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Executive
Summary: In February, the Fund rose by 7.6% (the
FTSE Gold Mines Index was +6.8%, gold +3.3%, silver
+9.5% and palladium -4.2%). 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 74% with a Compound Annual
Growth Rate (CAGR) of 28% p.a. after all fees. The
sector's recent correction starting in early December
has come to an end, particularly in the small and mid
cap area where the fund has its biggest bets. We remind
our investors of the key reasons for holding our 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 4% and now only
palladium), and with 96% invested in shares, overwhelmingly
small and mid-cap companies; some 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.
Our 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.
Company
News Company visit to the fund's biggest position,
Randgold, in Mali (the Loulo and Marila mines) revealed
it's shaping up into a world-class deposit. 7% of the
fund is invested there. Ivanhoe, the second largest
position, Canadian stock promoter Robert Friedland's
company, is selling its Australian Savage River iron
ore interest to focus on Mongolia. The pain of the high
Rand is causing Durban Deep to consider tough measures
to mothball up to 1/3 of its domestic production. This
is bad news for Durban Deep and its S African competitors,
but good news for gold. Ballarat, our 4th biggest position,
increased inferred mineral resources by 57% to 1.1mn
oz and up-graded risk-adjusted exploration potential
to 9.2mn oz.
Macro
News Indian and Chinese banks have cut exposure
to the USD from 81% in 3Q01 to 67% in 3Q04. South Korea's
central bank said that it would diversify its USD 200bn
currency reserves. Gold's recent low of USD 413 came
on news that the IMF would sell/revalue gold reserves
(103mn oz) as part of debt relief plan for poor countries.
This would need 85% majority voting. The US holds 17%
of the votes. 12 US senators mainly from mining states
are voting against it, arguing that the world's poorest
countries, like Tanzania and Peru, will be hurt. WGC
reported gold demand grew 8% in 2004, spurred on by
USD hedging/growth in India, China etc. Bank of England
Governor, Mervyn King, stated that the US deficits and
Asia's hoarding of USD assets posed a threat to international
monetary system.
The
Outlook In the January report we made an important
technical point. Total speculative (net long/short)
gold positions on COMEX were back to early 2003 levels,
near 5mn oz, down from c20mn oz in 4Q04. "Early
2003" was just before our fund rose 80%. From the
start of the gold bull market that began in 2001, each
recovery high in the COMEX net long position has been
larger than the one before, with a higher gold price
than the one before. If we assume that the net long
position will top out in the next mini-bull cycle in
the 25-30mn oz region, this implies a gold price of
well over $500. At $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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