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July 2014

For the month of July, spot gold closed at $1,282.55 down $44.77 per ounce, or 3.37 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, declined 1.72 percent. The U.S. Trade-Weighted Dollar Index rose 2.11 percent for the month. Also for July, the Philadelphia Gold & Silver Index (XAU) fell 1.98 percent.  The S&P/TSX Global Gold Index fell 0.31 percent, while the FTSE/JSE African Gold Mining Index rose 2.48 percent.

For the month of July, the Gold and Precious Metals Fund fell 3.00 percent, while the World Precious Minerals Fund fell 4.20 percent. See complete fund performance here.

Strengths

  • A Bloomberg survey shows gold traders and analysts have turned bullish on gold prices as tension over Ukraine and the Middle East escalate. Furthermore, flows to exchange-traded products backed by precious metals turned positive for the year as they took in $540.7 million in July, thus fully reversing the net outflow of $319 million in the six months through June.
  • Investors are buying metals from zinc to aluminum at the fastest pace since 2009, betting demand gains will tighten supply. The buying has been made evident by fresh money coming into exchange-traded funds (ETFs) backed by metals. Hedge funds are the most bullish on copper in at least eight years, after betting on prices to drop earlier in the year. Zinc, aluminum and platinum group metals (PGMs) have also seen incremental buying, in what is turning into a very exciting second half for metals.
  • Indian gold imports surged 65 percent in June after the central bank allowed more banks and traders to buy bullion overseas. The news is particularly encouraging as it occurred during a period when investors speculated import restrictions could be reduced, which would have had larger buyers deferring purchases in anticipation of a possible reduction in import taxes. More importantly, China’s and India’s monthly gold consumption represents the largest source of demand for bullion; thus, any increase, albeit small, can push the gold supply and demand further in favor of higher prices.

Weaknesses

  • Stronger economic data out of the U.S. has served as a headwind for gold. The second-quarter GDP report showed the economy grew 4.0 percent in real terms from last year, beating analysts’ expectations for a 3.0-percent rise. The U.S. dollar also found support after the Federal Open Market Committee (FOMC) meeting decided the Federal Reserve will continue to taper its bond purchases as planned, while keeping an eye on labor slack. Lastly, ISM manufacturing expanded in July at the fastest pace in more than three years, showing U.S. factories will help power the economy after a second-quarter rebound.
  • China’s gold imports from Hong Kong fell for a fourth month in June amid weaker demand from retailers. The data supports statements from the China Gold Association, saying domestic gold demand fell 19 percent in the first half of the year as investors bought fewer bars and coins. Similarly, jewelry demand in China fell 24 percent in the second quarter, according to Chow Tai Fook. The weakness has been attributed to a slowing economy, together with the unwinding of shadow-financing deals following fraud investigations. Buying is expected to increase as the government continues its monetary easing program, which has propelled industrial activity back into expansionary territory.
  • Curbs on gold imports are likely to remain in place according to Indian Finance Minister Arun Jaitley. The Indian government has announced it is inclined to continue with the measure as a means of controlling the widening current account deficit. The impact on the absolute level of gold imports has been properly documented; however, new data shows that India’s wealthy have been buying real estate as a means of protecting their real wealth from the devaluation risks of paper money. Recently though, gold buying has increased sharply, partly as a result of the crackdown on gold smuggling, which has served to evidence how tight the market is, and how relentless Indian demand for gold is.

Opportunities

  • Adam Graf of Cowen and Company published his second mergers and acquisition (M&A) report on the gold space. The report sees miners’ balance sheets improving going into 2015: with the average net debt to capital across the top six North American producers could be reduced by as much as 25 percent, thus allowing for acquisitions. Since last November’s report, several juniors have advanced their assets, however, with little effect on share price. As a result, Graf believes this disconnect provides a unique opportunity for seniors to purchase less risky assets at relatively the same price, versus a year ago. Some of his preferred takeout candidates include Pretium Resources, Seabridge Gold, Imperial Metals and Romarco Minerals.
  • After three years of comprehensive environmental and technical studies and analyses, the U.S. Army Corps of Engineers released the Final Environmental Impact Statement (FIES) for the Haile gold project owned by Romarco Minerals. The FEIS included no material changes to the proposed project, which is positive since the EPA originally gave the Draft EIS a favorably-high and rarely-awarded EC-2 rating. As a result of this news, BMO capital markets upgraded Romarco to “speculative outperform” from “market perform,” with a target price of $1.30 a share.
  • Citigroup issued a recommendation to turn strongly bullish on platinum as supply and demand factors push the market further into deficit. In addition, the U.S. bank is “especially” positive on copper and nickel, while it updated its views on gold. For bullion specifically, Citibank highlights strong retail buying, positive ETF flows and rising inflation concerns as reasons that underpin strong support for the yellow metal.

Threats

  • The recent breakout of the U.S. dollar has posed strong headwinds for commodities, especially gold. The pressure is unlikely to stop in the short term as other major currencies continue to weaken, namely the euro and the British pound, as European sovereign yields reach multi-century to all-time lows. These yields, while absurd to some, are a direct response to the threat of deflation in the eurozone, which posted its lowest inflation number since 2009 during the month. As such, speculators who have been on the short side of the gold trade are given more incentives to double down on their short calls and add short-term pressure to the gold price.
  • Productivity is now the top business risk facing mining and metals companies, according to Ernst&Young’s annual report on risks to the industry. The report highlights that long-term profitability requires a business-wide response to this threat. This risk is compounded by dwindling ranks of geosciences professionals, which has impaired mining companies’ ability to respond to dramatic fluctuations in commodity prices, according to HSBC. The risk that made the top ten in this year’s report is reliable access to water and energy. The report highlighted rising energy costs and competing water demands will become a more notorious business risk, especially for operators in Chile, Peru and South Africa.
  • BCA commodity strategists have reiterated their underweight gold call within the commodity complex. According to BCA, the strength of the dollar and the stabilization of the U.S. equity risk premiums, suggest gold will remain trendless in the second half of the year. Volatility in the aforementioned areas has been a key driver for gold in the past, thus their stabilization implies that it is unlikely gold prices will rise much further.

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 06/30/2014: Agnico Eagle Mines Ltd (Gold and Precious Metals Fund 1.61%, World Precious Minerals Fund 0.57%), Barrick Gold Corp. (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%), Goldcorp Inc. (Gold and Precious Metals Fund 0.07%, World Precious Minerals Fund 0.07%), Imperial Metals Corp. (Gold and Precious Metals Fund 1.34%, World Precious Minerals Fund 1.37%), Kinross Gold Corp. (Gold and Precious Metals Fund 0.14%, World Precious Minerals Fund 0.05%), Newmont Mining Corp. (Gold and Precious Metals Fund 0.12%, World Precious Minerals Fund 0.11%), Pretium Resources (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 3.07%), Romarco Minerals Inc. (World Precious Minerals Fund 1.00%), Seabridge Gold (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%), Yamana Gold Inc. (Gold and Precious Metals Fund 1.42%, World Precious Minerals Fund 0.56%).

Net Asset Value
as of 08/29/2014

Global Resources Fund PSPFX $10.06 0.09 Gold and Precious Metals Fund USERX $7.57 0.06 World Precious Minerals Fund UNWPX $6.99 0.04 China Region Fund USCOX $8.29 -0.01 Emerging Europe Fund EUROX $7.99 -0.01 All American Equity Fund GBTFX $34.04 0.16 Holmes Macro Trends Fund MEGAX $24.69 0.15 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change