Although Brazil's situation is not as bad as Argentina's before their debt default and 70% currency devaluation, there still remains the fear that Brazil's debt is too big to handle. A political election coming up this fall adds a little intrigue as the leading candidate is an economic socialist, worrying anyone considering loaning money to Brazil. Therefore, a problem is being created from a delicate situation which could easily spread to other South American countries such as Paraguay and Chile.

The U.S. Federal Reserve decided to leave the federal funds rate unchanged at 1.75%. While many analysts believe that the American economy is back on the way up, there are several news items which don't look good. One, the continuous breakout of companies with fraudulent financial reports over the past two years has cheated many investors of a fair deal, and is probably contributing to the decline in investment capital coming to New York, meaning a lower dollar. Second, there doesn't appear to be any government policy which appreciates the danger of continuous trade deficits of the magnitude existing today. Nothing is being done about it, and it is only getting worse. Finally, the only meaningful economic area in the U.S. economy operating with vigor is the housing market, supported by a 40 year low in mortgage rates and producing another new homes sales record in May. Mortgage rates remained near 6.20% for now. When this sector slows due to a weakening economy or higher interest rates, we as a nation will have to face a much weaker economy.

For the month, gold funds plunged from a high set in early June, following gold equities down as they gave up gains accumulated since January. The price of gold momentarily edged up slightly from 326.5 to a peak of 327.8 but then slowly slid to end the month at 313.5. Silver moved from 5.02 to 5.11 before closing the month at 4.83. The XAU index fell from 84.2 to 71.4 (-15%), which unfortunately also represented most gold funds. The 30 year U.S. Treasury bond rate held at 5.51%, not far from where it was in January. The euro approached parity with the dollar, climbing from .934 to close at .994 dollars per euro. The Bank of Japan intervened twice last week to keep the yen from appreciating so much against the dollar, but the yen still managed to climb from 124.2 to close at 119.4 yen per dollar. The dollar index closed at 1.05. Oil was up slightly from $25.30 to $26.86.

fn         Fund                   1 mo   3 mo  12 mo   2 yr   3 yr
12 MNTGX Monterey OCM Gold    .  -9.5   16.0   75.2   85.5   74.45
 6 SGGDX First Eagle SGen Gold.  -9.6   19.5   97.7  117.6  112.24
15 SCGDX Scudder Gold & Pr Mt S  -9.7   15.4   53.1   73.7   62.99
20 INIVX Van Eck Intl Inv GoldA -10.8   18.3   86.0   84.2   53.46
16 TGLDX Tocqueville Gold     . -10.8   11.5   75.9   94.5   99.29
 5 FSAGX Fidelity Select Gold . -10.9    7.5   55.1   70.0   65.58
 4 EKWBX Evergreen Prec Mtls B. -12.2   13.6   61.7   89.5   80.70
13 OPGSX Oppenheimer Gold A   . -12.3    4.8   34.9   51.9   35.74
 7 FKRCX Franklin Gold & PrM A. -12.3    3.0   28.0   47.0   44.28
21 VGPMX Vanguard Prec Metals . -12.8    4.3   35.8   68.1   57.90
10 FGLDX INVESCO Gold         . -13.1   10.0   54.6   50.9   35.48
19 USAGX USAA Gold            . -13.6   10.7   69.2   93.1   81.69
 9 LEXMX ING Pilgrim Pr Mtls A. -13.6   14.3   65.2   78.5   63.00
 2 BGEIX Amer Cent Global Gold. -13.6   11.6   71.3   87.3   66.63
14 RYPMX Rydex Prec Metals    . -13.9    3.8   42.9   48.9   
 8 GOLDX Gabelli Gold         . -14.0   10.5   72.2  100.0   95.19
 3 INPMX AXP Precious Metals A. -16.0   13.1   46.7   70.1   48.55
11 MIDSX Midas Fund           . -16.1    7.1   53.4   40.6    0.00
18 UNWPX US Global World PrecM. -17.5   28.3   97.5   62.8   34.42
17 USERX US Global Gold Shrs  . -18.0   19.5   86.6   80.8   54.39
1  ASA   ASA Ltd              . -18.2    6.2   66.0  104.1  105.66

The correction finally arrived like a hammer. Almost all gold equities suffered deflation in price as many investors took profits. All funds were still well ahead over the past 12 months and up somewhat for the last 3 months.

fn    Fund                      pos  nav(6-28)
 6 SGGDX First Eagle SGen Gold.   64.7   11.27
16 TGLDX Tocqueville Gold     .   60.4   22.50
12 MNTGX Monterey OCM Gold    .   58.8    7.92
20 INIVX Van Eck Intl Inv GoldA   55.1    9.19
 5 FSAGX Fidelity Select Gold .   52.0   21.61
19 USAGX USAA Gold            .   48.8   10.12
15 SCGDX Scudder Gold & Pr Mt S   47.5   10.35
 4 EKWBX Evergreen Prec Mtls B.   46.5   19.10
 2 BGEIX Amer Cent Global Gold.   45.5    8.29
 8 GOLDX Gabelli Gold         .   44.5   10.54
18 UNWPX US Global World PrecM.   44.2   10.43
 9 LEXMX ING Pilgrim Pr Mtls A.   43.0    4.89
17 USERX US Global Gold Shrs  .   41.2    5.28
10 FGLDX INVESCO Gold         .   41.0    2.52
13 OPGSX Oppenheimer Gold A   .   37.1   13.37
 3 INPMX AXP Precious Metals A.   33.8    8.20
 7 FKRCX Franklin Gold & PrM A.   32.2   12.35
14 RYPMX Rydex Prec Metals    .   31.8   28.95
21 VGPMX Vanguard Prec Metals .   31.2   11.15
11 MIDSX Midas Fund           .   26.4    1.35
 1 ASA   ASA Ltd              .   20.6   30.66

Some of these funds reached a new high in early June but fell back during the correction. A value of 0.0 would indicate a retracement halfway to a 12 month low probably set last summer.

As mentioned before, Fidelity Select Gold (FSAGX), with exceptional marketing and management, recently passed Vanguard as the gold fund with the largest amount of assets under management.

fn         fund                  assets
 5 FSAGX Fidelity Select Gold .   476
21 VGPMX Vanguard Prec Metals .   441
 1 ASA   ASA Ltd              .   294
 2 BGEIX Amer Cent Global Gold.   282
 7 FKRCX Franklin Gold & PrM A.   205
20 INIVX Van Eck Intl Inv GoldA   163
15 SCGDX Scudder Gold & Pr Mt S   113
10 FGLDX INVESCO Gold         .   100
19 USAGX USAA Gold            .   100
13 OPGSX Oppenheimer Gold A   .    88
16 TGLDX Tocqueville Gold     .    78
 9 LEXMX ING Pilgrim Pr Mtls A.    71
 8 GOLDX Gabelli Gold         .    49
18 UNWPX US Global World PrecM.    41
 3 INPMX AXP Precious Metals A.    36
11 MIDSX Midas Fund           .    34
 6 SGGDX First Eagle SGen Gold.    34
14 RYPMX Rydex Prec Metals    .    32
12 MNTGX Monterey OCM Gold    .    26
17 USERX US Global Gold Shrs  .    24
 4 EKWBX Evergreen Prec Mtls B.    15

fn         fund                   beta
 6 SGGDX First Eagle SGen Gold.   1.68
17 USERX US Global Gold Shrs  .   1.59
18 UNWPX US Global World PrecM.   1.57
 2 BGEIX Amer Cent Global Gold.   1.52
 8 GOLDX Gabelli Gold         .   1.50
20 INIVX Van Eck Intl Inv GoldA   1.46
12 MNTGX Monterey OCM Gold    .   1.44
19 USAGX USAA Gold            .   1.39
16 TGLDX Tocqueville Gold     .   1.32
 4 EKWBX Evergreen Prec Mtls B.   1.27
 9 LEXMX ING Pilgrim Pr Mtls A.   1.22
 1 ASA   ASA Ltd              .   1.21
 5 FSAGX Fidelity Select Gold .   1.12
10 FGLDX INVESCO Gold         .   1.11
 3 INPMX AXP Precious Metals A.   1.10
15 SCGDX Scudder Gold & Pr Mt S   0.98
11 MIDSX Midas Fund           .   0.98
14 RYPMX Rydex Prec Metals    .   0.96
13 OPGSX Oppenheimer Gold A   .   0.82
 7 FKRCX Franklin Gold & PrM A.   0.74
21 VGPMX Vanguard Prec Metals .   0.62

The beta for each fund changes monthly as the fund advances and declines, but the relative position on the ladder doesn't change much, except as a reference to other funds. As you can see, there is a big difference between management policies of different funds. The nav price movement is a direct reflection of the types of equities selected by the fund manager.

*** Funds that diversify with government treasuries, bullion or natural resource stocks generally have a lower beta and are less volatile compared to a portfolio concentrating on small capitalization mining companies.

The price of gold dropped to 313.4, still ahead of the early May price, but indicating that there will be a test of the $312 level and perhaps as far down as the $300 area. Gold held above 320 for most of June until it was evident that the gold equities were making a major give up of gains. Gold traders often get a feel for the market by watching equity expectations and vice-versa. The fact that equities and funds fell and stayed down was negative for the price of gold. Now we will have to see some optimism in one or the other, or perhaps a tension-increasing world news event.

I mentioned Brazil because they have been talking to the IMF about financial assistance, and another large default in South America could bring down several smaller economies. The fear of such an occurrence often helps to bring it about. In this case, however, Brazil has a much stronger base and a more stable economy than Argentina, and should get through with only adjustments. Until they do, other smaller countries such as Paraguay, Chile, Mexico and Venezuela will still be at risk of economic contagion. All of these have lowered their currencies against a falling dollar, so that speaks volumes about the current weakness of their economies.

Here are two articles of concern:

prudentbear.com

George Soros thinks the dollar is in trouble.

The price of gold seemed to ignore the falling dollar, which continued its plunge against most other currencies. Under normal conditions, the gold price would increase, but is obviously suffering from its overbought condition. I would not expect it to fall much further.