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February 2014

For the month, spot gold closed at $1,326.44 up $81.89 per ounce, or 6.58 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 10.47 percent. The U.S. Trade-Weighted Dollar Index declined 1.99 percent for the month. Also for February, the Philadelphia Gold & Silver Index (XAU) rose 9.83 percent.  The S&P/TSX Global Gold Index rose 8.88 percent, while the FTSE/JSE African Gold Mining Index rose 13.90 percent.

For the month of February, the Gold and Precious Metals Fund (USERX) rose 16.20 percent, while the World Precious Minerals Fund (UNWPX) rose 15.32 percent. See complete fund performance here.

Strengths

  • Gold is heading for a second month of gains, the longest such run since August. Bullion has gained more than 10 percent this year, rebounding from the biggest annual decline in more than three decades, even as the U.S. Federal Reserve announced a reduction in asset purchases at its past two meetings.  The rally in gold is apparently halting the 13-month outflow from the biggest exchange traded fund (ETF), as the yellow metal broke above its 200-day moving average for the first time since August 2012 on reports that the Fed started 2014 with a sharp increase in M2 money supply. Assets in the SPDR Gold Trust are poised for the first monthly inflow since December 2012.
  • Gold demand remains very strong. China’s January Hong Kong gold imports soared 326 percent year-over-year. The Hong Kong region exported a net of 83.6 tonnes of gold to the Chinese mainland in January, down slightly from December exports of 91.9 tonnes. A recent report from the Swiss Customs Administration shows the European nation shipped more than 80 percent of its gold and silver bullion to Asia. The main destinations were Hong Kong, India and Singapore, while the main sources of gold imports were the U.K. and the U.S. Despite the recent price recovery in gold, the demand from physical buyers in Asia continues to drive a wave of gold finding its way from weak hands into strong hands.
  • The mining industry in Canada has seen a significant increase in mergers and acquisition (M&A) activity. Investment bankers report more than $3 billion in mergers and acquisitions in less than two months this year versus $2.6 billion in the first quarter of 2013, and $4.8 billion for the full year. On the other hand, according to Bloomberg’s review of financial statements across 1,300 mine operators, 49 percent of Canadian-domiciled companies have less than three months of cash, 62 percent have less than six months, and 74 percent have less than 12 months, which is the highest percentage ever recorded, likely a catalyst to get a deal done.

Weaknesses

  • The two “most accurate” gold forecasters are holding on to their bearish forecasts for 2014, even after the metal posted its best start to a year since 1983, according to a Bloomberg report. The report fails to convey the fact that these analysts are permanently bearish on gold, and the 15-month recent downtrend favored their forecast. However, gold is likely to remain range bound as sentiment on the recovery in the U.S. is still very well anchored. According to UBS, gold is in a frustrated market as the metal needs the risk-on, developed market growth story to be challenged in order to rise. And, despite the emerging market turmoil, and a few weak macro-data points in the U.S., investors appear not to budge. The risk for gold is that the environment makes it neither a clear-cut buy nor a clear-cut sell.
  • New Gold Inc. released its full-year 2013 operating results together with its guidance for 2014. Gold production for 2014 disappointed investors’ expectations at 380,000 to 420,000 ounces, roughly flat relative to 2013. The analysts at Paradigm Capital were “baffled” as to why the company made no mention of significant reserve grade decreases in the New Afton mine, which represents more than half of the company’s valuation. The team at Desjardins estimates that reserve grades across the company decreased 2.9 percent, with New Afton’s grades decreasing nearly 14 percent. As a result, gold contained in the resource statement decreased over 10 percent (ex-Blackwater).
  • A Mineweb article suggests that gold ETFs appear to have fallen out of favor in India. The exchange traded funds experienced the first yearly decline in assets under management (AUM) since introduction in 2007. In 2013, the local gold ETFs slid 26 percent, losing approximately $479 million in AUM. These liquidations may have gone to supply the tight physical market after import curbs were raised.

Opportunities

  • For those investors that have thought bitcoins might be a viable alternative to gold, they have something new to consider.  Mt. Gox, once the world’s largest bitcoin exchange, filed for bankruptcy after the company lost 750,000 bitcoins belonging to users and 100,000 of its own. The company blamed weak computer systems for the theft of bitcoins, focusing attention on the digital currency’s risk. For digital currencies, security measures may leave a lot to be desired in comparison to the security one has of physical gold being locked in a bank vault.
  • With the stronger gold performance this year we are seeing some analysts revising their price predictions higher. For example, UBS analyst Edel Tully has revised her gold one-month average forecast price from $1,180 to $1,280, and her three-month gold price prediction stands now at $1,350 vs. $1,100. Also, RBCCM’s Toronto-based analytical team has revised its long-term gold and silver price assumptions to $1,400 and $23.50, respectively. The higher the price goes, the more likely commodity forecasters will start adjusting their price targets higher.
  • Paradigm Capital is of the opinion that the recent strong gold performance should translate into a rotation into the equities whose share prices have lagged, starting with the better quality ones. Despite the strong showing of the sector year-to-date, share prices have recovered only a small percentage of the past three-year loses, thus leaving a large amount of upside to be captured still. As a matter of fact, gold has recovered only about 15 percent of its three-year, high-low spread, and the vast majority of equities have recovered even less.
  • There have been commentaries circulating that suggest billions of dollars’ worth of private capital is currently waiting to be deployed in the mining sector. Yet, according to Mark Tyler, senior investment banker at Nedbank Capital, there is a “wall of funding” waiting. According to Tyler, there is evidence suggesting $8 billion of private capital, and a similar amount of money in public funds are currently stuck, as fund managers are engaging in more comprehensive, due-diligence processes. The main argument for the increase is the fact that good deposits have been ruined by poor management in the past; it takes longer to do due diligence on management.

Threats

  • The Democratic Republic of Congo’s government and local miners failed to agree on mining code. Talks have been extended to try to overcome differences over proposed tax changes in a draft mining code. Prolonged discussions over the new code may have a chilling effect on Randgold and Banro, both with operating mines located in the Democratic Republic of Congo.
  • The world’s biggest macro hedge fund says Canada has a tough decade ahead of it, with Ray Dalio’s Bridgewater Associates saying in its well-read daily note that the country’s economy is just beginning a tough period of rebalancing. While this could be negative for the country as a whole, further currency weakness would likely be a positive for the gold miners which sell their production benchmarked to a U.S. dollar gold price.
  • ABN AMRO, the largest Dutch bank by assets, argues that gold will decline as the U.S. dollar strengthens on positive macro data. The bank, which last spring announced it would not honor its commitments on physical gold deposits and would issue paper gold receipts to its customers instead, says the good start of the year for gold as the best-performing precious metal will soon come to an end.
  • National Bank Financial is of the opinion that 2014 gold mining production guidance is likely “to carry a mixed negative bias as the move to ‘profitable ounces’ may not materialize as quickly as investors hope.” This next step of cost cutting may fall short of expectations both with respect to magnitude and timing since the flexibility of mining operations is constrained, according to the bank’s analysts.

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 COMEX is the primary market for trading metals such as gold, silver, copper and aluminum.

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.

Holdings in the Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 12/31/2013: Banro Corp. (Gold and Precious Metals Fund 0.11%, World Precious Minerals Fund 0.05%), New Gold Inc. (Gold and Precious Metals Fund 0.47%, World Precious Minerals Fund 1.00%), Randgold Resources Ltd. (Gold and Precious Metals Fund 1.83%, World Precious Minerals Fund 1.05%), SPDR Gold Shares (Gold and Precious Metals Fund 3.87%).

Net Asset Value
as of 04/15/2014

Global Resources Fund PSPFX $9.47 0.05 Gold and Precious Metals Fund USERX $6.74 -0.21 World Precious Minerals Fund UNWPX $6.40 -0.21 China Region Fund USCOX $7.93 -0.11 Emerging Europe Fund EUROX $7.94 -0.10 All American Equity Fund GBTFX $31.57 0.14 Holmes Macro Trends Fund MEGAX $22.96 0.13 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change