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Executive
Summary: In March, the Fund fell by 4.0% (the FTSE
Gold Mines Index was -4.8%, gold -2.0%, silver -2.3%
and palladium +9.7%). In 2004, the fund was down 7.7%
after a rise of +80% in 2003. Since inception 2 years
ago the fund is up by 67% with a Compound Annual Growth
Rate (CAGR) of 24.2% p.a. after all fees. Last
month, USD strength and higher interest rate fears created
a headwind for the precious metals sector, particularly
in the small and mid cap areas where your fund has its
biggest investments. 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. It holds pre-IPO stock (African Minerals),
a much reduced bullion position (only 3.5% and now only
palladium), and is 96% invested in shares, overwhelmingly
small and mid-cap companies, with nearly 5% of this
in options and warrants.
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
March, we reduced the number of names from 70 to
66.
Company
News More mine closures in South Africa and strike
action at Harmony's Free State gold mines. South African
producers have had to contend with a lower Rand gold
price and cost inflation, at the expense of their margins.
DRDGold, South Africa's 4th largest gold mine, puts
its loss-making North West Mines into liquidation, with
the loss of 6,500 jobs, following continued losses and
seismic activity, which made two shafts unsafe. The
fund has been very underweight the South African sector.
This is changing and it is likely that next month we
will be reporting a much larger South African exposure
in the fund. Bendigo Mining (3.5% of the fund) announced
that its production will ramp up quicker than previously
expected as it re-engineers and optimizes its production.
In what is becoming a theme in the sector, Perseverance
announced that gold output has been delayed a month
at its Fosterville project due to labour shortages;
capital costs have also risen by another 5%. Bema's
Refugio project has been further delayed due to equipment
shortages. Lommin announced that they would buy Southern
Platinum for CAD 2.66/share. Centerra Gold said that
its operations on the Kumtor Mine, in the Kyrgyz Republic
are unaffected by the change of government.
Macro
News The USD rally and higher interest rates backed
by FED and central bank chatter spell a headwind for
the gold and precious metals sector. Longer term, the
fact that even the FED admits that inflation may be
a problem, is a positive. Consensus forecasts for the
top in interest rates have been reduced for later in
2005. Indian and Chinese banks have cut exposure to
the USD from 81% in 3Q01 to 67% in 3Q04. South Korea's
central bank said it would diversify its USD 200bn currency
reserves. The latest World Gold Council quarterly report
shows that net consumer demand for gold in 4Q04 was
+5% in tonnage terms and +18% in USD terms y-o-y. For
2004 as a whole, tonnage demand was +7%.
The
Outlook The USD will continue to be the dominant
factor for the fund in the short term. We are looking
for signs that the market malaise over higher interest
rates is coming to an end (there are some early signs).
When the market begins to sense that we are indeed getting
close to a top, it will rally significantly towards
USD 500/oz. At USD 500 gold, the fund, based on the
gearing that P&C Director and former global CEO
of Rothschilds, Bruce Albrecht, has calculated for each
fund holding, should have a theoretical fair value 50-70%
above current levels.
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