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August 2014

For the month of August, spot gold closed at $1,287.52 up $5.28 per ounce, or 0.41 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 2.79 percent. The U.S. Trade-Weighted Dollar Index rose 1.59 percent for the month. Also for August, the Philadelphia Gold & Silver Index (XAU) rose 3.45 percent.  The S&P/TSX Global Gold Index rose 3.14 percent, while the FTSE/JSE African Gold Mining Index rose 3.32 percent.

For the month of August, the Gold and Precious Metals Fund rose 1.75 percent, while the World Precious Minerals Fund declined 1.13 percent. See complete fund performance here.

Strengths

  • After Imperial Metals’ tailings breach, the government of Ontario announced that it has established the Ring of Fire Infrastructure Development Corporation to unite first nations and the public and private sectors. Canadian Natural Resource Minister Greg Rickford emphasized the need to engage with all communities in the region in addition to working effectively with the mining industry. The news is a positive sign for how future disputes will be settled by reason and not carried away with extreme policies.
  • As part of the continuing deregulation of the gold market in China, Shanghai has allowed 21 banks to become market makers in the interbank gold wholesale market. The announcement was released by the Shanghai Gold Exchange on their website and signals that gold is still very much an important asset in the world’s most populous country.
  • Klondex Mines reported strong second-quarter results, its first full quarter of operations. For the quarter, Klondex generated $7.4 million in free cash flow, setting it apart from peers both junior and senior, which have struggled to generate free cash flow at current gold prices. The company also reported earnings per share of $0.04 on record revenue generation. Analysts expect costs to decrease even further in the third and fourth quarters on lower mine development costs and higher production from long stopes.

Weaknesses

  • Gold imports into Hong Kong fell by 42 percent in July from the prior month. The decline comes on the back of anti-corruption campaigns and price declines that have turned away Chinese consumers. Although the news reveals weakness in the gold market, measuring gold imports into China through Hong Kong is not as reliable as it once was. Routes have been established through both Shanghai and Beijing, with the former revealing a much smaller decline in gold consumption. Unfortunately markets and the media still report only the Hong Kong figures, which will continue to tell less and less of the story as liberalization of the gold market continues in China. 
  • Despite the continued resilience of gold prices, the amount of gold backing global ETPs has declined 2 percent so far this year. The contrarian performance of gold funds reveals that the precious metal is still struggling to attract flows.
  • Deflationary pressures continue to plague the global economy. Both food and energy prices have been significantly depressed over the past few weeks. Even in the U.S., where strong signs of economic recovery exist, the producer price index (PPI) increased just 0.1 percent month-over-month in July and just 0.2 percent year-over-year. Persistent deflation seeks to reduce gold’s attractiveness as an inflation hedge.

Opportunities

  • History reveals that September is gold’s favorite month. The historical outperformance of gold in September relates to India’s festival period, which extends from late August to October. The wide use of gold in the festivals for gifts, prizes and decorations serves to boost gold demand in the coming months.
  • Shanghai is planning to implement a gold free-trade zone. On September 26, the Shanghai Stock Exchange is expected to start bullion trading in the city’s free trade zone, confirming the idea that Shanghai is determined to become a regional gold-trading hub. Xu Luode, the exchange’s chairman, has said that the gold contract will be priced and settled in yuan and trading should begin in the third quarter.
  • U.S. economics research from Macquarie Group argues that underlying inflation continues to be dependent on wage growth, which the financial services group expects to accelerate, consistent with reduced labor slack. According to its research, current wage growth dynamics appear comparable to the second half of 2004, a period soon followed by accelerating wage growth. 10-year government bond yields continue to be depressed. Any acceleration in wage growth and inflation would translate into substantial negative impacts to real yields and would prove a strong tailwind for gold prices.

Threats

  • The United Nations Interregional Crime and Justice Research Institute (UNICRI) is planning to implement a global study examining the relationship between organized crime and gold. While there are worthwhile concerns relating to gold and organized crime, this signal spotlight overlooks the prevalence of smaller illegal gold operations, shining all of its light on larger producers. This failure to distinguish between different gold producers serves to harm the gold mining industry overall.
  • As the U.S. dollar continues to strengthen, the cost to insure against emerging market currencies is on the rise. According to data from Bloomberg, the cost of options contracts betting on a decline in the currencies of Brazil, Indonesia, South Africa, Turkey and India have risen to the highest level in roughly five months. A stronger dollar has already started creating headwinds for gold, which typically moves inversely with the dollar. The subsequent decline in emerging market currencies would only serve to strengthen the dollar further on a relative basis.
  • World demand for gold shrank 7.2 percent in the first half of the year compared to the previous period a year earlier. In India, demand for gold fell 39 percent in the quarter ended June 2014, according to the World Gold Council. If there is no trend reversal in the demand for gold, the second half of 2014 could see significant headwinds.

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: Imperial Metals Corp. (Gold and Precious Metals Fund 1.34%, World Precious Minerals Fund 1.37%), Klondex Mines Ltd (Gold and Precious Metals Fund 6.58%, World Precious Minerals Fund 6.60%).

Net Asset Value
as of 09/30/2014

Global Resources Fund PSPFX $9.01 -0.10 Gold and Precious Metals Fund USERX $6.14 -0.12 World Precious Minerals Fund UNWPX $5.77 -0.13 China Region Fund USCOX $7.78 -0.05 Emerging Europe Fund EUROX $7.53 0.02 All American Equity Fund GBTFX $32.78 -0.20 Holmes Macro Trends Fund MEGAX $23.59 -0.21 Near-Term Tax Free Fund NEARX $2.25 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change