demand (according to the nation's biggest bullion retailer). The same is true in Germany, where reinsurer Munich Re has boosted its gold and cash reserves in the face of the negative interest rates imposed by the European Central Bank (ECB), reports Reuters.
  • The world's largest asset manager, BlackRock, and PIMCO are both recommending inflation-linked bonds and gold, according to Zero Hedge, warning that costs are poised to pick up and there is a growing risk of inflation. BlackRock believes stabilizing oil prices and a tighter labor market could be contributors. BCA Research also pointed out the gap between consumers' realized and expected inflation. A divergence here could mean a wave of investors will flock to gold when and if their expectations are not in line with the realized data, which show core inflation rising over the near-term.
  • Silver may be ready to come out of gold's shadow, reports Bloomberg, with mine supplies forecast to contract this year. According to Standard Chartered, mine production of silver will probably drop in 2016 for the first time in over a decade and demand is set to outstrip supply for a fourth straight year. Assets in ETFs backed by silver also climbed to the highest since September.

Threats

  • Jeffries reports in its Global Equity Strategy that with U.S. equity markets just shy of their all-time highs but earnings growth tepid, a debate has sparked over the legitimacy of the earnings being reported. The divergence between Generally Agreed Accounting Practices (GAAP) and pro-forma that began from mid-2014 widened annually to around 30 percent in 2015. However, there was a noticeable deviation in the fourth quarter of 2015 between GAAP and pro-forma earnings from mid-2015, the report continues, widening to nearly 70 percent.

Key Negative Interest Rates

  • There are "no limits" to how far central banks can ease monetary policy, reports Bloomberg, stating that this is a recent declaration of both ECB President Mario Draghi as well as Bank of Japan Governor Haruhiko Juroda. These policymakers have joined their counterparts in Denmark, Sweden and Switzerland to embrace interest rates of less than zero. JP Morgan's economist reported in a recent study that the ECB could cut rates to negative 4.5 percent and the Fed to negative 1.3 percent. They strongly cautioned investors that there appears to be a lot of room for central banks to probe how low rates can go, stating: "We believe it would be a mistake to underestimate their capacity to act and innovate." Jurgen Stark, the ECB's former chief economist, believes the actions will end in chaos, stating: "The ECB is ignoring the increasingly obvious negative side effects of its policy." The man who invented the term QE, Professor Richard Werner from Southampton University, believes the ECB's policies could destroy half of Germany's 1,500 savings and cooperative banks over the next five years, according to the article.
  • Gold Fields Mineral Services, a research unit of Thomson Reuters, stated it thinks the gold rally will prove to be short lived and sees the metal dropping to under $1,200 an ounce. The statement went on to say: "Once current market turbulence starts to ease we are likely to see the price retreat again." Goldman Sachs predicts losses over the coming year for gold, despite the precious metal's rally, citing the Fed's interest rate increases over no fewer than three times. The group forecasts that bullion will be at $1,100 in three months. Supporting Goldman's view, gold's relative strength index, an indicator that tracks momentum, has climbed over 70, reports Bloomberg. This indicates to some analysts that prices will fall.

Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. 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. Performance does not include the effect of any direct fees described in the fund's prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end here or by calling 1-800-US-FUNDS.

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 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. (Returns are quoted as price return in the home currencies of each index. For example, the S&P/TSX Canadian Global Gold Index is calculated using Canadian Dollars.)

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 3/31/2016: Tahoe Resources Inc. 0.00%; Lake Shore Gold Corp. 2.40% Gold and Precious Metals Fund, 1.34% World Precious Minerals Fund; Silver Standard Resources Inc. 0.00%; Claude Resources Inc. 0.00%; B2Gold Corp. 0.00%; New Gold Inc. 0.02% World Precious Minerals Fund; Polyus Gold International Ltd. 0.00%; BlackRock Inc. 0.00%; Standard Chartered PLC 0.00%.

Net Asset Value
as of 05/27/2016

Global Resources Fund PSPFX $5.07 -0.01 Gold and Precious Metals Fund USERX $7.67 -0.23 World Precious Minerals Fund UNWPX $6.42 -0.14 China Region Fund USCOX $6.91 0.08 Emerging Europe Fund EUROX $5.58 -0.01 All American Equity Fund GBTFX $23.67 0.06 Holmes Macro Trends Fund MEGAX $18.01 0.12 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 -0.01