Gold Mid-Year Review

During the fiscal half year ending April 30, 2008, the Tocqueville Gold Fund returned (13.72)% vs. (8.64)% for the benchmark XAU (Philadelphia Stock Exchange index of gold and silver shares) and (9.64)% for the S&P 500.

During the past six months, the Federal Reserve and other world central banks have had to resort to unprecedented measures to prevent a total meltdown of global credit. The Fed, for example, has exchanged high quality treasury bonds held on their balance sheet for much lower quality debt instruments including mortgage backed securities and other difficult to value paper in order to provide liquidity to banks and brokerage houses. The European Central Bank and the Bank of England have undertaken similar initiatives. Financial market confidence remains fragile despite these extraordinary measures and the premiums for risk taking remain high. In short, we believe the environment for gold remains excellent.

In the hours before the dramatic Fed bailout of Bear Stearns and their counterparties in derivatives trades, gold briefly exceeded $1000/oz. Since then, it has been in a corrective mode and in our opinion, is attempting to establish a new base from which can launch to new highs. Shares of companies that are engaged in mining or processing gold (“Gold Shares”) have also entered this corrective phase and appear to be awaiting leadership from the metal before moving higher. However, major gold producers are enjoying significantly higher prices than a year ago and as a result should report favorable earnings comparisons over the next few quarters. The anticipated positive earnings reports will contrast starkly with likely negative earnings comparisons being reported by large segments of the economy including finance, housing and retail. This contrast alone could prove to be the catalyst necessary to attract improved investment interest.

Small and mid cap stocks which represent a significant exposure in the Fund’s portfolio continue to dramatically underperform large cap mining stocks. The reason in our opinion is that generalist investors for the time being prefer the liquidity of large cap Gold Shares despite the superior values offered by the small cap sector. We have no way of knowing how long this valuation disparity will last. However, based on history, the differential ultimately narrows so that smaller cap stocks ultimately provide superior relative performance.

While financial commentary obsesses over the high price of oil, few appear to understand that the strength of oil and other commodity prices in large part reflect the loss of value of the U.S. dollar. A sharp correction in commodity prices, in our opinion, will only come because of what has been dubbed as “demand destruction.” Few seem to realize that demand destruction in the short run is the equivalent of a more serious economic downturn than markets now appear to envision.

Under that scenario, U.S. dollar weakness could accelerate because the Fed would be powerless to raise interest rates sufficiently to defend the currency. It seems to us that the Fed’s best option to avoid a prolonged and deep recession would be to validate high commodity prices via inflation, as it did in the 1970’s. Under those circumstances, the upside for gold and Gold Shares should be substantial.