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Executive
Summary: In May, the Fund fell by 3.98% (the FTSE
Gold Mines Index was +1.1%, gold -4.2%, silver +8.2%
and palladium -8.2%). In 2004, the fund was down 7.7%
after a rise of +80% in 2003. Performance would have
been 1-2% higher if we hadn't adopted a conservative
"book cost" valuation for the large DRD Gold
holding, whose price is up by nearly a third since the
placing. This will be ironed out for next month end,
by which time the placing will be "seasoned".
Since inception 2 years ago the fund is up by 41.3%
with a Compound Annual Growth Rate (CAGR) of 14.3% p.a.
after all fees. 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
May, we continued to focus the fund by reducing
the number of names from 66 to 61. We sold the last
of our palladium. Our overweight position in Australian
stocks was the main contributor to underperformance
- they have not rallied as much as North American index
stocks. Our overall emphasis on intermediate stocks
hurt us. Historically, intermediates tend to lag a recovery
in the big cap index. DRD Gold was one of the best performing
stocks in May.
Company
News. The big news was our participation in the
DRD Gold (the old Durban Deep) financing led by our
fund's advisers, Baker Steel. The value of the position
is shown at cost by the administrator until the issue
has 'seasoned' later this month. If a market value had
been used rather than cost, the Fund would have been
over 1-2% higher.
Macro
News. Despite consensus expectations of a weaker
dollar, the US currency has strengthened, producing
a headwind for gold when quoted in US dollars. Data
indicating that the US economy is not extensively slowing
coupled with frequent downgrades of European growth
has been a major factor in the dollar rally. US rate
increases and European constitutional troubles accentuated
the movement. Gold actually did better than expected
in this environment supported by physical demand especially
in Asia. World Gold Council estimates that 2005 consumption
is running 26% ahead of 2004.
The
Outlook. The dollar continues to be important for
the gold price. Growth differentials continue to favour
the US but the European constitutional crisis should
soon become old news unless the EU leaders want to keep
shooting themselves in their feet. Any further political
problems in Europe that hurt the Euro could change the
view of Asian investors who were diversifying into Euros
to reduce US dollar concentration and drive them toward
gold as the diversifier. Bad news in Europe is not necessarily
bad for gold. Silver prices seem to have advanced faster
than underlying fundamentals in a balanced demand situation
while supply of Palladium is increasing pressure upon
the metal.
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