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October 2014

For the month of October, spot gold closed at $1,173.48 down $34.68 per ounce, or -2.87 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 18.40 percent. The U.S. Trade-Weighted Dollar Index rose 1.14 percent for the month. Also for October, the Philadelphia Gold & Silver Index (XAU) fell 20.01 percent.  The S&P/TSX Global Gold Index fell 19.17 percent, while the FTSE/JSE African Gold Mining Index fell 24.32 percent.

For the month of October, the Gold and Precious Metals Fund lost 16.61 percent, while the World Precious Minerals Fund declined 17.85 percent. See complete fund performance here.

Strengths

  • Fear and uncertainty in the global economy is stimulating gold demand. This month the International Monetary Fund (IMF) downgraded its outlook for global growth, increasing the attractiveness of gold as a safe haven. Furthermore, the more dovish mentality from the Federal Reserve has been a big tailwind for gold, which has been depressed by expectations of rate increases.
  • Singapore Exchange Ltd. is set to start trading a kilobar gold contract. The exchange joins others in the region, such as the Shanghai Gold Exchange, which started bullion trading in the Shanghai free-trade zone last month. These two developments reveal the importance of the global gold market to Asia.
  • A number of gold companies reported misses on production during the month, but Alacer Gold reported strong third-quarter results. The company saw gold production increase 27 percent which helped to drive production costs lower.  In addition, Alacer’s cash balance rose by $28 million to $320 million.   In other news, Franco-Nevada Corp. entered into an agreement with Lundin Mining Corp. to acquire a gold-silver stream. Lundin recently purchased an 80-percent interest in Freeport-McMoRan’s Candelario/Ojos del Salado mining complex in Chile. Balmoral Resources Ltd. reported that its drill results revealed a higher-grade potential at its Martiniere property. Romarco Minerals received its awaited 401 Water Quality Certification for its Haile project. Lastly, Richmont Mines raised its gold output view to 85,000 to 90,000 ounces, claiming strong performance from Island Gold mine.

Weaknesses

  • Gold markets were wildly affected by central bank policymakers across the world. In the United States, a more hawkish tone from the Federal Reserve, combined with the official announcement of the end of Quantitative Easing (QE), pushed gold prices down. The Bank of Japan surprised investors with a substantial expansion in its asset purchases and a commitment to double its purchases of equities, making the central bank the single biggest holder of Japanese equities.  These two events, combined with stronger-than-expected, third-quarter GDP data from the U.S., caused a selloff in gold and gold stocks during the month.
  • Standard Chartered Bank is cutting its exposure to the diamond business after the jewelry chain Winsome defaulted. Another problem is that bulk orders from the U.S. are for lower-quality jewelry, smaller diamonds and lower caret-value gold. The economic recovery in the United States was thought to revive demand for higher-quality products. However, this scenario has not played out yet, causing many to forecast weakness in the industry.
  • Senior gold-producing companies are cutting costs amid declining bullion prices. However, despite cost-cutting, third-quarter earnings are expected to decline by 27 percent. Silver producers are estimated to report a 33-percent decline in earnings per share due to falling silver prices.  For example, Alamos Gold reported disappointing third-quarter results this month. During the quarter, the company only produced 28,000 ounces at higher-than-expected costs. Despite the poor operating performance, the company’s financial position remains strong with $375 million in cash and no debt.  Expectations remain that Alamos could acquire another asset in the near-term.

Opportunities

  • With one of China’s primary goals being to increase international use of its currency, the yuan, it should accumulate more gold. This is the view taken by Song Xin, President of the China Gold Association, who believes the country should accumulate 8,500 tonnes in reserves. This logic stems from the fact that, when each country’s currency became internationalized, the United States and the United Kingdom held over 50 percent of reserves in gold. If China seeks to do the same, gold demand and prices should see substantial gains. Additionally, Alan Greenspan, former Chairman of the Fed, articulated in an article in Foreign Affairs that China would see unexpected strength in the international financial system if it were to convert some of its foreign exchange reserves into gold. Clearly, there is speculation as to the advantages China could have if it were to purchase and hold more gold.
  • The first opinion poll pertaining to the Swiss gold referendum revealed stronger support for the policy than against. The referendum would require the Swiss National Bank to hold at least 20 percent of its reserves in gold. As it currently stands, the Swiss National Bank has only 7 percent of its reserves in gold. The cost to reach the 20-percent mark would amount to roughly $70 billion of additional gold purchases. If passed, bank would have to buy roughly 1,500 tonnes of gold over five years to meet the 20-percent requirement. Since 1993, the bank has reduced its gold holdings by 1,550 tonnes, the largest liquidation by any central bank. Changing from the largest seller to a rapid buyer should create serious tailwinds for gold. The initiative put forth in Switzerland is part of a larger theme relating to increased gold purchases by central banks. Global central bank reserve holdings had been declining without interruption since 1989 until the financial crisis. Since 2008, there has been a steady rise in central bank gold holdings. With the possibility of substantial purchases from the Swiss National Bank, this rise should continue.

  • Alan Greenspan came out with interesting points on the current global economic environment. The former Fed Chairman referred to QE as a pile of tinder that hasn’t been lit. Furthermore, due to the global turmoil, Greenspan stated that gold is a good place to invest money due to its value as a currency outside of government policy. In fact, he argues that gold is the premier currency, more so than the dollar.

Threats

  • The World Gold Council is calling on India to mobilize and monetize its household savings embedded in physical gold stocks. If the Indian government decides to use the idle gold from households and temples, it would reduce the need for future imports, which would be negative for global gold demand.
  • Paul Tudor Jones, a world renowned macro trader, said that commodities as a whole will be ugly until at least 2020. Jones argues that having reached the peak a few years ago, commodities still have a long way to go before the bottom is reached.  This month, BMO Capital Markets, Morgan Stanley and ANZ all reinforced their negative outlook for gold prices. While this consensus is negative, such wide agreement usually coincides with a reversal in the going trend.
  • Zambia altered its tax rules for the second time in six years this month. The government is aiming to scrap the corporate tax rate and variable taxes in favor of raising the revenue-based royalty. While the royalty currently stands at 6 percent, it could go as high as 20 percent.

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.)

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 09/30/2014: Alacer Gold Corp (Gold and Precious Metals Fund 1.99%, World Precious Minerals Fund 0.44%), Alamos Gold Inc. (World Precious Minerals Fund 0.04%), Balmoral Resources Ltd. (World Precious Minerals Fund 1.18%), Franco-Nevada Corp (Gold and Precious Metals Fund 6.44%, World Precious Minerals Fund 1.16%), Freeport-McMoRan Copper & Gold 0.00%, Lundin Mining Corp (Gold and Precious Metals Fund 1.31%, World Precious Minerals Fund 0.58%), Richmont Mines Inc. 0.00%, Romarco Minerals Inc. (World and Precious Metals Fund 1.46%), Winsome 0.00%.

Net Asset Value
as of 11/25/2014

Global Resources Fund PSPFX $8.13 -0.10 Gold and Precious Metals Fund USERX $5.78 0.14 World Precious Minerals Fund UNWPX $5.16 0.04 China Region Fund USCOX $8.18 -0.02 Emerging Europe Fund EUROX $7.44 0.01 All American Equity Fund GBTFX $33.39 0.03 Holmes Macro Trends Fund MEGAX $23.45 0.03 Near-Term Tax Free Fund NEARX $2.26 No Change China Region Fund USCOX $8.18 -0.02