Fourth Quarter 2011

The Gold and Precious Metals Fund underperformed its benchmark, the FTSE Gold Mines Index, during the fourth quarter of 2011. The World Precious Minerals Fund outperformed its benchmark, the NYSE Arca Gold Miners Index, for the same period. Spot gold closed the quarter at $1563.70 per troy ounce, a decrease of $60.28 or 3.71 percent. The S&P 500 Index rose 11.82 percent. In the currency markets, the U.S. Trade Weighted Dollar Index strengthened by 2.07 percent. 

This quarter’s negative performance was mainly due to both funds’ structures favoring junior to mid-tiered names that have historically outperformed the senior gold mining companies but don’t fare as well during periods of financial stress, such as in 2008.  In an effort to shore up liquidity, European banks sought new ways to gain access to dollars by lending their gold to the market, which drove lease rates on gold to their lowest level on record.  In addition, gold was likely a source of liquidity to meet redemptions for hedge funds that anticipated large redemptions due to poor equity market performance and suffered somewhat from European banks, such as France’s Credit Agricole’s decision to scale back its commodity trading and finance business in a move to reduce risk.  Gold did finish the year with a 10 percent lift, which was the eleventh straight annual gain; however the gold stocks, particularly the juniors, came under pressure due to tax loss selling. 

With this in mind, gold stocks trading at such depressed valuations has created an opportune time for merger and acquisition activity.  This past quarter we were witness to a number of transactions: Agnico-Eagle acquired Grayd Resources for a 41 percent lift in its share price; B2Gold acquired Auryx Gold for 92 percent premium; New Gold bought Silver Quest Resources for a 27 percent share price gain; IAMGOLD announced that it would spend around $23 million buying minority stakes in three Colombian-focused exploration companies: Bellhaven Copper & Gold, Tolima Gold, and Colombia Crest Gold; China’s Shangdong Gold made a cash offer to purchase Jaguar Mining for $785 million (this has not yet materialized); AngloGold took a strategic 19.9 percent stake in London listed Mariana Resources through a private placement at a 41 percent premium to its prior closing price; Eldorado Gold announced it would acquire European Goldfields for a friendly C$2.5 billion cash-and-share plan; and  Luxor Capital Group, a major hedge fund, said it would buy Crocodile Gold for up to 215.5 million shares, representing a 60 percent premium over the previous day’s close. 
Maintaining the rising dividend trend among gold companies, Goldcorp, IAMGOLD, Barrick Gold, and Newmont Mining announced increases in their dividends this quarter by 32, 25, 25 and 17 percent respectively.  Following Newmont’s lead, Eldorado Gold also announced an enhanced dividend policy that links its payout to the gold price and the number of ounces sold.  It is anticipated the company’s next payout will be 67 percent higher. With companies having higher-than-usual cash levels, dividend payments are becoming more and more common and should raise the appeal of gold mining companies to investors that are seeking safety and income from their investments.

Unfortunately, there were a number of headwinds for the precious metal.  Zimbabwe, India, Zambia, Eritrea, Ghana, Argentina, Australia, Tanzania, Canada and South Africa were all in the news regarding royalties, policy changes, profit-sharing and mining taxes.  Country and political risk continued to affect mining companies’ day-to-day business.  A weakening demand was highlighted by the United States Mint reporting that sales of the U.S. gold and silver bullion coins slowed in the fourth quarter as precious metal prices fell from their highs, signaling that investor interest in physical metal purchases may be waning.  Seasonally slow jewelry demand in India (the world’s largest gold buying nation) and a ban from the People’s Bank of China (PBOC) on all non-official gold trading exchanges in the world’s number two gold consuming company, all contributed to weaker sentiment.  The PBOC ordered the closure of all gold trading platforms and services outside the Shanghai Gold Exchange and Shanghai Futures Exchange.  The Bombay Bullion Association also said during the quarter that December’s imports of gold bullion to India will likely stand 50 percent below December 2010 levels. 

Despite tough gold markets, we continued to see strength from Asia.  Recent government statistics showed that Chinese gold imports were up 50 percent in October from September.  With the Chinese New Year beginning January 23, this presents a strong platform for further Chinese gold import records.  Additionally, we have seen political support from the Asian countries, with the head of research at China’s Central Bank being quoted saying that the country should buy gold as the only safe place for risk adverse investors when other assets are losing value.  Japanese Finance Minister Jun Azumi also announced that he will be rewarding investors who buy reconstruction bonds with half-an-ounce of gold, an added incentive that could boost the return by nearly six times. India also was reported to be considering freeing gold doré imports, which up until this point, has only been undertaken by India’s central bank. 

We would expect there to be renewed interest in picking up many of the beaten down gold stocks with the start of the new year as the sell off was exacerbated by tax loss selling in both the U.S. and Canada in the fourth quarter.  Seasonally, the January Effect should be in play and gold prices typically see seasonal strength going up until the April/May window. The fact that world gold mine production, although growing, will not keep pace with the expected growth in global gold demand, is one we cannot forget.  Furthermore, with the juniors’ underperformance leaving the companies with valuations at levels similar to 2008, there is room for a strong mergers-and-acquisitions year ahead, and for stocks’ prices to reverse, as 2009 was one of the best years to own gold stocks.

Past performance does not guarantee future results.

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. 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 at the close of trading on December 20, 2002. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

Holdings in the Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX) as a percentage of net assets as of 12/31/2011: Agnico-Eagle: USERX 4.08%, UNWPX 3.56%; AngloGold Ashanti: USERX 2.93%, UNWPX 0.73%; Auryx Gold 0.00%; B2Gold 0.00%; Barrick Gold: USERX 3.84%, UNWPX 0.82%; Bellhaven Copper & Gold 0.00%; Colombia Crest Gold 0.00%; Crocodile Gold 0.00%; Eldorado Gold: USERX 1.40%, UNWPX 1.25%; European Goldfields 0.00%; Goldcorp: USERX 2.27%, UNWPX 1.01%; Grayd Resources 0.00%; IAMGOLD: USERX 3.00%, UNWPX 1.10%; Jaguar Mining 0.00%; Luxor Capital Group 0.00%; Mariana Resources: UNWPX 0.15%; New Gold: USERX 1.94%, UNWPX 1.12%; Newmont Mining: USERX 2.14%; Shandong Gold 0.00%; Silver Quest Resources 0.00%; Tolima Gold: UNWPX 0.48%.