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Executive
Summary: In July, the fund rose by 3.6% (the FTSE
Gold Mines Index was -3.4%, gold -1.3%, silver +2.1%
and palladium +6.3%). In 2004, the fund was down 7.7%
after a rise of +80% in 2003. Since inception over 2
years ago the fund is up by 55.1%, with a Compound Annual
Growth Rate (CAGR) of 20.7% p.a. Last month saw the
gold price slightly decline by about 1% yet the fund
was able to advance by over 3%. We remind our investors
of the key reasons for holding the fund:
1.
Institutional weightings in gold, mining and resource
shares are way below the averages of the '70s, '80's
and '90's. Gold and natural resources are in a generational
bull market. Few analysts understand the epochal implications
of the emergence of China, India etc on global commodity
demand, less still can they 'model' the probable course
based on historical data.
2.
The fund is highly leveraged to a gold price and commodities
recovery.
3.
The fund has the unique feature of being able to hold
physical bullion as well as shares up to 100% of fund
value.
4.
It is the policy of the fund to have the leading specialist
commodity advisers in the world advising on the fund's
investments.
5.
The fund is a 'whole of cycle' fund. In the latter stages
of a commodity bull cycle, shares will have discounted
all the good news and it's safer and more profitable
to hold physical bullion and higher levels of cash.
But not yet.
In
July, we continued to reduce the number of names
with a decline from 59 to 52. We will be adding some
new names in August. The portfolio benefited through
its investments in smaller precious metals companies
where it is overweight while the FTSE large capitalisation
companies where the fund is underweight were depressed
by some poor company results. Gold should benefit from
the completion of the entire 500 tonne 2005 agreed US
gold sale program.
Company
News. Ballarat, the third largest holding, secured
underwriting for its listed options that mature in September.
Banro, 7th largest holding, announced increased resources
at iis DRC facility and raised finance for additional
expansion. Randgold, the largest holding, announced
that it will start production of gold at its Loulo mine
in Mali two months earlier than expected.
Macro
News. China's revaluation of its currency was small
in magnitude but represented a change in policy. We
can not expect further future revaluations. Most commentators
see this as very favourable for the gold price with
increasing Chinese demand. Additional academic studies
became public knowledge during the month showing the
diversifying benefits of gold and other precious metals
with a conclusion that portfolios should hold over 7%
in physical precious metals.
The
Outlook. The physical market is somewhat long at
the moment, but not so much as to make a significant
rally in gold impossible. We are sticking to our belief
that a rally towards the USD 500 area is possible in
the next few months. Our degree of confidence will only
increase if the USD continues to weaken. Equally, if
oil continues to rally above USD 60 towards USD 80,
the outlook for gold and the fund will significantly
improve. Overall, we think that the fund is ready for
a 'run' and we remind our readers of the price action
in 2003, when it rose nearly 80% in a straight line
once the marginal players like hedge funds started to
put money into what is, in the final analysis, an extremely
volatile and illiquid sector. The fund (97% invested)
is ready for this.
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