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Third Quarter 2014

For the quarter, spot gold closed at $1, 208.67 down $109.72 per ounce, or -8.32 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 19.03 percent and the U.S. Trade-Weighted Dollar Index rose 7.72 percent for the quarter. Also for the third quarter, the Philadelphia Gold & Silver Index (XAU) fell 19.59 percent, the S&P/TSX Global Gold Index fell 15.26 percent and the FTSE/JSE African Gold Mining Index fell 12.70 percent.

For the quarter, the Gold and Precious Metals Fund fell 19.95 percent and the World Precious Minerals Fund fell 21.82 percent. See complete fund performance here.

Strengths

  • China officially opened the Shanghai Free Gold Exchange during the quarter. By giving foreign investors direct access to its gold market for the first time, China is seeking to obtain more influence over prices while simultaneously boosting the global use of its currency, the yuan. 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.
  • Gold imports into India are estimated to rise to 60-70 tonnes per month, up from 38 tonnes in July. The significant rise in gold imports comes from the start of festival season in the country. The uptick in demand should be very strong for gold for the rest of the year.  In the first eight months of this year, Shanghai imported $15.98 billion of gold, a staggering indicator of demand in China. According to HSBC, central banks around the globe are expected to buy 425 tonnes of gold next year. The bank estimates buying this year to be at 400 tonnes, showing a steady increase in central bank purchases through 2015.
  • Klondex Mines reported strong second-quarter results, which was its first full quarter of operations. The company generated $7.4 million in free cash flow, setting it apart from both junior and senior peers, 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

  • Despite it historically being the best month for gold, this September saw nothing but declining gold prices. The typical increase in demand from India due to the festival season appears to have been overshadowed by the extraordinary strength of the dollar and its negative effect on gold prices.
  • Unfortunately, the new NarendraModi government in India is not expected to relax the country’s gold import restrictions. The import duties are set to remain for some time unless the government can induce other exports to alleviate a growing trade deficit. A consequence of the restrictions has been an increase in gold smuggling into India as festival season ramps up.
  • Gold imports into Hong Kong fell by 42 percent in July from the prior month.  Although the news portrays 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, which bypass the historic route used to measure gold imports into China. 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 endures in China. 

Opportunities

  • Macquarie U.S. economics research argues underlying inflation continues to be dependent on wage growth, which it 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. With 10-year government bond yields continuing to be depressed, any acceleration in wage growth and inflation would translate into substantial negative impacts to real yields, and a strong tailwind for gold prices.
  • Despite overall market sentiment favoring equities, George Soros has decided to bet on gold. Soros increased his bearish position in equities by 605 percent last quarter. The world famous investor did, however, double down his position on gold mining ETFs, while adding many gold companies as well.

  • Klondex Mines Ltd. is significantly undervalued relative to its peers. Despite its higher profit margins and similar revenue production, Klondex’s enterprise value is much lower than that of its peers. This undervaluation creates a significant opportunity for those seeking to take advantage of cheap and high-quality gold companies. In addition to the company’s superior margins, Klondex recently identified two additional veins at its Fire Creek mine, with grades exceeding one ounce per tonne.  A new resource estimate for Midas and Fire Creek will certainly add to the company’s resource base at year end.

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 just this week posted its lowest inflation number since 2009. 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.

  • The recent record performance of the S&P 500 is painting an incomplete picture of current market conditions. Roughly 47 percent and 40 percent of stocks in the Nasdaq Composite (CCMP) Index and the Russell 2000 Index, respectively, are experiencing a bear market. The divergence between large-cap and small-cap stocks points out significant threats in the market and paints a much darker picture for future performance.
  • The National Mining Association President, Hal Quinn, said that the number-one challenge to the United States mining industry is the domestic regulatory bureaucracy. While it typically takes seven to 10 years to permit a mine in the United States, other countries with similar environmental standards do so within two to three years. The bureaucracy in the U.S. could continue to weaken the domestic mining industry.

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.)

The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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: Alamos Gold Inc. (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.04%), Argonaut Gold (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%), AuRico Gold Inc. (Gold and Precious Metals Fund 1.85%, World Precious Minerals Fund 0.41%), B2Gold Corp (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%), Detour Gold Corp (Gold and Precious Metals Fund 0.00%, World Precious Minerals Fund 0.00%), Klondex Mines Ltd (Gold and Precious Metals Fund 7.76%, World Precious Minerals Fund 7.51%), Primero Mining Corp (Gold and Precious Metals Fund 0.05%, World Precious Minerals Fund 0.02%).

Net Asset Value
as of 10/30/2014

Global Resources Fund PSPFX $8.21 -0.12 Gold and Precious Metals Fund USERX $5.43 -0.35 World Precious Minerals Fund UNWPX $4.99 -0.27 China Region Fund USCOX $8.00 0.03 Emerging Europe Fund EUROX $7.37 No Change All American Equity Fund GBTFX $32.68 0.15 Holmes Macro Trends Fund MEGAX $23.00 -0.02 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change