Gold Showing Signs of Life

Since inception July 1^st through October 30^th, a difficult period for most investors, the Tocqueville Gold Fund has appreciated 7.6 %. In launching the fund, concern about the overall market outlook was foremost in our thinking. Although our concerns proved well founded and with painful consequences, we are pleased that the gold sector ran counter to the market correction as we had anticipated.

Stock market outlook and psychology by investors changed dramatically in the third quarter, ushering in a new market cycle and a very different landscape than we have become accustomed to. Disinflation, high valuations, and low long- term interest rates appear to be on their way out. Reflationary policies are becoming more appealing to world governments. Voters have had their fill of inflation fighting, austerity, unemployment and deflation. There is hardly anyone left who thinks anti inflation policies should dominate. We expect to see a move to lower short- term interest rates, rapid money supply growth, more emergency bailouts, and fiscal deficits. These changes will be good for gold, but not necessarily so for the bond market or equity valuations.

For economic stimulus to work, Asia must begin to resume growth. In fact, without Asian participation, the outlook would be quite negative. As Alan Greenspan recently observed, the US cannot remain an island of prosperity while Asian and emerging market economies falter. The best chance to avoid a deep, prolonged world recession is for stimulus to take effect. An Asian recovery would increase demand for physical commodities. It would very likely lead to increases in commodity prices of all kinds, including gold.

In the US, against a backdrop of rising long term interest rates, corporate earnings are heading lower because of deflationary price trends, declining consumer confidence, and excess capacity. We expect these trends to continue into 1999. Among the 25 largest market capitalizations, only 5 trade at less than a price to earnings multiple of 20 on 1999 earnings. Obviously, these lofty valuations will be very difficult to sustain in the economic environment we envision. There is plenty of room for stocks to move lower.

Why is this happening? We are in the midst of a world banking crisis, characterized by Greenspan and others as the most serious in more than fifty years. Throughout the 1990’s, the Fed’s easy money policies led to a buildup of questionable credit leading to investment speculation as typified by the collapse of Long Term Credit, or the unprecedented valuations of world equity markets. The result is that financial institutions are laden with bad investments and irretrievable losses.

Unwinding these excesses with a minimum of pain, if it can happen that way at all, can only happen slowly, over several years. For the unwinding to happen quickly would require a market crash. Policy makers are working feverishly to avoid such an outcome. The most politically acceptable path is a \"little bit\" of inflation. Deflation has made it all but impossible to service dollar and other hard currency loans, thereby undermining credit and impairing bank capital. Higher price levels do the opposite, at least for a while.

Beneficiaries in this new environment are gold, hard commodities, assets such as real estate financed by high levels of debt, and holders of short- term debt such as commercial banks. Of these, the most high-powered play by far is gold and shares of gold producers.

We expect this new market cycle will last for several years. We recommend a small (5%) exposure to gold and gold shares. Gold historically performs inversely to financial assets. It is a constructive way to deal with the more pessimistic investment outlook. A small exposure can preserve or even increase purchasing power in a down market.

The recent market rally is based on a rebound from a severely oversold condition. It has also been fueled by aggressive monetary stimulus. A combination of rapid money growth, low short-term interest rates and in all likelihood fiscal deficits next year is very favorable for gold.

We are at the very early states of these market changes. For many, our views will be quickly dismissed. We are happy to be standing away from the crowd, but expect to have increasing company over time. In that vein, we welcome your interest in the Tocqueville Gold Fund and would be happy to respond to your questions or comments.

^©Tocqueville Asset Management LP. All rights reserved.
November 1998

This commentary is not an advertisement or solicitation to subscribe to the Tocqueville Gold Fund, which may only be made by prospectus. To receive a free prospectus, which contains more information on management fees and other expenses, call (800) 697-FUND (3863). Read it carefully before you invest or send money. The Gold Fund is subject to the special risks associated with investing in gold and other precious metals, including: the price of gold/precious metals may be subject to wide fluctuation; the market for gold /precious metals is relatively limited; the sources of gold/precious metals are concentrated in countries that have the potential for instability; and the market for gold/precious metals is unregulated. In addition, there are special risks associated with investing in foreign securities, including: the value of foreign currencies may decline relative to the US dollar; a foreign government may expropriate the Fund’s assets; and political, social or economic instability in a foreign county in which the Fund invests may cause the value of the Fund’s investments to decline.