Story of Gold Market

The Gold Report: Malcolm and Marshall, you started the Encompass Fund in June of '06 with the intent of investing in a wide array of sectors, "to minimize or avoid sharp declines in the market," as it says on your site. However, according to your stock chart, you had a fairly dramatic decline in Q4 '08 with a pretty dramatic recovery since then. Tell us a bit about what happened there.

Malcolm Gissen: What happened was that prior to and in 2008 we emphasized resource companies in our portfolio, and we believed that these companies were performing well. We had confidence in management. In the case of the resource companies, many of them continued to expand their resources, in some cases, very substantially. So we felt we were pretty comfortable with holding these positions in our portfolio.

In the second half of 2008, a number of these companies experienced very sharp declines in their stock prices. We were alarmed, so we called the companies and asked if they knew what was going on. Their only explanation was that somebody was dumping a lot of their shares, which we, of course, could see in the market.

But it wasn't until very late in the year, when these companies spoke to and visited hedge funds, that the hedge funds would tell them that they had experienced a lot of liquidations and, as a result, were selling all of their resource company positions – and selling them as quickly as they could. In some cases, it was program trading. In other cases, they just dumped the stock. In the case of the junior mining companies, where the stock was generally thinly traded, it had a profound impact on stock prices when hundreds of thousands of shares or, in some cases, millions of shares, were unloaded in the marketplace, driving down the price of a number of these companies anywhere between 50% and 95%. When we saw that happen late in the year and realized the cause, as managers of the Encompass Fund, we decided we would buy more shares of some of the companies. We did that and that is one of the reasons the Encompass Fund has gained about 80% this year.

Marshall Berol: There were several things we did, but when we saw what was happening with the markets in the fourth quarter of 2008 and what was happening with the companies that the Fund was invested in, we went back and reviewed each of the companies for how well we thought they could survive (i.e., a good investment going forward), and sold several of the companies we felt were weaker because of finances or the projects, or the time involved in getting the projects moved along, and factors of that nature. So those companies we sold at that time, and as Malcolm said. We increased the positions in some of the companies that we did own and felt were strong companies with good management, finances and projects that we felt would be worth owning going forward. Fortunately, that has worked out this year.

Malcolm Gissen: I would say I have not been surprised at how well many of the companies in the Encompass Fund have performed this year. Marshall may not agree with this – and we don't agree on some issues – but I expected that good companies that performed well from an operations standpoint would outperform. I felt that the resources companies that were continuing to expand their resources would excel since I didn't think the prices of the resources were going to decline much. I felt there would continue to be demand for the resources and so I've not been surprised by the performance and, in fact, think that there's more to come. I don't think the story is over yet.

Marshall Berol: Yes, we're definitely of the view that the resource investment story is not over. We're still in the early innings. There are a lot of reasons we believe that the demand for resources will continue to expand. It's supply-demand in the case of gold and, to a lesser extent, silver. It's the storehouse of value. There's the inflation aspect. A lot of aspects come into the various resources – whether it's the metals or energy – that we feel has a very bright future going forward.