The gold sector (9.5%) continues to underperform the resources sector (13.5%). This despite the gold price reaching a 27-year high of $747/oz as cost and production problems continue to plague the sector.

The problems in the sector were most evident in the announcements by Harmony (HAR) during the quarter. After the company warned of a very poor quarter as a result of operational difficulties at some of its mines and inclusion of costs that had been omitted from the first quarter results, its woes were compounded by the surprise resignation of CEO Bernard Swanepoel. As a result, the HAR share price lost 30% of its value over a two-day period. New management has been put in place, but we believe that the company faces a long road to recovery, made more difficult by the recent outbreak of fires underground and the shaft accident.

The weakening dollar continues to support the dollar gold price, with strong demand in terms of investment and jewellery. In fact, after the closure of the South Deep hedge book by Gold Fields, another gold company called Newcrest recently announced its intention to close its 4m oz hedge book (with over half of that being closed already), indicating their outlook for the gold price.

As such, the fund continues to be weighted in those precious metal shares that will be able to capture most of the commodity price upside through better relative operational performance.

The quarter to June saw the gold price weaken by 2% in US dollar terms to $650/oz and by 4% in rand terms to R147,575/kg. The weakness is the result of a combination of factors. Firstly, there is the notion that gold demand typically slows down at the beginning of the northern hemisphere summer ("sell in May and go away"). Secondly, the yellow metal was under pressure from central bank sales and disinvestment from the ETFs (Exchange Traded Funds). However, despite ending the quarter on a rather weak note, the average price for the quarter was $668/oz and R151 784/kg in US dollar and rand terms, respectively. This compares to $650/oz and R150 802/kg achieved during the first quarter of the year.

The rand gold price was impacted by the firmer currency, which averaged R7,08/$ versus R7,23/$ in the first quarter. The gold index, J150, fell in sympathy with the weaker gold price. Harmony fared better than the other two majors, with the prospects of uranium supporting the price. Generally speaking, there seems to be less interest in gold majors across the globe as the companies contend with higher costs, operational difficulties, declining reserves and a lack of volume growth.

The fund took advantage of the stronger rand and increased its offshore weight to about 10%. Exposure was limited to small to mid-tier gold companies that have better prospects of growing their reserve bases and production profiles over the next 12 to 24 month

REVIEW OF Q1 2007

The first quarter saw a resurgent gold price until global markets suffered a knock in confidence at the end of February. Gold dropped to $640/oz, after reaching a high of $685/oz. This move was counter-intuitive, as gold is considered a safe haven - leading some market commentators to conclude that the sell-off in gold was linked to the unwinding of the Yen carry trade. Although marginal declines in gold exchange traded funds and a sharp drop in net long positions on the Commodity Exchange would lend support to this assertion, we consider the link rather spurious. The price has since rebounded and ended the quarter closer to $665/oz. The rand gold price was aided by a weaker rand during the quarter and ended the period 8% firmer at R154 000/kg.

The gold shares, as reflected by the FTSE J150 Index, had a very volatile quarter. Overall, they failed to keep up with the firmer rand gold price. Weighing on the index's performance was DRD Gold, which fell 25% during the quarter. This was due to the issuing of more shares to repay debt and the questionable financial health of its ASX listed subsidiary, Emperor Mines. Harmony suffered at the end of March after it announced the issuing of shares to pay off a royalty obligation in Australia. Anglogold is still affected by overhang fears as Anglo-American failed to provide new guidance on its intended disposal. Gold Fields was the star performer of the sector despite having Barrick, Harmony and JCI as possible sellers of 6% of issued shares following the South Deep/Western Areas acquisition

During December, the gold price continued to strengthen following its strong run during the two preceding months. For the year as a whole, the yellow metal appreciated by 24%, which is somewhat low in comparison to other metals. However, the gold price seems to have broken some technical resistance and has moved markedly away from the $600/oz level. In rand terms, gold has remained in a reasonably narrow range - around the R4 500/oz level reached in May.

Unfortunately, the performance of the FTSE/JSE All Gold Index (up only 16% during 2006) looks rather disappointing and does not match the performance of the underlying commodity price. This is probably a reflection of the difficult state of the industry - with its decreasing production, lack of life at many shafts and poor free cash flow - combined with fairly high share ratings, as evidenced by current price:earning ratios and dividend yields.

Unfortunately, the consolidation in the industry over the past few years has narrowed the playing field tremendously and has left us with fewer shares in which to invest. We have deviated from buying only gold shares, by holding various investments in platinum stocks where we see much better fundamentals. These have helped to outperform the FTSE/JSE All Gold Index by 10% during the year. We are pleased to report that we are again allowed to invest in foreign shares for this fund and have started to build up stakes in two gold projects in the Democratic Republic of Congo.