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First Quarter 2014

For the quarter, spot gold closed at $1, 284.01 up $78.35 per ounce, or 6.50 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 11.49 percent and the U.S. Trade-Weighted Dollar Index rose 0.08 percent for the quarter. Also for the first quarter, the Philadelphia Gold & Silver Index (XAU) rose 8.72 percent, the S&P/TSX Global Gold Index rose 16.03 percent and the FTSE/JSE African Gold Mining Index rose 42.61 percent.

Strengths

  • China's gold imports from Hong Kong rose in February due to increasing demand resulting from the country allowing more banks to import the yellow metal. Net imports for February totaled 109.2 metric tonnes, which added to the 83.6 tonnes imported in January. These numbers account for a 140 percent rise, relative to the same period in 2013. Similarly, gold ETFs appear to be back in fashion, as total known gold ETF holdings are now 870,000 ounces higher since bottoming at 55.8 million ounces in mid-February.
  • Mineweb reports that the Indian government eased import regulations to allow some of the country's private-sector banks to buy gold from abroad. This move could boost gold imports in India and considerably bring down physical premiums. The Reserve Bank of India allowed five private-sector banks to participate in the import programs, as the country seeks to prevent the flow of illicit money and smuggled gold ahead of the primary elections this year.
  • A class-action lawsuit was filed in a Manhattan federal court, claiming that five banks which oversee the century-old London gold fix, colluded to manipulate the benchmark. Authorities around the world are already investigating the manipulation for signs of wrongdoing. Canadian hedge fund billionaire Eric Sprott cites the investigations into gold-price manipulation as one of the triggers for gold rerating to $2,400 per ounce in 12 months.

Weaknesses

  • Gold traders are bearish, expecting the Federal Reserve to continue cutting its stimulus and raising interest rates as the economy strengthens. The reason for this was most frequently cited in the poll related to Fed Chairman Janet Yellen's comments this quarter, which suggested rates would rise in the U.S six months after the end of the bond-buying program this fall. In other news, European central banks may end a 15-year-old restriction on sales of gold holdings. Under the agreement, central banks were limited to selling a maximum of 400 tonnes over a five-year period.
  • Platinum and palladium have not shown strength, even as a resolution to the work stoppages in South Africa is not yet in sight. Miners continue to demand onerous raises of nearly 100 percent over a four-year period. In the U.S., domestic mine gold production in 2013 dropped 3 percent or 128,602 ounces from the prior year, according to estimates released by the U.S. Geological Survey.
  • Standard & Poor's downgraded Chicago-based Coeur Mining and Australia's Santa Barbara. The rating agency argued that Coeur's higher debt load, together with lower precious metal prices, earned the company its new B-rating. In terms of Santa Barbara, higher production costs, together with lower production volume and execution risks in the cost-saving initiatives, have led to a deterioration of credit metrics. Similarly, Moody's downgraded Hecla Mines, arguing substantial near-term capital spending plans.

Opportunities

  • During a presentation in San Antonio during the quarter, Jefferies Chief Strategist David Zervos commented on gold and the equity market's reaction to Yellen's press conference in March. In his opinion, the Fed's focus on driving real interest rates negative will continue, simply because high real rates deter investments. Just ask Japan, which lost two decades while experimenting with high real rates. The Fed will likely raise nominal interest rates, but only when existing inflation can justify them; thus keeping real interest rates flat or negative. Yellen may have brought up the subject at this time because the Fed can see inflation in the horizon.  Loan growth, as shown on the loan to deposit ratio below, drives money velocity. Velocity is one of the key components of inflation and was on a downtrend since 2008. This spike in velocity will act as a detonator to the unprecedented $4 trillion monetary base, thus spurring rising inflation.

  • If the threat of imminent inflation hasn't hit home for you, David Rosenberg, Chief Economist at Gluskin Sheff, brings a cascade of money supply indicators that will have you thinking. According to Rosenberg, since the beginning of the year, M1 money supply has exploded at a 23 percent annual rate, 45 percent over the past four weeks. M2 has risen at 7.3 percent pace, while the M1 multiplier bottomed a month ago, boding well for velocity to pick up. In terms of loan growth, which has accounted for velocity missing in action since 2008, commercial paper and industrial exploded 19 percent. These are crazy numbers according to Rosenberg. The quantity theory of money says that based on the statistics above, inflation may not yet be present, but it is in your future.
  • David Rosenberg says the Fed is looking at inflation in the rear-view mirror, not through the front window as they should be. Rosenberg agrees that inflation appears benign today; however, the signs of imminent rising inflation cannot be ignored any longer. According to Rosenberg, the National Federation of Independent Business (NFIB) plans to raise selling prices, which has a 70 percent correlation with inflation. In addition, the non-financial commercial paper lending has exploded at a 43 percent annual rate, not a particularly deflationary statistic. As a result, Rosenberg believes we have no "anchor" to hold inflation back.
  • On March 20, gold recorded a golden cross when the 50-day moving average crossed above the 200-day moving average. A golden cross is traditionally associated with the breaking of a bear market trend and the beginning of a bull market, where the 200-day moving average becomes a support level in the rising market. Our analysis shows that, going back to 2000, a golden cross in gold is followed on average by a 50 percent rally lasting on average 15 months.

Threats

  • Hedge funds may hesitate from buying more gold. The hesitation comes after the funds boosted their bets on the metal ahead of the Fed meeting that speculated rates may rise in 2015. A Bloomberg report shows that speculators and other money managers increased their net-long positions to the highest level since 2012 ahead of the Fed meeting on March 19.
  • Goldman Sachs' head of Commodities Research Jeffrey Currie has reiterated his view that gold will fall to $1,050 by the end of the year, leading numerous analysts and investors to question his conclusions. According to Currie, gold's rally this year has been driven by unsustainable factors, such as a weather-induced slowdown in the U.S., increased geopolitical tensions and Chinese credit concerns. According to Lawrence Williams, a Mineweb contributor, Currie has avoided any comment related to the continued strength of Asian physical buying as well as the decided reversal of ETF redemptions; the two most important gold drivers of 2013.
  • A wave of weak economic data released by the Chinese government agencies during the quarter helped propel gold higher, as U.S. and European markets weighed the risk of a deceleration in Chinese economic growth. The weak data points released show the risk of Chinese physical gold and jewelry buyers to defer consumption to a later date. As a matter of fact, Chinese retail sales data showed growth of 11.8 percent, missing analysts' estimates for a13.5 percent increase. As a result, gold demand from China may be lower in the short term, or until the festival and wedding season starts later in the year.

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).

M1 Money Supply includes funds that are readily accessible for spending. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

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 03/31/2014: Couer Mining (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%), Helca Mines (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%), Santa Barbara (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%).

Net Asset Value
as of 04/24/2014

Global Resources Fund PSPFX $9.87 0.02 Gold and Precious Metals Fund USERX $6.70 -0.03 World Precious Minerals Fund UNWPX $6.42 -0.01 China Region Fund USCOX $8.01 -0.01 Emerging Europe Fund EUROX $8.02 -0.05 All American Equity Fund GBTFX $32.09 -0.10 Holmes Macro Trends Fund MEGAX $23.48 -0.08 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change