On the last day of the month the Federal Reserve raised the short term interest rate from 1.00 to 1.25% as a precautionary move against a growing economy. Although expected by just about everyone, the thought of an increase knocked gold down $9 a day before the announcement. However, the smallness of the .25% increase made many analysts state that gold would recover quickly. With the peaceful transfer of power in Iraq, oil dropped to near a three month low around $36 from the previously $40 range.

A major increase in the U.S. monetary base and the money supply in the past five months has alarmed many analysts that inflation will result, if not already on its way. Background rumors hint that expected higher interest rates are already having an effect on Fannie Mae and large mortgage companies. Some financial organizations will be carrying massive mortgage inventories at 6% when rates go back up, and that means assets on their books will decrease in value. Even with the sales of new homes hitting new records in May, prices in many areas of the country are beginning to back down. Since just about everyone expects interest rates to go up more, mortgage rates will too. However, at the end of June, rates were actually decreasing as the long bond yield dipped to 5.31% from 5.34% after reaching 5.52%. Mortgage for a 30 year fixed loan was about 6.25%.

The commodity markets are also indicating that gold and silver have a limited downside and may be setting up a base for a big move once the deficits and weaknesses in the dollar are seriously recognized by investors. The euro closed at 1.216, down slightly and the dollar held at 88.95. The first quarter trade deficit of 144.9B didn't seem to have much effect on anyone. However, it's one of those many half-hidden background items which eventually join together to cause an avalanche.

The Dow closed at 10435, enjoying a minor rally in June.

An interesting factor is approaching as the national debt, at the end of June at $7.274 TRILLION, is approaching the recently set debt limit, and must be addressed politically. Expect some fireworks as someone has already tried to put a rider in another bill which would have overlooked the limit. It didn't pass. Sometime this fall a new limit will have to be approved to fit the monster budget deficit and the one for next year. It looks like no one wants to admit that we are spending too much.

fn       Fund                     1 mo   3 mo  12 mo   2 yr   3 yr
21 VGPMX Vanguard Prec Metals .   -0.4  -12.2   29.6   38.0   95.1
11 MIDSX Midas Fund           .   -0.5  -18.8   20.7   41.5  117.1
10 FGLDX INVESCO Gold & Pr Mtl.   -1.2  -14.3   24.4   35.3  109.1
15 SGDAX Scudder Gold & Pr Mts.   -1.7  -18.9   50.4   75.1  174.8
13 OPGSX Oppenheimer Gold A   .   -2.2  -15.1   29.5   35.0   90.8
 7 FKRCX Franklin Gold & PrM A.   -2.4  -15.3   22.8   32.4   73.9
12 OCMGX Monterey OCM Gold    .   -2.9  -20.7   15.9   37.8  141.4
19 USAGX USAA Gold            .   -3.1  -16.6   32.7   53.3  163.9
 6 SGGDX First Eagle Gold     .   -3.2  -17.3   15.3   32.4  164.9
18 UNWPX US Global World PrecM.   -3.5  -22.1   56.0   46.1  188.6
 8 GOLDX Gabelli Gold         .   -3.6  -18.1   18.4   37.7  139.4
 2 BGEIX Amer Cent Global Gold.   -3.7  -18.5   16.1   29.2  121.8
 4 EKWBX Evergreen Prec Mtls B.   -3.7  -18.3   31.7   47.8  141.6
 3 INPMX AXP Precious Metals A.   -3.7  -22.5   25.3   32.8   94.9
20 INIVX Van Eck Intl Inv GoldA   -3.8  -18.5   21.2   28.3  138.7
 9 LEXMX ING Precious Metals  .   -3.9  -17.9   15.6   27.2  111.5
 5 FSAGX Fidelity Select Gold .   -4.0  -19.9    6.5   14.3   80.7
 1 ASA   ASA Ltd              .   -4.1  -16.3   -2.7   22.8  103.8
14 RYPMX Rydex Prec Metals    .   -4.2  -21.0   14.6   21.0   74.0
16 TGLDX Tocqueville Gold     .   -4.2  -17.0   24.3   41.9  150.7
17 USERX US Global Gold Shrs  .   -4.6  -20.8   35.6   33.0  148.2

Steady Vanguard Precious Metals (VGPMX) took the top spot with Midas Fund (MIDSX) right behind, both posting minor losses. The past three months have been dismal for gold funds, but the change from last June is still substantial to the upside.

Vanguard gold is a relatively conservatively managed fund and has done well as the market moved in a relatively narrow range this year. Like Fidelity Gold (FSAGX) and American Century (BGEIX), Vanguard's size limits its investment policies. A small investment in a small mine has very little effect on its nav. To move too much of their assets into a smaller mine moves and distorts the market for that mine.

The Position indicator gives the relative position of a fund between its 52 week high and low. A high is represented by +100 and a low by -100. As of June 30, 2004.

fn        Fund                    pos     nav
 4 EKWBX Evergreen Prec Mtls B.   27.2   27.56
18 UNWPX US Global World PrecM.   22.4   13.68
21 VGPMX Vanguard Prec Metals .   15.6   14.02
15 SGDAX Scudder Gold & Pr Mts.    8.7   16.90
10 FGLDX INVESCO Gold & Pr Mtl.    6.0    3.29
16 TGLDX Tocqueville Gold     .   -1.6   30.07
19 USAGX USAA Gold            .   -2.1   14.07
13 OPGSX Oppenheimer Gold A   .   -2.2   16.89
 7 FKRCX Franklin Gold & PrM A.   -2.6   16.12
11 MIDSX Midas Fund           .   -4.5    1.81
17 USERX US Global Gold Shrs  .   -5.4    7.00
 6 SGGDX First Eagle Gold     .   -9.1   14.37
 3 INPMX AXP Precious Metals A.   -9.7    9.79
20 INIVX Van Eck Intl Inv GoldA  -19.6    9.32
 2 BGEIX Amer Cent Global Gold.  -23.5   10.51
 9 LEXMX ING Precious Metals  .  -27.2    6.22
14 RYPMX Rydex Prec Metals    .  -28.4   35.01
 8 GOLDX Gabelli Gold         .  -32.1   14.38
12 OCMGX Monterey OCM Gold    .  -34.1   10.67
 5 FSAGX Fidelity Select Gold .  -46.7   23.18
 1 ASA   ASA Ltd              .  -53.6   36.09

This indicator shows that most funds have given up most of their annual gains, and some are below their 52 week averages and some well below it. However, it also shows that no fund is near its 52 week low.

The following list shows the approximate size of funds as measured in total assets under management in $millions as of the end of June. This is only an approximation as the size changes daily with new purchases, redemptions, and nav changes. Relative positions of the funds usually don't change much. The largest remain the largest.

fn         Fund                 $assets
 5 FSAGX Fidelity Select Gold .    629
 2 BGEIX Amer Cent Global Gold.    603
21 VGPMX Vanguard Prec Metals .    528
16 TGLDX Tocqueville Gold     .    464
 6 SGGDX First Eagle Gold     .    392
 7 FKRCX Franklin Gold & PrM A.    388
 1 ASA   ASA Ltd              .    345
19 USAGX USAA Gold            .    281
18 UNWPX US Global World PrecM.    253
20 INIVX Van Eck Intl Inv GoldA    232
13 OPGSX Oppenheimer Gold A   .    201
 8 GOLDX Gabelli Gold         .    185
14 RYPMX Rydex Prec Metals    .    160
15 SGDAX Scudder Gold & Pr Mts.    114
10 FGLDX INVESCO Gold & Pr Mtl.    102
 9 LEXMX ING Precious Metals  .     82
12 OCMGX Monterey OCM Gold    .     66
17 USERX US Global Gold Shrs  .     63
 3 INPMX AXP Precious Metals A.     62
11 MIDSX Midas Fund           .     50
 4 EKWBX Evergreen Prec Mtls B.     38

While these numbers had increased over the past year, a total of several hundreds of millions of dollars in assets were lost in April, partially recovered in May, and some more lost in June. With gold threatening to rally over 400 and stay there, these asset numbers could significantly increase.

The beta indicator measures the relative volatility of a fund's net asset value (nav) movement over the last 52 weeks as compared to the gold fund group average, 1.0. This number indicates volatility but does not specify the direction of movement, so it is only a measurement of relative activity of the price of the fund.

fn        fund                    beta
18 UNWPX US Global World PrecM.   1.51
15 SGDAX Scudder Gold & Pr Mts.   1.47
 4 EKWBX Evergreen Prec Mtls B.   1.39
17 USERX US Global Gold Shrs  .   1.29
19 USAGX USAA Gold            .   1.11
13 OPGSX Oppenheimer Gold A   .   1.11
 3 INPMX AXP Precious Metals A.   1.07
20 INIVX Van Eck Intl Inv GoldA   0.95
12 OCMGX Monterey OCM Gold    .   0.93
11 MIDSX Midas Fund           .   0.90
16 TGLDX Tocqueville Gold     .   0.90
 2 BGEIX Amer Cent Global Gold.   0.86
14 RYPMX Rydex Prec Metals    .   0.85
 7 FKRCX Franklin Gold & PrM A.   0.85
21 VGPMX Vanguard Prec Metals .   0.84
10 FGLDX INVESCO Gold & Pr Mtl.   0.82
 8 GOLDX Gabelli Gold         .   0.82
 9 LEXMX ING Precious Metals  .   0.82
 5 FSAGX Fidelity Select Gold .   0.75
 6 SGGDX First Eagle Gold     .   0.63
 1 ASA   ASA Ltd              .   0.62

The beta for each fund may change as the fund advances and declines, but the general 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.

Gold stocks and funds are down about 20% for the year but appeared to be resisting further decline. They are quick to rally and slow to drop. The last two weeks of June saw gold move back over 400 for three days before the interest rate increase pushed the price back down. It looks more and more like a base was set at 383-385 in June after a support level set at 375-378 in May was not reached again.

Four different funds moved to the top this month: Vanguard Precious Metals(VGPMX), Midas Fund (MIDSX), INVESCO Gold and Precious Metals (FGLDX), and Scudder Gold and Precious Metals (SGDAX). The difference in fund results over the past twelve months is relatively narrow as only two funds are up over 50% (Scudder Gold - SGDAX and US Global World Precious Minerals - UNWPX), but no other fund has run off and left the pack. Only Fidelity (FSAGX) and ASA are not in double digit increases.

The increase in the short term interest rate is still below inflation and the CPI numbers, and is in an historical position which generally produces higher gold prices. We can expect more rate increases which temporarily knock gold, but may not see many until after November. Greenspan is trying to give financial institutions time to adjust their books so we won't have such a big shock to the system when the facts become obvious.

Situations like this with rising rates due to increasing prices have almost always been a sign of coming inflation, and a rising gold price.