Commentary of Year-to February 2018 Results and Near

Term Strategy and Outlook

Old habits die hard and the hardest habit to kick it seems in this
market today is the one that expects the prices of almost everything to go
up everyday. (That habit may have died in this March week just ended.)
Complacency in this mindset of expectations made new highs in
February. But February also brought a shock to that complacency with an
unexpected eruption in volatility simultaneous with a sudden spike in
interest rates, a sudden swoon in the dollar and a rapid crescendo of
selling in the U.S. equities markets that quickly erased 10% from its
recent all time highs. Our portfolio quickly bounded ahead and briefly
registered its best levels of the new year only to retrace and give back all
of those gains to finish the month with a year-to-date result of
approximately-29%
While frustrating that we were not rewarded with the jolt of monetary
gratification long enjoyed by the “buy high and be happy crowd” we were
confidently gratified that February brought the four horsemen of higher
rates, declining dollar, declining stocks, higher volatility and higher
measured inflation that we had long been expecting and imminently
looking for as the crucial ingredients for our investment portfolio to
flourish. Our large concentration in the gold mining equities space came
under renewed confusion of the sort we have seen before and the result
was a whip-saw effect that saw that position both up during the month but
then closing down and revisiting the lows they last saw this recent mid-
December only to finish 40% higher two weeks later by December 31.
This time we started February at these same December ending levels for
this part of the portfolio but finished February at those same mid
December lows. Those mid-December and February ending lows for this

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sector meant nothing fundamental beyond an exceptional buying
opportunity and I responded personally by making a new six figure
personal investment in our Fund and similarly have made arrangements
to do so again now.
We have been holding a large and strategically overweight position
in the gold equities sector for over 1 year. This position has grown as the
price for this sector declined, the scale of cheapness reached multi-
decade levels, and the catalyst for a major revaluation became more
certain and more immediate. We did this with the goal and intention
of capturing a return of several hundred percent. That movement has
already begun. Our expectations are that this will occur while a vastly
overvalued general market gets dramatically revalued downwards thus
creating an unusual opportunity for us to cash out later with large gains
from the gold and gold equities and recycle and be able to recycle capital
into a broad landscape of broken stocks. The same factors that will drive
gold and gold equities higher are those that will cut down to size today’s
overpriced market favorites. A look back in time to the last white hot top in
the stock market, the year 2000, played out exactly the same way where
the then “must own” Tech and telecom leaders like Cisco, Oracle, Lucent,
and even Microsoft lost between 65 – 80% or more off their market highs
over a 3 year period and setting us up for the so-called “lost decade”
where it took nearly 10 years for most market averages to revisit their
former highs. Meanwhile, gold experienced a decade where the precious
metal rose some 700% from 2000 to 2011. Many gold equities did even
better than this. History never repeats but it does rhyme and this rendition
of the same themes will feature a stunning run for gold and a sharp
reversal for the popularity for financial assets.

Why This Time is Different

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 If the mantra for real estate is location, location, location; then for
the stock market that same mantra should be liquidity, liquidity, liquidity.
In October the U.S money spigot was turned off as the U.S. Fed began to
take the initial baby steps of selling down its mammoth balance sheet of
bonds purchased over 8 years with almost $4 Trillion of printed money.
No surprise then that interest rates crept steadily higher until touching the
2.9% level on the U.S. 10 year treasury note which started the snap in the
market in early February. This would have in itself been sufficient to start
the stock market correction rolling, however we also got the added bonus
of an incipient global trade war and in addition a budget busting tax plan
that promises ever higher interest rates as a result of the mountains of
new treasury paper that must now be auctioned off every two weeks as
far as the eye can see. These bond sales will come at the perfectly worst
possible time, namely having to sell just as the Fed gets going selling its
massive pile of bonds. The obvious question becomes: “Sell to whom?”
With the U.S savings rate hitting all time historic lows and a global trade
war designed to curb the very same foreign trade surpluses we depend on
to be recycle back to the U.S. in the form of U.S. Treasury bond
purchases; is it any wonder that rates can only go up? In 2008 a 4%
interest rate set off a global financial crisis. With rates now near 2.9% and
global debt double what it was in ’08 and central banks switching from
providers of liquidity to drainers of liquidity, interest rates ratcheting higher
is a 100% certainty and with that comes another global financial crisis.
This set of circumstances promises to bring some of the worst stock
market carnage many newcomers will ever see, but the certainty of higher
rates and a global systemic crisis also brings systemic solvency risks.

Timing is Everything

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 The unusual setup at hand is precisely that just as risk parameters
on a broad swath of factors advance to the breaking point, gold, which is
the antithesis of risk has moved to the opposite extreme and the gold
equities to historic lows of extremes just as everything is set to violently
turn. This is the reason for our overweighted position in gold and the gold
equities. Gold is negatively correlated to the general market and just as it
moved out of favor as every other asset class soared in popularity and
into bubble territory, as this capital starts to flee it will seek the only likely
beneficiary of this violent rotation for the simple reason that it always has.
Coupled with solvency risks and a likely rout in the dollar, this capital flight
into gold and gold equities can and will be explosive to the upside and this
expectation is the reason for our overweight position and the justification
to tolerate the volatility that comes with it. Rest assured that we are not
married to this asset class but only to the unusual opportunity it presents
now. We plan to exit when it reverts to its historic characteristics and after
harvesting the expected and outsized potential gains and in addition to
taking advantage of other evolving scenarios with asset classes that are
declining.

From a plunging stock market, through to the collapsing crypto

mania along with a faltering dollar and a weakening bond market....every
bubble is now bursting and every lever is now in place to propel the gold
sector. Our fund has been positioned and patiently awaiting this moment
as capital now has begun its shift towards our major sector weightings
and investors at large realize that they are trapped in all the wrong assets
at the very worst of times. We are in this round to win and we are highly
confident that we will see great and imminent gains ahead in the near

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term and through the balance of this year. Thank you for your continued
support, patience, and confidence in our vision.1

Best Regards,

John Scurci

Portfolio Manager and Chief Investment Officer

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