Third Quarter 2018

For the quarter ended September 30, 2018, the World Precious Minerals Fund fell 8.42 percent, outperforming the fund’s benchmark, the NYSE Arca Gold Miners Index, which lost 16.58 percent. See complete fund performance here.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

Strengths

  • The World Gold Council (WGC) reported that central banks added a net total of 193.3 metric tons of gold to their reserves in the first six months of 2018, representing an 8 percent increase from the same period in 2017 and the strongest first half of the year since 2015. Meanwhile, the U.S. Treasury reported that Russia is quickly liquidating U.S. dollar assets. Since the U.S. imposed heavier sanctions on Putin’s allies in April, the country has sold $81 billion worth of U.S. government debt, totally four-fifths of its cache. In the face of greater U.S. sanctions, Russia bought more gold in July than in any other month this year. The Russian central bank purchased 26.1 tons of bullion, bringing its total holdings to 2,170 tons valued at $77.4 billion, according to the International Monetary Fund (IMF). The Reserve Bank of India (RBI) has made its first gold purchase in nine years, according to Bloomberg. The bank purchased 8.46 tonnes of gold in financial year 2017-2018.
  • The first bullion-backed ETF guaranteed by a government has launched on the New York Stock Exchange (NYSE). Australia’s Perth Mint Physical Gold ETF (AAAU) started trading during the third quarter, allowing shareholders to exchange their shares for gold and have the physical metal delivered to their doorstep by Perth Mint. Richard Hayes, the Perth Mint’s chief executive officer, said that “we believe investors will have greater confidence with the knowledge that their wealth is physically stored in one of the most secure central bank grade vaults in the southern hemisphere.”
  • Inflation is creeping into the market, which has historically been positive for the price of gold. U.S. consumer sentiment fell to the lowest level in almost a year, according to a University of Michigan report. Bloomberg writes that this could be a possible caution signal for spending following strong gains in the second quarter.

Weaknesses

  • Gold imports to Indian consumers dropped over 25 percent in June from a year earlier, reports Bloomberg. The rupee’s extended slump hit record lows last month, making overseas goods more expensive. Between the weaker rupee and changing attitudes among millennials, Indian jewelers are struggling to gain new customers as young, urban professionals increasingly choose vacations, electronics and other luxuries over jewelry.
  • In the third quarter, Vanguard announced that it is restructuring and changing the name of its $2.3 billion Vanguard Precious Metals and Mining Fund, reports Kitco News. The fund will be renamed the Vanguard Global Capital Cycles Fund and will reduce its exposure to mining stocks to just 25 percent from 80 percent. This move shows that negative sentiment and bearishness on gold and precious metals has hit a bottom, as Vanguard is one of the largest fund companies.  Its rotation out of gold mining stocks could lead to some near-term weakness in share prices but could certainly be a buying opportunity as well.  In terms of timing, Avi Gilbert, creator of elliotwavetrader.net, noted “You don’t see these types of moves at market tops.”
  • The Bank of Nova Scotia was ordered to pay a fine of $800,000 by the Commodity Futures Trading Commission (CFTC) after self-reporting that traders were found to have placed fake orders for gold and silver futures contracts, commonly known as “spoofing.” Bloomberg writes that spoofing is a practice whereby a trader attempts to push the price of contracts up or down. Such incidents at the bank occurred from at least June 2013 through June 2016. By self-reporting the misconduct, the bank received a significantly reduced fine.

Opportunities

  • President Donald Trump may be making gold great again, according to Bloomberg. Trump criticized the Federal Reserve for raising interest rates and “taking away our big competitive edge.” The president believes America “should not be penalized because we are doing so well.” After Trump’s comments, gold futures headed for the biggest increase in over two weeks.
  • Barrick Gold, the world’s largest producer of gold, reported a decline in second-quarter production as planned maintenance weighed on output, as expected. The gold miner produced only 1.05 million ounces in the first quarter of this year, which is the lowest amount for Barrick in 16 years. This emphasizes the notion that the world has hit “peak gold” supply, where most of gold has already been discovered and it’s become much more difficult to find new deposits. Also, gold giants Barrick and Randgold Resources announced their merger late in the quarter, which will create the world’s largest gold mining company. Mark Bristow is set to become the CEO of newly combined company.
  • Barron’s Andrew Bary writes that out-of-favored gold now deserves a place in investment portfolios. Compared with stocks and other financial assets, gold appears to be inexpensive, and gold stocks are at their most discounted level in over 20 years relatively.

Threats

  • A recent National Association of Realtors (NAR) report shows that sales of previously owned U.S. homes unexpectedly fell in June, indicating a shortage of affordable listings, while rising prices continue to limit demand. The housing market in cutthroat areas appears to be headed for the broadest slowdown in years as buyers are being squeezed by rising mortgage rates and prices climbing twice as fast as incomes. Robert Shiller, a Nobel Prize-winning economist, says that “this could be the very beginning of a turning point.”
  • A liquidity crunch is the new worry for credit investors. “It’s not trade wars or an equity market correction that look to be keeping credit investors up at night,” Bank of America strategists wrote in a recent note. “The concern is a more pervasive rush for the exit at some point in the future.” An otherwise healthy economic backdrop is being overshadowed by extreme moves that are haunting cross-asset investors, Bloomberg reports, with illiquidity fears rising across the board. “It’s especially a concern in high-yield credit, where investors holding cash bonds can face steep penalties if they rush for the exit,” the article reads.
  • Ten-year Treasury yields turned negative for European buyers by quarter end due to mounting costs to convert payments from euros into dollars. Bloomberg writes that the three-month cross-currency basis dropped to minus 40 basis points overnight, from about minus 16 points, marking the biggest single-day decline since 2009. A similar change happened for Japanese-based investors. Three-month yen cross-currency basis swaps fell to minus 54 basis points recently, and as a result, 10-year Treasuries now yield minus 0.08 percent for hedged Japanese buyers. This could result in fewer buyers of U.S. debt.

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 FTSE Gold Mines Index encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

A cross-currency basis swap is a floating swap where two parties borrow from, and simultaneously lend to, each other an equivalent amount of money denominated in two different currencies for a predefined period of time.

Neither the Gold and Precious Metals Fund nor World Precious Minerals Fund held any of the securities mentioned in this article of 9/30/2018.

Net Asset Value
as of 12/12/2018

Global Resources Fund PSPFX $4.59 0.03 Gold and Precious Metals Fund USERX $6.46 -0.01 World Precious Minerals Fund UNWPX $3.03 -0.02 China Region Fund USCOX $7.97 0.06 Emerging Europe Fund EUROX $6.18 -0.01 All American Equity Fund GBTFX $24.18 0.06 Holmes Macro Trends Fund MEGAX $18.17 0.13 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change