Gold ended the third quarter at US$1209/oz, declining by -8% and giving back the gains from June. Year to date, the price has risen only -0.4%. In the short term, we think that a strengthening US dollar will put pressure on investment demand for gold and keep the price close to current levels. However, we expect central bank buying (particularly Chinese) and Asian jewellery demand to support demand in the medium term. Cuts in exploration and expansion capital expenditure by mining houses should create a supply crunch in two to three years' time. In other words, medium- to long-term fundamentals are still positive.

Gold equities moved in line with the price. The FTSE/JSE Gold Mining Index declined by -12.4% this quarter, while the Old Mutual Gold Fund outperformed the index. Goldfields was the best performing stock in the sector, rising 10% after underperforming in the second quarter, while its peers all fell. The worst performer was AngloGold Ashanti which fell -25% in the quarter. AngloGold announced a proposal to raise US$2.1bn via a rights issue and to restructure its business, splitting the South African assets from the global and African portfolio, but retaining a controlling stake in South Africa. The company faced major pushback from investors and withdrew the proposal, but the event has raised doubts about their comfort level with their debt burden. Like many major gold producers globally, AngloGold Ashanti finds itself in a precarious position of being heavily indebted at a time when the gold price, and therefore revenue, is at multi-year lows.

Although we are holders of Anglogold Ashanti, we have been underweight relative to the index, which was a contributor to outperformance in this quarter. We remain cautious on the stock given the shape of the balance sheet. The recent rand weakness will buffer South African producers' margins by softening the decline of the gold price in rand terms, which makes Sibanye Gold and Harmony look more interesting.

After moving sideways for most of April and May, the gold price climbed to US$1327/ oz. in June from a low of US$1243/oz. Asian demand for gold has been growing strongly for a number of years. In response to robust regional demand, Singapore is launching a physical gold contract in September 2014. The Singapore Kilobar Gold Contract will facilitate physical trading in 25 kg lots. Uniquely, the contract will be exchange traded. The price will be set in the market, in contrast to the 100-year old London Gold Fix, which has recently come under scrutiny. The World Gold Council is considering a review of the Fix where the gold price is set auction-style twice a day by four big banks on a conference call. These moves towards more transparency will ensure that the price is reflective of underlying supply and demand. Jewellery and central bank demand have been holding up. Exchange traded fund (ETF) liquidation needs to reverse for a strong move in the gold price.

Labour unrest remains a concern for the mining industry in South Africa. The Association of Mineworkers and Construction Workers (AMCU) wanted their members working on gold mines to join the platinum belt-centered strike in pursuit of a R12 500 monthly wage. AMCU is not the dominant union in the gold sector and wages were agreed between National Union of Mineworkers (NUM) and the Chamber of Mines in 2013. Encouragingly, the labour court upheld an interim order granted early this year to mining houses preventing AMCU members from striking at gold mines across the country. The five-month long platinum strike has opened the door to restructuring and we may see the major platinum producers selling off less profitable operations. Sibanye Gold has expressed interest in acquiring platinum mines.

Gold equities moved sideways with the FTSE/JSE Gold Mining Index delivering only 0.2% this quarter. Mid-cap Sibanye Gold and small cap Pan African Resources were the outperformers, up 24% and 7%, respectively, while the majors gave back some of the gains from the first quarter. All gold producers remain focused on keeping costs down and being very careful with capital allocation. AngloGold Ashanti and Gold Fields have resigned from the World Gold Council in an effort to cut costs. The global cuts to exploration and expansion budgets will constrict supply in the long term, which will support the price.

What a bounce! After ending 2013 on a low of US$1 200/oz., the gold price recovered very well during the first quarter of 2014, reaching a high of US$1 385/ oz. during March, before falling back somewhat towards the end of the month. We believe that there is more to come as the outlook for the metal looks promising. We are thus looking forward to reaping more rewards from our aggressive repositioning of the fund undertaken towards the end of last year. Already this action has started to pay off: whereas the US dollar gold price rose by a respectable 8% during the quarter, your fund returned more than double that.

We remain very positive about the longer term fundamentals for the yellow metal. While last year saw a lot of liquidations of physical gold in the West, particularly from investors who were selling their exchange traded fund (EFT) holdings, these seem to have abated now. At the same time, demand from the East has been extraordinarily strong, with both China and India vying for the top spot in global gold consumption. Many more "newly rich" are emerging in these countries, and they will want to own more of the yellow metal.