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Second Quarter 2014

For the quarter, spot gold closed at $1,327.32 up $43.32 per ounce, or 3.37 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 11.67 percent and the U.S. Trade-Weighted Dollar Index declined 0.41 percent for the quarter. Also for the second quarter, the Philadelphia Gold & Silver Index (XAU) rose 10.94 percent, the S&P/TSX Global Gold Index rose 8.93 percent, and the FTSE/JSE African Gold Mining Index rose 0.17 percent.

For the quarter, the Gold and Precious Metals Fund rose 14.31 percent and the World Precious Minerals Fund rose 13.36 percent. See complete fund performance here.

Strengths

  • Gold posted back-to-back gains over the last two quarters, a rally not witnessed since 2011. In addition, gold prices climbed 10 percent year-to-date, topping most asset classes. The outlook remains positive as China’s manufacturing purchasing managers’ index (PMI) expanded in June for the first time in six months. This was the highest reading since November 2013, as policymakers continue the implementation of targeted accommodative policies. Gold has become increasingly important to Chinese consumers. As a matter of fact, the China Gold Association forecasts the global flow of gold from west to east will probably last for up to two decades as rising incomes spur demand. The demand is such that the Chicago Metals Exchange (CME) is developing products to trade gold during Asian trading hours.
  • Gold rose strongly toward the end of the quarter, after Federal Reserve Chairman Janet Yellen stated that interest rates will remain low for an extended period of time, while disregarding rising inflation as noise. As a result, the U.S. dollar weakened to its lowest level this month, and speculators who had pushed the number of short contracts to a five-fold rise since March, were left scrambling to unwind their trades. In Europe, the European Central Bank (ECB) became the first major central bank to take one of its main rates negative as President Mario Draghi unveiled historic measures to fight deflation. “The ECB's policy changes were very expansionary and that on balance is supportive of gold...I think more is coming,” Dennis Gartman, author of The Gartman Letter said.
  • The Shanghai Free-Trade Zone international gold trading will be a reality by year-end, according to city government officials. More details leaked out to give investors a better idea of the impressive capabilities of the proposed exchange. Testing for interest-rate liberalization and currency usage is currently ongoing, as the exchange seeks to allow foreign investors to trade in the market using offshore Chinese yuan accounts. Jiang Shu, senior analyst at Industrial Bank in Shanghai, stated that the recent advances show the Chinese authorities are serious about yuan- and gold-trading reform.
  • “Chindia” (China and India) gold demand exceeds global production, according to Bloomberg’s Ken Hoffman. According to Hoffman’s research, China is consuming gold at a rate of 5.15 million ounces per month, while India, at the current import-tariff reduced rate, is consuming 2.85 million ounces per month. The total “Chindia” consumption is 8 million ounces per month, or 560,000 higher than the estimated 7.44 million ounces per month global mine output. With this deficit in mind, any relaxation of Indian import curbs will likely skew the fundamental supply/demand balance even further into deficit.

Weaknesses

  • After a surge in mistrust during Europe’s debt crisis, the German government has decided not to proceed with the proposed repatriation of $141 billion in gold holdings currently stored in the U.S. and the U.K. Analysts have speculated the repatriation request had the potential to irritate U.S.-German relations. Others have ventured to speculate the gold simply is not available for delivery to the rightful German owners, to which a German government official responded, “The Bundesbank [has] never doubted the integrity of the foreign gold-storage sites.”
  • A new report by SNL Metals & Mining concludes that the cost of building a mine has increased significantly over the last decade, from $560 per ounce of production capacity in 2004, to more than $2,300 last year. To make matters worse, SNL analysts argue that curtailment in capital spending since 2013 will take at least until 2015 to reverse the rising trend (as current forecasts show costs will rise to $2,400 per ounce this year). In addition, Ian Williams, CEO of Charteris Treasure Portfolio Managers, asserts that current replacement cost is $1,500 per ounce. Given such an environment, it is likely impossible for gold to trade below replacement cost for very long.
  • Canada will make it harder for miners to comply with its anti-corruption laws after small- and mid-cap miners have been targeted by allegations of corruption of foreign officials. The amendment to the Canada’s Corruption of Foreign Public Officials Act (CFPOA) has increased its maximum jail term to 14 years with no limit on fines, and allows for Canadian law enforcement to prosecute Canadian individuals or companies for bribery, regardless of where the alleged bribery took place. A Grant Thornton report shows more than one in four people have reported having paid a bribe in the last 12 months.

Opportunities

  • It’s time to nibble on gold stocks, according to Michael Kahn, a Barron’s technical analyst. Signs suggest a decent rally is in the cards for gold, says Kahn, who argues the extreme bearishness of this cycle will leave no sellers left, while incremental buying will pull bullion up. Similarly, Swiss-based Incrementum published its latest “In Gold We Trust” report, predicting a gold rally to $1,500 over 12 months. The report argues that current monetary experiments should lead investors to buy gold as a hedge for worst-case scenarios. The analysts at Paradigm Capital are also pounding the table for gold saying “the stars are aligning.” Gold equities are expected to fly this summer as the seasonal trade kicks in, given the fact that gold stocks are “coiled springs” due to the high beta of lower gold prices.
  • The supply deficit for platinum is estimated at 818,823 ounces this year, according to New York-based CPM Group. The shortfall will be the largest ever, even as platinum remains vulnerable to operational disruptions in South Africa, which accounts for 73 percent of global supply. Analysts forecast miners will need months to ramp up to full capacity, further exacerbating the supply shortfall. Similarly, the diamond market is expected to be in significant deficit for the foreseeable future, with Rio Tinto forecasting demand to double current mined supply. It is unclear how miners plan to meet increasing demand, but it implies material upside to existing producers. Lucara Diamond has appreciated nearly 50 percent this year by continuing to recover rare 100-carat plus diamonds.

  • Inflation rose robustly in May for the third consecutive month, bringing the annual change above 2 percent for only the second time since the end of the recession. U.S. personal consumer expenditure (PCE), the most widely monitored inflation measure by Federal Reserve officials, leaped to 1.4 percent. National Bank research argued dismissal wouldn’t be easy this time around, but that’s exactly what Janet Yellen did in her press conference. On the same note, Canaccord raised gold to overweight following the consumer price index (CPI) readings and the belief that the Fed is “cornered.” They conclude by saying investors should buy inflation-protection hedges.
  • Bank of America (BofA) recommends investors buy gold into the third quarter as the seasonality trade kicks in with Ramadan and Indian buying. Historically, the July through August period sees a demand boost from religious festivities, which BofA believes could push gold past $1,400 this year. Not surprisingly, Goldman Sachs is actually buying gold despite its commodities analysts calling gold a “slam-dunk” sell. The bank has agreed to swap dollars for gold with the government of Ecuador, a total of 466,000 ounces (or $580 million) at an estimated price of $1,245 per ounce for a three-year term. Even though the Ecuadorian side denied the transaction was a sale, it is highly unlikely the South American government will have the means to recover its gold in three years’ time. Actions speak louder than words, and Goldman is buying gold.

Threats

  • A Bloomberg report states China’s chief auditor discovered $15.2 billion loans backed by falsified gold transactions, thus adding to the signs that the yellow metal may be used with other commodities in fraudulent financing deals. The revelation may spur a wave of gold sales as lenders seek to unwind gold-backed transactions to ensure their counterparties are not fraudulent.
  • The gold surge can’t sustain itself, according to Donald Selkin, chief market strategist at National Securities Corp. According to Selkin, the spike was caused by the Iraqi conflict and Yellen’s comments, which will fade as investors seek excitement in other areas of the market. Analysts at Barclay’s agree with his observation, noting that physical demand has been “unspectacular” as of late.
  • Low rainfall could affect India’s gold consumption due to a slow start to the monsoon season. Much of the country’s farmland depends on rain for its crops due to the lack of irrigation, leaving farmers concerned that the late start of the monsoon season may reduce the size of crops. A reduction in crop volumes would be detrimental to the wealth of farmers, which could inhibit gold purchases in the country. In addition, rising oil prices due to the Iraqi conflict are putting pressure on Indian inflation and its current account deficit, as the country imports 80 percent of its crude needs.
  • Central Bank gold buying will decrease, according to statistics revealed by the World Gold Council (WGC). According to its outlook, the WGC estimates central bank buying will reach about 300 tonnes this year, about one-fourth lower than the 409 tonnes purchased last year. The WGC concludes the lower buying is yet another example of the gold market becoming more dependent on consumers, and less on investors.

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 Philadelphia Stock Exchange 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).

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. The Purchasing Manager's Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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 World Precious Minerals Fund as a percentage of net assets as of 06/30/2014: Lucara Diamond Corp (Gold and Precious Metals Fund 0.30%, World Precious Minerals Fund 1.67%), Rio Tinto (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%).

Net Asset Value
as of 07/23/2014

Global Resources Fund PSPFX $10.26 0.01 Gold and Precious Metals Fund USERX $7.69 -0.06 World Precious Minerals Fund UNWPX $7.25 -0.03 China Region Fund USCOX $8.27 0.01 Emerging Europe Fund EUROX $8.29 0.06 All American Equity Fund GBTFX $33.21 0.22 Holmes Macro Trends Fund MEGAX $24.08 0.18 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change