BMG BullionFund 2009 ANNUAL REPORT

Transcription

1 BMG BullionFund 2009 ANNUAL REPORT

2 BMG Gold BullionFund In 2009, Bullion Management Group Inc. launched BMG Gold BullionFund, the latest addition to the family of BMG Funds. BMG Gold BullionFund was established in response to requests from investors and advisors for an open-end mutual fund trust that would invest exclusively in uncompromised physical gold bullion. BMG Gold BullionFund is built on the same model as BMG BullionFund, which means its objective is to provide a secure, convenient, low-cost, moderate-risk alternative for investors seeking the benefits of capital preservation, appreciation, portfolio diversification and hedging protection that only real bullion ownership can offer. The bullion holdings in BMG Gold BullionFund are allocated, insured and held in trust under a custodial agreement with the Bank of Nova Scotia. * For full details about BMG Gold BullionFund, please visit *

3 CONTENTS 2 President s Message 6 A Look Back at Outlook 25 Annual Management Report of Fund Performance 37 Annual Financial Statements 38 Auditor s Report BMG BullionFund Annual Report

4 PRECIOUS METALS RESUME THEIR ROLE AS THE ANTI-CURRENCY PRESIDENT S MESSAGE Gold is not and never has been a currency. It is something entirely different and far more valuable. It is money. Nick Barisheff, President, Bullion Management Services Inc. It is more than a year since Wall Street made some very bad bets that resulted in unprecedented losses, losses that will be passed on to the American public. For their incompetence and greed, most of the company heads responsible were rewarded with generous severance packages or with new jobs commensurate in pay and status to the ones they left behind. Even more surprising, perhaps, is that one year later many of these people continue to advise the US government s financial policy makers. 2 Bullion Management Services Inc.

5 Trend analyst Richard Karn likens this particular situation to a group of chickens getting together and consulting with the foxes about a problem that is plaguing their community the rapidly decreasing chicken population. Since the same key figures remain firmly in charge of US fiscal policy, the status quo will continue until the chicken coop is empty. That may not take very long. In a speech given to the Empire Club of Toronto recently, I referred to gold as the anti-currency because gold is not and never has been a currency. Gold is something entirely different and far more valuable. It is money. Few investors realize that money and currency are not the same. What, exactly, is money? Money is defined as a medium of exchange, a unit of account and a store of value. For centuries, the term money referred to coins made of rare metals (gold and silver) with intrinsic value, and to notes backed by precious metals. Currency is quite different. It derives its value by arbitrary fiat government decree. Government-issued paper currencies represent money but they are not money. They are simply promissory notes, government liabilities whose long-term value depends entirely on the fiscal and monetary discipline of the government that issued them. And therein lies the problem. In an era of massive fiat currency expansion by desperate governments across the globe, today s currencies are depreciating in value faster than yesterday s news. Fortunately for those who own them, gold and other precious metals have risen in value against all currencies as they have resumed their historical role as money, a store of value. In Canada, the meltdown of 2008 quickly transformed a budget surplus into a multi-billion-dollar deficit. In the US, an already-broken banking system faces up to 1,000 additional bank failures as the troubled *$3.5 trillion commercial real estate sector begins to default on billions of dollars in loans. By issuing exorbitant new quantities of paper currency in hopes of reflating a bubble of their own creation, the world s major political and economic powers have temporarily staved off the inevitable while continuing to destroy their own fiat currencies. And that means gold and precious metals will keep rising. The world s central bankers (the issuers of fiat currency) know all too well that dollars and yen and euros and pounds are not money. They are currencies backed by nothing but a promise; they can be depreciated at the whim and fancy of every government that comes to power. In contrast, gold has been money for 3,000 years and will continue to be so for another 3,000 years. It is a fact that no government in history from Greece to Rome to pre-world War II Germany to modern-day Zimbabwe and many others has been able to resist debasing its own currency over time US dollars the things Americans call money are simply pieces of green paper. On the other hand, gold has been money for literally thousands of years. Yet people seem to be more terrified of owning gold than US dollars. Bill Fleckenstein, President, Fleckenstein Capital BMG BullionFund Annual Report

6 until it ultimately becomes worthless. As we enter 2010, the US and its G-20 partners - including Canada - are debasing their currencies at breakneck speed in order to keep their economies from tipping into deep depression. It is interesting that despite the ongoing financial crisis and its attendant currency destruction, the stock markets have rallied as if we were back in the Roaring Twenties. A market awash in risk-free stimulus dollars has allowed hedge funds, traders and other institutional investors to drive up US stock indices as much as 70 percent from their March 2009 lows. But most observers know we have not entered a new bull market for stocks, or a new era of economic prosperity. This unsustainable bear market rally is built on quicksand because it is driven by near-zero interest rates and government spending, not real earnings or real economic growth. Few investors realize just how far and how fast the world s major currencies have fallen. This is because the mainstream media and most financial advisors measure currencies against each other. But if the world s currencies were measured against money (i.e. gold) their true decline would be revealed. As Figure 1 indicates, the US dollar, Canadian dollar, euro and pound have fallen an average of 70 percent in gold terms since Global debt and government spending is not only at record highs but increasing, putting sovereign debt at risk. Countries currently on default watch include Greece, Iceland, Portugal, Spain, Italy and the world s second-largest economy, Japan. In the US, American states at risk of default include California, Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin. The inevitable consequences of government defaults include higher taxes, more layoffs, fewer services and, of course, When the price of gold moves, gold's price isn't moving; rather it is the value of the currencies in which it's priced that is changing. John Tamny, economist, H.C. Wainwright Economics 4 Bullion Management Services Inc.

7 currency destruction. If the US dollar were not the world s reserve currency, it would have been decimated by the irresponsible actions of its own government. As we begin 2010, market sentiment may be bullish but conditions are paradoxical: confidence in the banking system remains low but bank bonuses remain high, credit is tight but monetary policy is loose, unemployment is still rising and tax revenues are falling. Wall Street is no more regulated today than it was in 2007, and business as usual is the common refrain. An emerging theme for 2010 is that the more things change, the more they stay the same. Only things aren t the same, so something has to give. With that theme is mind, this year s report will include a number of remembrances of warnings past from prior years annual reports. Government debt was already at historic levels before the 2008 meltdown. Now, trillions of dollars in new government spending will artificially bloat 2010 GDP growth both in North America and abroad. There is only one politically acceptable way to pay for the stimulus trillions, and that is to expand the (fiat) money supply at an explosive rate. That is exactly what the US Federal Reserve has been doing for the past year, as its Monetary Base (M0) has skyrocketed from $800 billion to over $2 trillion. History and economics tell us that rapid increases in the supply of fiat currencies spell big trouble for investors because they slash purchasing power and set the stage for spiralling inflation. Fiat money supply expansion would be enough to spark inflation by itself, but there is another factor to deal with: Peak Oil. Peak Oil is not someone s pet theory or a rumour spread by left-leaning conservationists. It is supported by hard production data. Peak oil analysis is a field-by-field extrapolation of what has already happened to existing oil fields. Peak Oil does not refer to the end of oil; it refers to the topping or peaking of worldwide oil production. Complacency may be returning to the markets, but we have certainly not returned to the era of business as usual. There is a new and troubling future ahead of us. What we are experiencing right now is just a brief calm before the next storm. Unless governments around the world stop issuing massive amounts of new fiat currency and decide to put their fiscal and monetary houses in order, the price of gold, silver and platinum will continue to rise. There is a famous investment axiom that states, Now is always the most difficult time to invest. To that I would add, But now is also the best time to ensure the wealth we have accumulated is protected through the ownership of gold, silver and platinum. Sincerely, Sincerely Nick Barisheff, President, Bullion Management Services Inc. A BMG Company *All amounts in US dollars, unless otherwise noted. We should be asking ourselves whether a US economic recovery based solely on massive monetary expansion and deficit spending at all levels is sustainable. Nick Barisheff, 2003 BMG BullionFund Annual Report BMG BullionFund Annual Report

8 A BRIEF CALM BEFORE THE NEXT STORM A LOOK BACK AT 2009 The Fed created * $2 trillion of assets and debts to rescue banks from their incredible stupidity and almost certain bankruptcy. American taxpayers, to whom the Fed is beholden, have no idea how the money was spent and who the money went to. - Richard Russell, editor/publisher, Dow Theory Letters Last year, 2009, was a year of extreme volatility for the stock markets, but not for precious metals. During the first quarter of the year, global stock markets virtually collapsed, with the Dow Jones Industrial Average freefalling 3,000 points to 6,547 by March 9, its lowest level in 12 years. While the Dow recovered in 2009, posting a 15 percent gain for the year, precious metals outperformed the index by a significant margin. Gold rose 26.9 percent, silver 57.5 percent and platinum 62.2 percent (Figure 2). 6 Bullion Management Services Inc.

9 The bear rally begins In March 2009, the financial markets reversed course after finally receiving their reward from US Treasury Secretary Tim Geithner: a multi-trillion-dollar bailout plan. The stock markets transformed from Mr. Hyde into Dr. Jekyll, and a prolonged multi-month rally began. It did not matter that many of the world s largest banks were insolvent. It didn t matter that unemployment had soared into double digits (after all, unemployment is a lagging indicator ). It didn t matter that no one knew whether the bailout plan would actually work. The important thing was to do something and do it as quickly as possible. Within weeks, the Dow at 6,500 became a distant memory. By year end, the Dow had not only recovered from its March lows, it had actually risen nearly 15 percent for the year (Figure 3). The technology-heavy NASDAQ rose more than twice as high, up 44 percent for the year. Investors were thrilled. The Fed and Treasury had come to the rescue, all was well again and business was returning to normal. But prudent investors were not fooled. The markets were not reflecting economic reality. The most expansive monetary policy in history As the price of stocks rose higher month after month, so too did the price of precious metals. What was driving precious metals higher this time wasn t fear of a deflationary depression but its opposite: rapid currency creation by major world governments and their central banks. Stimulus dollars, euros and yen had to be found somewhere, and quickly, so the most expedient solution was to create them out of thin air. The only problem: as global money supply expanded, currency depreciation accelerated across the world. In the US, the epicentre of money creation, 2009 represented the most expansive period of monetary policy in history. As the balance sheet of the stimulus-promoting Federal Reserve skyrocketed towards $2 trillion, the US dollar began to tumble in value. The more the dollar fell, the more precious metals prices rose, partly because they are priced and traded in US dollars, and partly for another reason: Gold, in particular, rises when the world s reserve currency falters because unlike fiat dollars, gold is money. BMG BullionFund Annual Report

10 A coming currency crisis The Fed s monetary actions have depreciated the value of every dollar in circulation and every dollardenominated savings account, investment account and pension fund held by investors across the globe. A third or more of the world s wealth is shrinking because it is denominated in rapidly depreciating US dollars. The impact of the shrinking dollar on global trade is equally calamitous. As the US continues to debase its currency, its major trading partners have decided to speak out. We are concerned about the security of our financial assets, said China s Assistant Finance Minister Zhu Guangyao, whose country owns $1.5 trillion of depreciating US Treasury bonds. John Whitehead, a former chairman of the New York Fed, believes US lawmakers will refuse to do the right thing and vote for higher taxes. This is a road to disaster, he says. Before I go to sleep at night, I wonder if tomorrow is the day Moody's and the S&P will announce a downgrade of US government bonds. I've always been a positive person and optimistic, but I don't see a solution here. It is no coincidence that for the first time in over 20 years, central banks became net buyers rather than net sellers of gold in This is truly a watershed event. When central bankers add gold to their foreign exchange reserves instead of dollars, they are signalling a lack of confidence in the world s reserve currency. Gold resumes its role as the world s anticurrency Over the past six years, China has quietly doubled its gold reserves to 1,054 tonnes, and recently allowed its 1.3 billion citizens to purchase gold bullion for the first time. India's central bank purchased over 200 tonnes of IMF gold in the fall of 2009, demonstrating that large central banks were willing to pay the market price for gold. Russia has added 130 tonnes, while several smaller central banks, such as those in Sri Lanka and Mauritius, have also added to their gold reserves. On October 6, Robert Fisk, a veteran Middle East correspondent writing for the UK s Independent, described how Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading. If you destroy the dollar you re going to destroy a worldwide economy, and that s what we re on the verge of doing. - Ron Paul, US Congressman 8 Bullion Management Services Inc.

11 The Iranian oil bourse allows oil sales in several currencies except the US dollar. Ten member states in Central and South America and the Caribbean have agreed to use the sucre rather than the dollar for intraregional trade. Venezuela, one of the West's largest oil suppliers, is also a member of this new alliance. This last move is very significant for gold and precious metal investors because, since 1973, the US has been able to accumulate huge deficits thanks to an agreement with OPEC to price oil exclusively in dollars. This system worked until the 2008 financial crisis, but now the rules of the game are changing. Budget deficits are soaring around the globe The massive funding requirements needed to stimulate the global economy are sending government budgets into huge deficits. Canada s budget surplus has turned into a deficit estimated to be CDN$33 billion, which will soar to CDN$85 billion over the next five years. Kevin Page, Canada s Parliamentary Budget Officer, says Canada won t be able to balance its budget unless it raises taxes or implements spending cuts. In the US, the deficit has tripled to a record $2 trillion and will balloon to $10 trillion over the next five years. Although the official deficit estimate for 2009 is $1.4 trillion, the reality is that an additional $500 billion in debt (more than the entire deficit in 2008) is off-book and thus unreported. The UK deficit is forecast at 175 billion for the coming year and over 500 billion over next four years. When these and other countries budget deficits are added to the trillions of dollars of existing government debt (Figure 5), it will stretch country credit ratings to the limit, making the cost of future financing far more expensive. Canadians keep increasing their personal debt As government debt soars and the recession lingers, Canadian consumers have actually increased their debt to income level as Figure 6 indicates. This prompted Bank of Canada Governor Mark Carney to caution Canadians about their debt loads, which have escalated to CDN$90,000 per household, or 140 percent of total income. The vulnerability of Canadian households to adverse wealth and income It is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect new normal GDP growth rates of 1%-2%, not 3%+ as we used to have. - Bill Gross, Managing Director, PIMCO BMG BullionFund Annual Report

12 shocks has risen in recent years as aggregate debt levels have increased in relation to income, Carney warned in the Bank of Canada s December 2009 Financial Review. Few Canadians seem worried though, perhaps because they believe interest rates will remain low. Total credit card debt in Canada soared to CDN$78 billion in September 2009, according to an Equifax Canada report. Meanwhile, credit card delinquencies shot up 53 percent to CDN$3.6 billion. At least one in 10 Canadian consumers has more than 10 credit cards in their wallets. Suddenly, debt is in and frugality is out. Incredibly, only two years after the meltdown and one year after the recession, bidding wars for homes have erupted in Toronto, causing out-of-luck buyers to complain that mortgage financing is too easy to come by. It appears that in Canada at least, credit is flowing freely and the credit crunch is a distant memory. Americans massive (and unpayable) mortgage debt While the level of US credit card and other personal debt is troubling, the mortgage debt problem is ruinous. According to the Federal Reserve s website, total outstanding US home mortgage debt reached $14.6 trillion in Q This exceeds total US GDP. Roughly 25 percent of mortgagors owe more than their property is worth. But according to an August 2009 report by Deutsche Bank AG, house prices are now expected to continue dropping through the first quarter of This means almost half of US homeowners with a mortgage 25 million homes are likely to be under water before the housing recession ends. Since consumers represent 70 percent of US GDP, this does not bode well for future growth. Fiscally, we are in uncharted territory. Because of this gigantic deficit, our country s net debt is mushrooming no one can know the precise level of net debt to GDP at which the United States will lose its reputation for financial integrity. - Warren Buffett, Chairman, Berkshire Hathaway 10 Bullion Management Services Inc.

13 Central banks are creating massive amounts of new currency to fund sovereign debt Consumers may be knee-deep in debt, but governments are in even greater debt through the monetization of sovereign debt by central banks. Since August 15, 1971, when the US cut its link to the gold standard, the currency of all countries became fiat currency that is, currency that can be issued by central banks in unlimited amounts without legal constraints, and is backed by nothing more than a promise. It is not surprising that for decades, spendthrift world governments and their monetary authorities have chosen to issue far more fiat currency than needed just to remain technically solvent. Foreign ownership of American debt Foreign investors held only 5 percent of the US public debt in Today, the US owes nearly half of its debt to foreigners, and China is now America's largest foreign creditor. If the US continues to try and inflate its way out of debt, future Treasury financings will come at a great cost: much higher (risk-adjusted) rates. In fact, since the US already pays half a trillion dollars in interest each year, or about 25 percent of total tax revenues, rising rates could create a financial calamity. We should be united around the fear of China as our banker, warns Douglas Holtz-Eakin, a former director of the Congressional Budget Office. America s real debt The US is also burdened by trillions of dollars in unfunded liabilities for Social Security, Medicare and Medicaid. Money the government has promised to taxpayers for Social Security has instead been borrowed for its own use. Money the government promised to fund future Medicare and Medicaid benefits and military/government pensions has not been set aside at all. Richard Fisher, a member of the Federal Open Market Committee, believes total US debt including Medicare and Social Security is BMG BullionFund Annual Report

14 over $119 trillion (Figure 7). To put this number in perspective, it is more than $390,000 for every man, woman and child in the US. When, not if, interest rates rise from their near-zero levels, US government debt payments will soar because every percentage point rise in interest rates adds an additional $120 billion in interest payments. And if inflation were to take hold as a result of the explosive expansion of the fiat money supply, rates could easily rise to 10 or 15 percent, as happened during the 1970s stagflation era. If so, government interest payments alone would gobble up over 90 percent of total tax revenues. With this kind of economic future looming on the horizon, is it any wonder the US dollar is in irreversible decline? Economic insanity: the global response to the crisis The response to the meltdown of 2008 has been swift, massive and completely wrong. Without actually knowing the solution to the financial crisis, governments around the world decided to employ a combination of quick fixes including trillion-dollar stimulus programs, zero percent interest rates and quantitative easing. While these fixes may have prevented another great depression in the short term, one must wonder if the cost (in inflation and debt burdens in our future) is too high a price to pay. Why are the world s central bankers trying to reflate yet another a bubble after the chaos that has ensued from the previous one? Have they not learned anything from the past, or do they have an agenda we don t know about? That question, and others, is answered in the BMG Special Report, How to Protect Your Portfolio from the Economic Insanity at There is only one politically acceptable way to pay for the stimulus, and that is to expand the money supply at an explosive rate. This is a clear path to high inflation. History and economics tell us that rapid increases in the fiat money supply spell big Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America's future prosperity. - Henry Paulson, former US Treasury Secretary 12 Bullion Management Services Inc.

15 trouble for investors because they set the stage for spiralling inflation. When the bulk of US government spending filters into the economy and the banks begin lending again, inflation will be unleashed in full force. All investment portfolios will suffer unless they have a substantial allocation to an asset class that will retain its value no matter how high inflation rises: precious metals. Precious metals will always be in limited supply Precious metals bullion cannot be created out of thin air like paper currencies. Bullion has always been rare, but now it is even more so because mine supply for gold, silver and platinum has been in a deficit for over a decade. At present, the total value of available, investable, aboveground gold bullion amounts to $1.77 trillion. In contrast, total global financial assets (stocks and bonds) are valued at an astronomical $145 trillion or more and this is after the financial meltdown. Compare $145 trillion to $1.77 trillion held by central banks and private investors and you can see that bullion is priced at only one percent of financial assets. Financial assets simply dwarf bullion in perceived value as Figure 8 clearly shows. Those who say bullion is overpriced should examine these numbers carefully. Which asset class is overvalued: hard assets like gold and precious metals bullion, which must be mined at great cost and which will always be in limited supply? Or paper assets like stocks and bonds, which can be issued in virtually unlimited numbers by corporations and governments? In a world of increasing volatility and uncertainty, precious metals provided tangible, predictable wealth protection during the financial crisis. And now, as currency creation goes into overdrive, gold and precious metals have resumed their traditional role as money, the anti-currency. *All amounts in US dollars, unless otherwise noted. We believe that stimulus packages, in all their forms, make the same mistakes that got us here. They will lead to extreme overshooting or extreme undershooting. They lead to more borrowing, by socialising private debt. Professor Nassim Nicholas Taleb, author, The Black Swan BMG BullionFund Annual Report

16 LURCHING FROM ONE BUBBLE INTO ANOTHER 2010 OUTLOOK We have a market-friendly Fed injecting a lot of liquidity in the system which will set us up for another bubble economy. Excessive monetary accommodation that just takes us from bubble to bubble to bubble. - Stephen Roach, Chief Economist, Morgan Stanley As we enter 2010, optimism has returned to the markets as investors apparently feel the worst is behind them. According to a recent survey of US investment newsletter writers, nearly three-quarters are bullish on the markets, the highest reading since the Dow Jones Industrial Average reached its peak of 14,000 in October Meanwhile, the number of Canadians who think the economy will strengthen this year also reached its highest reading since Bullion Management Services Inc.

17 This optimism flies in the face of the facts. Fact 1: Credit and derivatives markets remain dysfunctional and out of control. Fact 2: Tens of millions of North Americans are still without work. Fact 3: GDP growth is a function of government spending. Fact 4: Consumers are saturated with debt. Fact 5: Large segments of the banking industry remain on life support. A glance back at last year s forecast The predictions in last year s Annual Report all came true. We said 2009 would be the year of print-andspend; that gold prices would soar; that mounting government debt would make all currencies appear risky; that the US dollar would accelerate its losing streak; that the Fed would break deflation because the Fed has an unlimited ability to print money. As we enter 2010, little has changed: deflation remains invisible, precious metals continue to rise and the US dollar continues to decline. Years before Alan Greenspan became chairman of the US Federal Reserve, he understood that gold was not only money but also the key to fiscal and monetary discipline because, as he so eloquently put it in a 1966 speech, the gold standard is incompatible with chronic deficit spending. He went on to say that the abandonment of the gold standard made it possible to use the banking system as a means to an unlimited expansion of credit, and that, In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Advice for investors in Forecast at a glance The price of gold is expected to rise as investors lose confidence in fiat currencies Silver and platinum prices should rise because of supply constraints, rising production costs and increased investment demand The global monetary response to the crisis will probably be highly inflationary Government debt will most likely continue to soar, increasing the risk of sovereign debt defaults The economic world changed forever after the bubble burst in 2008, but it appears governments, central banks and most investors have still not received the memo. Regrettably, key systemic imbalances were not allowed to self-correct. Instead we took the easy way out by putting ourselves on a government support system, both in the financial markets and in the economy. So says Paul Volcker, the well-respected former Fed chairman and an economic advisor to President Obama. These are unusual times. The markets are beset by a series of contradictions, according to an asset markets briefing in the January 7, 2010 edition of The Economist. They are dependent on extraordinary amounts of government stimulus. But that stimulus is in turn ultimately dependent on the willingness of markets to finance governments at low rates. The market s willingness to lend will quickly evaporate if governments do not show fiscal and monetary restraint. Interest rates cannot go any lower, the banking system is in turmoil and government debt The Obama-Bernanke-Geithner team wrings its hands as the economy refuses to respond to the trillions of dollars in spending. What s the solution? The solution is obvious spend more and more. It s madness they re bankrupting the USA with spending and debt. - Richard Russell, editor/publisher, Dow Theory Letters BMG BullionFund Annual Report

18 is out of control. Real wage growth is nonexistent, yet consumer spending accounts for 70 percent of the US economy outlook for precious metals Two interconnected trends will most likely drive precious metals bullion prices higher in 2010: one is the increasing loss of confidence in the US dollar and other fiat currencies; the other is the actions of major investors and countries as they move to shelter their portfolios from currency shock. The decline of the dollar has caused a flight to safety, and while alternative currencies seem to be in vogue, when investors try to divest their portfolios of depreciating dollars they discover that no currency provides a monetary store of value. Only money provides a store of value, and only physical gold and precious metals bullion is money. Precious metals have successfully preserved wealth for thousands of years because, unlike stocks, bonds and paper currencies, they are not someone else s promise of performance and they are not someone else s liability. In an environment where the US economy is still floundering and the reserve currency of the world is declining, wealth preservation is the primary investment strategy. Shrewd institutional investors are buying gold not only as preparation for an extended period of stagflation, but also as protection from a looming currency-driven economic crisis. As individual investors, we can ride the coattails of these highly knowledgeable institutional buyers by investing in the ultimate currency and crisis protection: precious metals outlook for silver and platinum Because silver and platinum are both industrial and precious metals, they will most likely outperform gold in the rising inflationary environment of 2010 and beyond. It is expected that the stimulus-driven rebound in the global economy will push commodity prices higher in the short term, and then as monetary authorities create another (likely hyperinflationary) bubble, they will soar in price in the long term. Silver: After a short-term price decline in 2008 because of the recession, silver has bounced back strongly in Some metals forecasters are predicting prices rising to as high as $25 per ounce this year due to accelerating currency weakness and the potential for a dollar crisis. In addition, extreme government stimulus spending will continue putting upside pricing pressure on silver as an investment, as will increasing industrial demand from emerging markets as a commodity. The economy is still weak, and the world will spend a lot of years undoing the damage, which includes huge government deficits and debt at record levels. - Bill Gates, Chairman, Microsoft, 2010 Annual Letter 16 Bullion Management Services Inc.

19 Platinum: Supply and demand fundamentals for platinum look bullish as increasingly stringent environmental legislation, combined with a strong rebound in vehicle demand from China and India, will likely push prices higher as we enter Supply constraints are also a factor in pushing prices higher, as global production plus reserves of platinum declined from 189,000 tonnes in 2008 to 179,000 tonnes, according to the latest United States Geological Service (USGS) data. Gold in the era of the shrinking dollar Very few North American investors understand how much purchasing power has evaporated, and is still evaporating, from their dollar-denominated portfolios because of years of US monetary and economic mismanagement. Figure 9 charts the decline in the US and Canadian dollar since Not only have they lost 82 percent of their value, they will continue to shrink as US and Canadian central banks continue to debase their currencies through money creation. Gold provides protection against fiat currency decline As we enter 2010, a currency crisis involving the yen, the pound or the euro is even more likely than a collapse of the US dollar. Rapidly deteriorating economic fundamentals from soaring government debt in Japan, the UK and parts of Europe will result in a flight to the US dollar, sending the greenback higher. But while the dollar rises, so too will the price of gold. This will result in a highly unusual positive correlation between the two in the short term, as the dollar s continuous decline will be masked by greater declines in other competing currencies. But make no mistake: while the US dollar will not be the first major currency crisis, it will surely be the last of the current currencies. The next event will be a dollar crisis. A full-blown dollar crisis will be much worse than our current financial crisis. - Ron Paul, US Congressman BMG BullionFund Annual Report

20 Currencies always decline fastest when government spending explodes, and as we enter 2010, no country on earth is spending like America. Federal Reserve Chairman Ben Bernanke has created trillions of dollars out of thin air to prop up ailing banks, car companies and mortgage financing agencies like Fannie Mae and Freddie Mac. In its Precious Metals Forecast 2010, ScotiaMocatta noted that seeing the value of the dollar steadily erode must be a nightmare for large US creditors such as China, Japan, South Korea, Russia, the oil-producing countries and Sovereign Wealth Funds (SWF) The danger is that they will reduce their exposure (to dollars), although in reality their collective holdings are so enormous that if they started to liquidate, the markets would likely collapse. Monetizing the debt: the fastest, easiest way to depreciate In 2010, the US Treasury will have to refinance at least $2 trillion in short-term debt. They can raise this money in one of three ways: through the sale of bonds, through increased taxation or through monetization by the Federal Reserve. But foreign investors showed decreasing appetite for US Treasuries in Rising unemployment along with an aging population makes increased taxation a poor option. Therefore, the Fed will be forced to monetize (in effect, create money to finance) the ballooning debt, further eroding confidence in the dollar as the world s reserve currency. Debt monetization will encourage central bankers, especially those in developing countries, to accelerate their accumulation of gold. Stephen Jen, a managing director at hedge fund BlueGold Capital and an expert on sovereign wealth funds, estimates that the percentage of gold held by the Chinese, Indian and Russian central banks is just 2.2 percent. This compares with 38 percent held by Western central banks. According to Jen, they would have to buy $115 billions worth of gold at current prices to raise their bullion holdings to just 5 percent, and $700 billions worth to reach just half of Western levels. The looming threat of spiralling inflation Financing this hundred-trillion-dollar commitment will require a massive expansion of the US money supply. But since this will also massively dilute the value of America s own currency (and thus inflate away the cost of its dollar-denominated future debt obligations), the US will be effectively defaulting on its obligations to foreign creditors. It is absolutely inevitable that the US will have to default on part of its existing liabilities, since the long-run trajectory of government borrowing is clearly unsustainable. - Niall Ferguson, author, The Ascent of Money 18 Bullion Management Services Inc.

21 Many years ago, the esteemed economist Milton Friedman stated that inflation is always and everywhere a monetary phenomenon. In other words, inflation is caused by an excessive increase in the money supply, and increasing prices are simply the effect, not the cause. Studies show that most industrialized countries have been increasing M3 by more than double the reported increases in the Consumer Price Index. Figure 10 shows that US (M3) money supply growth has been unrestrained since the dollar was de-linked from the gold standard in The amount of money creation (fiat currency) is breathtaking. In 1971, the money supply was $776 billion. It took 20 years for it to triple to $4 trillion, an amount reached in Only ten years later, in 2001, it had doubled to $8 trillion. Eight short years after that, it has risen 75 percent to $14.3 trillion. There is no debate as to the trend, which is not only expected to continue upwards but to accelerate. As former Merrill Lynch chief economist David Rosenberg points out, The new growth engine for the economy is government spending. A full explanation as to why this will cause massive inflation can be found on our website Learning Centre, in Nick Barisheff articles: The Next Crisis: Spiralling Inflation (Part1), dated October It should be noted that unemployment, no matter how high, cannot put a damper on inflation, because inflation is a monetary phenomenon and not a function of consumer demand. The high-inflation, high-unemployment 1970s taught us that lesson. If you have a debased currency, you will have a debased economy. - Alan Greenspan, former Federal Reserve Chairman BMG BullionFund Annual Report

22 The rising demand for gold Demand for physical gold will continue to rise in 2010 and well beyond as the world s central banks continue to accumulate gold as an essential element of their foreign exchange reserves. The lack of confidence in the US dollar is spreading to all corners of the globe and many parts of the business world. China has nearly doubled its gold reserves to 1,054 tonnes over the past six years, but because trillions of dollars of its reserves remain in US-dollardenominated assets, its central bank will be buying gold for many years to come. Both China and Russia recently announced they are planning to increase their gold reserves to 10 percent, which will put enormous upward pressure on the price of gold. Institutional investors are exchanging dollars for gold bullion. Hedge fund manager John Paulson, who made $3 billion last year shorting subprime mortgages, has taken a multi-billion-dollar position in gold as a hedge against inflation. Edward Zore, CEO of Northwestern Mutual Life Insurance Company, said they recently purchased $400 million in gold (the first time in the company s 152-year history) because The downside risk is limited, but the upside is large. We have stocks in our portfolio that lost 95 percent. Gold is not going down to $90. Business Week recently reported that hedge fund manager David Einhorn of Greenlight Capital Inc. has turned to gold bullion because of current US economic policy. Lone Pine Capital significantly increased its stake in gold this year. Twenty of twenty-two US hedge fund managers surveyed by London-based Moonraker Fund Management Ltd. admitted they had bought physical gold for personal investment. The wealthy are buying gold The very wealthy are diversifying into bullion to protect and preserve their wealth. Two-thirds of respondents to a recent survey published by the UK s Family Office Channel said they were more likely to invest in gold since the financial crisis. Less wealthy investors are not so farsighted yet. The majority still appear to think of gold as just a commodity like copper, zinc or pork bellies, perhaps because most of them have only experienced one kind of market a 25-year bull market in stocks. Until the average investor realizes that gold is a proven store of value and therefore a true hedge against inflation, deflation and stagflation, the mania phase remains far away. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." - John Maynard Keynes, British economist, Keynesian Economics 20 Bullion Management Services Inc.

23 Investors are turning to real money Where are investors putting their cash? It should no longer be in stocks. Key stock indices like the Dow Jones Industrial Average have been flat to negative in nominal terms since the end of the last century. And if the Dow is priced in gold (in other words, money) as opposed to depreciating dollars (in other words, fiat currency), its decline is far more dramatic, as Figure 11 shows. Real money keeps its value during inflation and deflation The debate between the inflationists and the deflationists is fierce. As discussed in our commentary, we are in the inflationist camp, but for precious metals holders it ultimately doesn t matter which outcome occurs. Let us explain. Assume the Dow:Gold Ratio falls to 2:1 over the next seven to ten years. In an inflationary scenario, the Dow could be 15,000 while gold rises to $7,500 (the Dow increased 50 percent, gold increased 750 percent). In a deflationary scenario, the Dow could have fallen to 2,000, with gold at $1,000 (the Dow decreased 80 percent while gold maintained its value). Clearly, precious metals holders preserve their wealth regardless of which flation occurs. In a deflationary scenario, investors not only sidestep a 70 percent drop and preserve their wealth by owning gold, they are able to capitalize on depressed prices with the money (i.e., purchasing power) that gold preserved. One thing I know for sure is that gold is going to have three zeros after the first number, I just don t know how big that number is going to be. - Pierre Lassonde, former president of Newmont Mining Corp., referring to Dow:Gold Ratio chart BMG BullionFund Annual Report

24 Low-risk precious metals will trump riskfilled financial assets Money, by definition, is a store of value. As we have noted, precious metals are a store of value and are therefore money, unlike currencies and financial assets that are subject to the risk of currency decline. If precious metals are proven to preserve their value over time, they must be proven to preserve wealth. Therefore, precious metals are a remarkably low-risk asset to hold in a portfolio. There is one caveat to this. To ensure they remain low risk, precious metals should be held in bullion form, and held for the long term. Short-term speculation in bullion or any other precious metals investment cannot be considered low risk for the simple reason that, in the short term, price pullbacks are inevitable and unpredictable. As economic risk rises in 2010 and beyond, astute investors are moving to preserve their wealth. To do so, they must move away from risky assets towards low-risk assets. The only truly lowrisk asset is money, and the only proven store of value money is precious metals. Cash is not money and neither is it risk-free: it is denominated in depreciating dollars, euro, yen or some other currency. Currencies, as opposed to money, lose value over time. GICs and savings accounts are not risk-free for the same reason: they are denominated in depreciating fiat currencies. US Treasury bills are not risk-free for two reasons: they are denominated in depreciating US dollars, and they are dependent on the ability of the US to pay back its debts. Government and corporate bonds are not risk-free for two reasons: they are denominated in depreciating dollars or other fiat currencies, and they are dependent on the ability of global governments and corporations to pay back their debts. Equities are riskiest of all: equities are priced on the present value of an unpredictable future stream of inflation-unadjusted earnings that are denominated in depreciating fiat currencies. You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold. - George Bernard Shaw, playwright, Nobel Prize in Literature 22 Bullion Management Services Inc.

25 Few on Wall Street or Bay Street report stock performance in inflation-adjusted terms. If this were to happen, each index and each stock in the Dow, the S&P 500 and the TSX would adjust downwards until it reached its true value. The demand for money (precious metals) will continue to outpace the demand for financial assets as long as the world s governments continue to create paper currency out of thin air. Currencies do not keep their value, as we have seen with the 85 percent decline in the value of US and Canadian dollars. And blue chip stocks can drop to virtually zero in a year, as we have seen with Citigroup and General Motors. The future of precious metals Is bullion in a bubble? There is no bubble. Gold is only a reflection of economic reality. Regardless of Wall Street s thinking, we will not revert to business as usual. The next 20 years will be completely unlike the past 20 because everything changed in As Bill Gross, manager of the world s largest bond fund, puts it, Staying rich in this future world will require strategies that reflect this altered vision of global economic growth. Fiscal irresponsibility will lead to ongoing competitive currency devaluations in every major currency including the US dollar. This will inexorably drive precious metals prices higher and higher because gold is money, the anti-currency. Predictions? In its 2010 Precious Metals Forecast, ScotiaMocatta expects gold to reach as high as $1,400 per ounce this year. ScotiaMocatta is the precious metals division of The Bank of Nova Scotia. Our expectation is that gold will probably reach at least $1,300 to $1,500 by year s end. But how high can gold go? The answer is a question: How much money can the world s central banks create? *All amounts in US dollars, unless otherwise noted. Fewer than 20 percent of executives surveyed by McKinsey expect the dollar to be the dominant global reserve currency by McKinsey Quarterly Report, January 2010 BMG BullionFund Annual Report

26 When do you sell? You NEVER sell your gold or silver. These precious metals are an integral part of your estate and net wealth. I don't care what the current price of gold is, gold represents unencumbered wealth. - Richard Russell, editor/publisher, Dow Theory Letters 24 Bullion Management Services Inc.

27 BMG BullionFund Annual Management Report of Fund Performance For the period ending December 31, 2009 Management Report of Fund Performance 25

28 This annual management report of fund performance contains financial highlights. Additional information relating to BMG BullionFund can be found in the attached annual financial statements. You can obtain a copy of the quarterly portfolio disclosure at no cost, by calling , by writing to us at Renfrew Drive, Markham, Ontario, L3R 0E1, or by visiting our website at or SEDAR at 26 Bullion Management Services Inc.

29 MANAGEMENT DISCUSSION OF FUND PERFORMANCE Investment Objectives and Strategies BMG BullionFund (the Fund ) invests in equal dollar proportions of unencumbered, fully allocated gold, silver and platinum bullion, with the objective of providing a secure, convenient, low-cost, low-risk alternative for investors seeking to hold gold, silver and platinum bullion for capital preservation, long-term appreciation, portfolio diversification and portfolio hedging purposes. By investing an equal portion of the Fund's subscription proceeds in gold, silver and platinum bullion, the Fund should be able to effectively reduce its volatility while improving long-term returns. This can be accomplished because the value of gold is primarily based on its monetary value, whereas the value of silver and platinum is based on their commodity value. During normal economic times, the commodity demand for silver and platinum should be higher than for gold, and the value of silver and platinum should typically outperform the value of gold. In contrast, if monetary demand increases, then the value of gold should typically increase faster than that of silver or platinum, although over time both silver and platinum should follow the price of gold. As a result, by investing in all three metals, the Fund should be able to reduce volatility while improving long-term returns. The economic factors that determine the price of gold, silver and platinum are also, in most cases, opposed to the factors that determine the prices of most other financial assets. Ownership of Fund units, therefore, acts as a hedge against the volatility of an investor's other investments. Units of a class of the Fund are not speculative and are only intended to be one part of an investment strategy. A small portion of the Fund's assets (generally no more than 5 percent) may be held in cash to allow the Fund to pay its expenses and to facilitate any redemption of units of a class of the Fund. The Fund will not use derivatives or invest in securities or certificates of companies that produce gold, silver or platinum bullion. The Fund will not invest in foreign securities. The Fund s objectives and strategies have not changed in Risk The risks of investing in the Fund remain as stated in the prospectus. The principal risk associated with investing in the Fund is fluctuations in the price of the metals as well as fluctuations in the relationship between the Canadian and US dollar. In addition, the Fund will be subject to precious metals risk, non-hedging strategy risk and specialization risk. Management Report of Fund Performance 27

30 MANAGEMENT DISCUSSION OF FUND PERFORMANCE (continued) Results of Operations During 2009 the Fund's net assets grew 41.1 percent from $205,621,445 to $290,154,946. Both higher bullion prices and net purchases of Fund units contributed to the growth in net assets. Gold holdings increased from 83,682 ounces to 94,565 ounces, silver holdings increased from 4,821,946 ounces to 5,574,150 ounces, and platinum holdings increased from 44,429 ounces to 53,567 ounces. For the year ended December 31, 2009 the unit value of the Fund s Class A units rose 19.3 percent in Canadian dollars and 40.5 percent in US dollars while the Class F unit value gained 20.6 percent in Canadian dollars and 42 percent in US dollars. The strong performance was primarily due to higher US dollar prices for gold (26.9 percent), platinum (62.2 percent) and silver (57.5 percent). The anticipation of economic growth resulted in higher demand for platinum and silver for industrial purposes after depressed levels in Gold was particularly strong in the last quarter, hitting a record high of $1, on December 3, 2009 as central banks realigned reserve holdings from US dollars. In spite of the increase in bullion holdings, custody fees remained at the 2008 level as lower rates were negotiated effective April 1, The new rates are 50 percent lower for gold and platinum, and 25 percent lower for silver. Recent Developments As reported last year, there was one financial disaster after another during That has suddenly changed, with certain economies showing healthy signs of recovery. The developing countries have been leading the recovery and pulling with them those countries that have natural resources and other products that emerging markets require. Now it is common to hear economists predicting inflation. However, there are signs that the greatest threat is still a monetary crisis. Examples include the Dubai World debt default and the Greek fiscal crisis. Then there are highly indebted countries like Ireland, Spain, Italy, the UK and Japan. Financial support from other nations is unlikely as most countries are experiencing rising debt levels. For example, the US government is running a huge deficit and has a record $2.5 trillion of debt maturing in The US economy is very weak, with high unemployment. So who will refinance the maturing debt? The developing countries have already indicated that they have financed enough US debt and are now purchasing precious metals. Due to the weak economy, the US government is unlikely to significantly increase interest rates to encourage purchase of its debt. Instead, the Federal Reserve will increase the US money supply to fund the maturing debt, causing a further drop in the US dollar, which is positive for precious metals. Central banks in China, India and Russia announced that they purchased 400, 200 and 50 tonnes of gold respectively during For the first time in 20 years central banks were net purchasers of gold and investment demand exceeded jewellery demand. The government of China is now facilitating and encouraging its citizens to purchase gold. For the past eight years platinum demand has exceeded mine production. In 2010, demand is projected to increase significantly as the automotive industry, the major consumer of platinum, recovers from two years 28 Bullion Management Services Inc.

31 MANAGEMENT DISCUSSION OF FUND PERFORMANCE (continued) of depressed automobile production and sales. Industrial and investment demand for silver is expected to remain steady in In addition to central banks increasing their allocations to precious metals, major investment fund managers are now allocating portions of their portfolios to precious metals. In this environment, the outlook for price appreciation is excellent. Related Party Transactions Bullion Management Services Inc. (the Manager ) is the manager, trustee, registrar, and transfer agent for the Fund. The Manager provides or arranges for the provision of all management and administrative services for day-to-day Fund operations, including providing Fund and unitholder accounting, record keeping and other administrative services. In consideration of the management and administrative services, the Fund pays the Manager a monthly management fee based on the Net Asset Value ( NAV ) of the Class A units and Class F units of the Fund, calculated daily. During the year ended December 31, 2009 the Fund incurred management fees of $5,365,608 [2008: $3,652,096]. For the year ended December 31, 2009, the Manager absorbed expenses of $58,767 [2008: $Nil]. The decision to reduce Fund operating expenses is made at the discretion of the Manager and may be changed at any time. Bullion Marketing Services Inc., an affiliate of the Manager, has been retained by the Manager to assist with the distribution of units of the Fund. At December 31, the Manager held 20,193 [2008: 20,193] units of Class E15 of the Fund. The Manager has created an Independent Review Committee ( IRC ) to review and provide impartial judgment on conflict of interest matters. The IRC reviews potential conflicts of interest referred to it by the Manager and makes recommendations on whether a course of action is fair and reasonable for the Fund. The IRC prepares an annual report of its activities for interested parties. A copy of the 2009 report will be available at in March Management Fees A portion of the management fees paid by the Fund is for trailer fees paid to dealers. The trailer fees are a percentage of the daily average NAV of the Class A units of the Fund, which are held by the dealer's clients. The table below outlines the Fund's annual management fees and the maximum trailer fees for the Class A units and Class F units of the Fund. Class A Class F Management Fees 2.25% 1.25% Trailer Fee (maximum rate as a percentage of management fees) 44.4% 0% Management Report of Fund Performance 29

32 PAST PERFORMANCE The following information does not take into account sales or redemption charges that would have reduced returns. Past performance does not necessarily indicate how the Fund will perform in the future. Class A Units (Canadian Dollars) Annual Compound Returns The following table shows the annual compound total returns for the Class A units in Canadian dollars to December 31, The annual returns are compared to inflation as measured by the Canadian Consumer Price Index (CPI) as calculated by Statistics Canada, as well, to the Bank of Canada s 3-month Treasury Bills. Since Inception (January 2002) Five Years Three Years One Year BMG BullionFund Class A CDN $ 6.1% 10.5% 5.5% 19.3% Inflation (CPI, Statistics Canada) 2.2% 1.7% 1.6% 1.3% Bank of Canada 3-month Treasury Bills 2.7% 2.8% 2.3% 0.3% The above comparison demonstrates how the Fund has generally achieved its objective of preserving capital while providing appreciation over the time periods indicated. For example, over a 5-year period the annual appreciation of the Canadian dollar Class A units was 8.8 percent above inflation, whereas 3-month Canadian Treasury Bills appreciated 1.1 percent above inflation. Year-by-Year Returns The following bar chart shows the Fund's annual performance in Canadian dollars in each of the past eight years to December 31, In percentage terms, the chart shows how an investment made on January 1 of the previous year would have increased or decreased by December 31 of the following year. In 2002 return calculations are made from January 17, even though the Fund did not start to take subscriptions from investors until March 5, 2002 and made its first bullion purchase on March 6, Bullion Management Services Inc.

33 PAST PERFORMANCE (continued) Class A Units (US Dollars) Annual Compound Returns The following table shows the annual compound total returns for the Class A units in US dollars to December 31, The annual returns are compared to inflation as measured by the US CPI as calculated by the US Department of Labor, as well as, to the US 3-month Treasury Bills. Since Inception (January 2002) Five Years Three Years One Year BMG BullionFund Class A US $ 11.8% 13.4% 9.2% 40.5% Inflation (CPI, US Dept. of Labor) 2.5% 2.6% 2.3% 2.7% US 3-month Treasury Bills 3.4% 2.8% 2.0% 0.2% The above comparison demonstrates how the Fund has generally achieved its objective of preserving capital while providing appreciation over the time periods indicated. For example, over a 5-year period the annual appreciation of the US dollar Class A units was 10.8 percent above inflation, whereas 3-month US Treasury Bills appreciated 0.2 percent above inflation. The following bar chart shows the Fund's annual performance in US dollars in each of the past eight years to December 31, In percentage terms, the chart shows how an investment made on January 1 of the previous year would have increased or decreased by December 31 of the following year. In 2002 return calculations are made from January 17, even though the Fund did not start to take subscriptions from investors until March 5, 2002 and made its first bullion purchase on March 6, Management Report of Fund Performance 31

34 PAST PERFORMANCE (continued) Class F Units (Canadian Dollars) Annual Compound Returns The following table shows the annual compound total returns for the Class F units in Canadian dollars to December 31, The annual returns are compared to inflation as measured by the Canadian CPI as calculated by Statistics Canada, as well, to the Bank of Canada s 3-month Treasury Bills. Since Inception (September 2004) Five Years Three Years One Year BMG BullionFund Class F CDN $ 10.5% 11.6% 6.6% 20.6% Inflation (CPI, Statistics Canada) 1.7% 1.7% 1.6% 1.3% Bank of Canada 3-month Treasury Bills 2.8% 2.8% 2.3% 0.3% The above comparison demonstrates how the Fund has generally achieved its objective of preserving capital while providing appreciation over the time periods indicated. For example, over a 5-year period the annual appreciation of the Canadian dollar Class F units was 9.9 percent above inflation, whereas 3-month Canadian Treasury Bills appreciated 1.1 percent above inflation. Year-by-Year Returns The following bar chart shows the Fund's performance for Class F units in Canadian dollars in each of the past six years to December 31, In percentage terms, the chart shows how an investment made on January 1 of the previous year would have increased or decreased by December 31 of the following year. Return shown for 2004 is for the period from Class F inception on September 15, 2004 to December 31, Bullion Management Services Inc.

35 PAST PERFORMANCE (continued) Class F Units (US Dollars) Annual Compound Returns The following table shows the annual compound total returns for the Class F units in US dollars to December 31, The annual returns are compared to inflation as measured by the US CPI as calculated by the US Department of Labor, as well as to the US 3-month Treasury Bills. Since Inception (September 2004) Five Years Three Years One Year BMG BullionFund Class F US $ 15.1% 14.6% 10.4% 42.0% Inflation (CPI, US Dept. of Labor) 2.5% 2.6% 2.3% 2.7% US 3-month Treasury Bills 3.4% 2.8% 2.0% 0.2% The above comparison demonstrates how the Fund has generally achieved its objective of preserving capital while providing appreciation over the time periods indicated. For example, over a 5-year period the annual appreciation of the US dollar Class F units was 12 percent above inflation, whereas 3-month US Treasury Bills appreciated 0.2 percent above inflation. Year-by-Year Returns The following bar chart shows the Fund's performance for Class F units in US dollars in each of the past six years to December 31, In percentage terms, the chart shows how an investment made on January 1 of the previous year would have increased or decreased by December 31 of the following year. Return shown for 2004 is for the period from Class F inception on September 15, 2004 to December 31, Management Report of Fund Performance 33

36 FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Class A units of the Fund and are intended to help you understand the Fund's financial performance for the past five years. The information is derived from the Fund's audited annual financial statements. Class A Net Assets Per Unit (Canadian Dollars) Net Assets, beginning of year Increase (decrease) from operations Total revenue Total expenses (0.27) (0.30) (0.28) (0.25) (0.17) Realized gains Unrealized gains (losses) 1.47 (0.56) Total increase (decrease) from operations 1.46 (0.83) Distributions From income From dividends From capital gains Return of capital Total distributions Net assets at December 31 of year shown (1) Net assets and distributions are based on the actual number of units outstanding at the relevant time. This schedule is not intended to be a reconciliation of opening and closing NAV per unit. Ratios and Supplemental Data Net assets value (000 s) 1 $217,764 $156,147 $92,851 $66,299 $33,855 Number of units outstanding (000 s) 1 22,620 19,354 11,039 8,083 5,139 Management expense ratio (%) Management expense ratio before waivers or absorption (%) Portfolio turnover rate (%) Trading expense ratio (%) Net asset value per unit $9.62 $8.07 $8.41 $8.20 $6.59 (1) This information is provided at December 31 of the year shown. (2) Management expense ratio is based on total expenses for the year and is expressed as an annualized percent of the daily average net assets. In 2009 and in years prior to 2007 the Manager absorbed a portion of the expenses. (3) The Fund s portfolio turnover rate indicates how actively the Fund s bullion investments are traded. A portfolio turnover rate of 100 percent is equivalent to the Fund buying and selling all its bullion once in the course of the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. 34 Bullion Management Services Inc.

37 FINANCIAL HIGHLIGHTS (continued) The following tables show selected key financial information about the Class F units of the Fund and are intended to help you understand the Fund's financial performance for the past five years. The information is derived from the Fund's audited annual financial statements. Class F Net Assets Per Unit (Canadian Dollars) Net Assets, beginning of year Increase (decrease) from operations Total revenue Total expenses (0.19) (0.21) (0.20) (0.17) (0.17) Realized gains Unrealized gains (losses) 1.60 (0.50) Total increase (decrease) from operations 1.71 (0.68) Distributions From income From dividends From capital gains Return of capital Total distributions Net assets at December 31 of year shown (1) Net assets and distributions are based on the actual number of units outstanding at the relevant time. This schedule is not intended to be a reconciliation of opening and closing NAV per unit. Ratios and Supplemental Data Net assets (000 s) 1 $19,904 $11,991 $8,938 $7,759 $5,950 Number of units outstanding (000 s) 1 1,952 1,418 1, Management expense ratio (%) Management expense ratio before waivers or absorption (%) Portfolio turnover rate (%) Trading expense ratio (%) Net asset value per unit $10.20 $8.46 $8.72 $8.42 $6.70 (1) This information is provided at December 31 of the year shown. (2) Management expense ratio is based on total expenses for the year and is expressed as an annualized percent of the daily average net assets. In years prior to 2007 the Manager absorbed a portion of the expenses. (3) The Fund s portfolio turnover rate indicates how actively the Fund s bullion investments are traded. A portfolio turnover rate of 100 percent is equivalent to the Fund buying and selling all its bullion once in the course of the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. Management Report of Fund Performance 35

38 SUMMARY OF INVESTMENT PORTFOLIO As at December 31, 2009 Gold, silver and platinum bullion Fine Average Market Ounces Cost Value Total $ $ % Gold Bullion 94, ,162, ,447, Platinum Bullion 53, ,620,517 82,326, Silver Bullion 5,574, ,960,764 99,283, Total Investment Portfolio 234,743, ,057, As the Fund does not rebalance portfolio holdings, the differential over an exact 33.3 percent allocation is due to the difference in performance of each metal. End of Management Report of Fund Performance. 36 Bullion Management Services Inc.

39 BMG BullionFund Annual Financial Statements For the period ending December 31, 2009 Financial Statements 37

40 38

41 STATEMENTS OF NET ASSETS As at December $ $ ASSETS Gold, silver and platinum bullion, at market value 291,057, ,662,863 [Average cost $234,743,521; 2008: $190,525,136] Cash 198,230 2,313,810 Subscriptions receivable 317, ,737 Accounts receivable 58, ,632, ,444,025 LIABILITIES Bank indebtedness 324,525 - Management fees payable 543, ,088 Accounts payable and accrued liabilities 346, ,065 Redemptions payable 262,749 93,427 1,477, ,580 Net assets represented by unitholders equity 290,154, ,621,445 Class A 217,763, ,147,446 Class E09 590, ,851 Class E10 312, ,239 Class E11 13,147,457 4,179,370 Class E15 3,394,288 2,456,620 Class F 19,904,429 11,990,640 Class G01 18,127,907 15,067,975 Class G05 1,191, ,332 Class G09 4,728,776 4,425,875 Class G10 1,827,100 1,513,573 Class G11 8,878,718 8,281,524 Class G15 287, ,154, ,621,445 Net assets per unit Class A Class E Class E Class E Class E Class F Class G Class G Class G Class G Class G Class G See accompanying notes On behalf of the Board of Directors of Bullion Management Services Inc., Trustee and Manager of the BMG BullionFund: Nick Barisheff, Director Larry Gamble, Director Financial Statements 39

42 STATEMENTS OF OPERATIONS Years ended December $ $ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments 7,474,624 (101,667) Net realized gain on foreign exchange 38, ,278 Change in unrealized appreciation (depreciation) of investments 43,167,481 (12,622,997) Net gain (loss) on investments 50,680,421 (12,467,386) INVESTMENT INCOME Early redemption fees 120, ,723 Interest 5,760 10, , ,777 EXPENSES Management fees [note 5] 5,365,608 3,652,096 Securityholder reporting costs 725, ,217 Bullion storage fees 604, ,616 Goods and Services Tax 345, ,575 Audit fees 105,504 87,095 Legal fees 89,000 77,528 Other administrative expenses 70,371 50,257 Independent Review Committee expenses Interest and bank charges 16, ,538 2,628 7,323,482 5,530,550 Expenses absorbed by manager 58,767 - Net investment loss for the year (7,138,244) (5,182,773) Increase (decrease) in net assets from operations 43,542,177 (17,650,159) Increase (decrease) in net assets from operations per class Class A 32,072,474 (12,478,775) Class E09 17,524 36,669 Class E10 83,306 (100,965) Class E11 1,810,967 (118,803) Class E12 - (64,823) Class E15 527,930 (1,767,901) Class F 2,827,563 (815,773) Class G01 3,004,352 (1,414,632) Class G05 205,833 (246,628) Class G09 862,543 (341,877) Class G10 313,527 (146,829) Class G11 1,782,331 (189,822) Class G15 33,827 - Increase (decrease) in net assets from operations per unit Class A 1.46 (0.83) Class E Class E (2.02) Class E (0.24) Class E12 - (0.34) Class E (2.77) Class F 1.71 (0.68) Class G (1.03) Class G (1.42) Class G (1.11) Class G (0.88) Class G (0.26) Class G See accompanying notes 40 Bullion Management Services Inc.

43 STATEMENTS OF CHANGES IN NET ASSETS Years ended December 31 Class A Class E $ $ $ $ Net assets, beginning of year 156,147,446 92,851, , ,159 Increase (decrease) in net assets from operations 32,072,474 (12,478,775) 17,524 36,669 Capital transactions Proceeds from issuance of units 67,826,243 98,532, , ,227 Redemption of units (38,282,546) (22,757,356) (38,961) (524,204) 29,543,697 75,774, ,178 (221,977) Net assets, end of year 217,763, ,147, , ,851 Class E10 Class E F $ $ $ $ Net assets, beginning of year 423,239-4,179,370 4,298,173 Increase (decrease) in net assets from operations 83,306 (100,965) 1,810,967 (118,803) Capital transactions Proceeds from issuance of units - 524,204 8,809,279 - Redemption of units (193,734) - (1,652,159) - (193,734) 524,204 7,157,120 - Net assets, end of year 312, ,239 13,147,457 4,179,370 Class E12 Class E $ $ $ $ Net assets, beginning of year - - 2,456,620 - Increase (decrease) in net assets from operations - (64,823) 527,930 (1,767,901) Capital transactions Proceeds from issuance of units - 1,679, ,912 7,955,303 Redemption of units - (1,614,419) (52,174) (3,730,782) - 64, ,738 4,224,521 Net assets, end of year - - 3,394,288 2,456,620 See accompanying notes Financial Statements 41

44 STATEMENTS OF CHANGES IN NET ASSETS (continued) Class F Class G $ $ $ $ Net assets, beginning of year 11,990,640 8,937,600 15,067,975 9,001,835 Increase (decrease) in net assets from operations 2,827,563 (815,773) 3,004,352 (1,414,632) Capital transactions Proceeds from issuance of units 9,679,337 8,417,708 1,293,387 8,718,617 Redemption of units (4,593,111) (4,548,895) (1,237,807) (1,237,845) 5,086,226 3,868,813 55,580 7,480,772 Net assets, end of year 19,904,429 11,990,640 18,127,907 15,067,975 Class G05 Class G $ $ $ $ Net assets, beginning of year 998,332 1,362,608 4,425,875 1,370,581 Increase (decrease) in net assets from operations 205,833 (246,628) 862,543 (341,877) Capital transactions Proceeds from issuance of units 73,790 1,143,585 1,836,298 4,275,846 Redemption of units (86,521) (1,261,233) (2,395,940) (878,675) (12,731) (117,648) (559,642) 3,397,171 Net assets, end of year 1,191, ,332 4,728,776 4,425,875 Class G10 Class G $ $ $ $ Net assets, beginning of year 1,513,573 1,115,657 8,281,524 5,725,529 Increase (decrease) in net assets from operations 313,527 (146,829) 1,782,331 (189,822) Capital transactions Proceeds from issuance of units - 544, ,796 3,523,581 Redemption of units - (101) (1,481,933) (777,764) - 544,745 (1,185,137) 2,745,817 Net assets, end of year 1,827,100 1,513,573 8,878,718 8,281,524 See accompanying notes 42 Bullion Management Services Inc.

45 STATEMENTS OF CHANGES IN NET ASSETS (continued) Class G15 Total $ $ $ $ Net assets, beginning of year ,621, ,985,454 Increase (decrease) in net assets from operations 33,827-43,542,177 (17,650,159) Capital transactions Proceeds from issuance of units 254,029-91,006, ,617,424 Redemption of units - - (50,014,886) (37,331,274) 254,029-40,991,324 98,286,150 Net assets, end of year 287, ,154, ,621,445 See accompanying notes STATEMENTS OF INVESTMENT PORTFOLIO As at December 31, 2009 Allocated Unallocated Total Fine Average Market ounces ounces ounces Cost Value Total $ $ % Gold Bullion 93, , , ,162, ,447, Platinum Bullion 52, , ,620,517 82,326, Silver Bullion 5,508, , ,574, ,960,764 99,283, Total Investment 234,743, ,057, As at December 31, 2008 Allocated Unallocated Total Fine Average Market ounces ounces ounces Cost Value Total $ $ % Gold Bullion 82, , , ,523,900 89,850, Platinum Bullion 41, , , ,360,124 49,582, Silver Bullion 4,592, , ,821, ,641,112 64,229, Total Investment 190,525, ,662, The Fund's gold, silver and platinum bullion is held under a custodian agreement for the Fund by a major Canadian Chartered Bank (or subsidiary thereof) on an allocated, segregated basis. The allocated bullion is recorded by Refinery, Exact Weight in Ounces and Identification Number. The Fund's bullion is free and clear of any lien or claim which the major Canadian Bank (or subsidiary thereof) may have, except where the claim arises from any unpaid costs. Financial Statements 43

46 NOTES TO FINANCIAL STATEMENTS 1. FORMATION OF THE FUND BMG BullionFund [the "Fund"] was established under the laws of Ontario by a Master Declaration of Trust and Regulation each dated January 15, 2002, as amended. Bullion Management Services Inc. is the Trustee and Manager of the Fund. The Fund currently offers 12 classes of units. These financial statements pertain to Class A, Class E09, Class E10, Class E11, Class E15, Class F, Class G01, Class G05, Class G09, Class G10, Class G11 and G12. The inception dates of the classes are as follows: Class A March 5, 2002 Class G01 November 1, 2006 Class E09 November 27, 2007 Class G05 June 20, 2005 Class E10 April 7, 2008 Class G09 July 6, 2005 Class E11 January 25, 2006 Class G10 May 17, 2006 Class E12 September 18, 2008 Class G11 October 14, 2005 Class E15 February 20, 2008 Class G15 August 21, 2009 Class F September 15, 2004 The Fund is also authorized to issue Class I and Class S units, none of which have been issued. All classes share the same attributes from a valuation perspective except that they are subject to different management fee rates. The Fund invests in equal dollar proportions of unencumbered, gold, silver and platinum bullion, with the objective of providing a secure, convenient, low-cost, low-risk alternative for investors seeking to hold bullion for capital preservation, long-term appreciation, portfolio diversification and portfolio hedging purposes. The Fund s purchase-and-hold investment strategy and fixed purchase allocation to each bullion type eliminates the need for a portfolio manager. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include estimates and assumptions made by the Manager that affect the amounts of assets, liabilities, income and expenses during the reporting periods. The significant accounting policies are summarized below: Designation of Financial Assets and Liabilities For the purpose of measuring and recognizing financial assets and liabilities shown on the Statements of Net Assets, each financial asset and financial liability is designated as follows: All bullion investments are initially recognized at fair value and are designated as held for trading, accounts receivable and subscriptions receivable, and are reported at cost and designated as financial assets. Similarly, accounts payable, redemptions payable and accrued liabilities are reported at cost and designated as financial liabilities. 44 Bullion Management Services Inc.

47 NOTES TO FINANCIAL STATEMENTS (continued) Valuation of Investments Gold, silver and platinum bullion are valued at the London PM Fix price an internationally recognized price benchmark set by London Bullion Market Association for gold and silver, and by the London Platinum and Palladium Market for Platinum. Gold and Platinum have a price fix set twice per day and are identified by AM or PM suffixes. Silver has one price fix per day. The difference between this amount and the average cost is being shown as unrealized appreciation (depreciation) of investments. The market values of investments denominated in foreign currencies are translated into Canadian dollars at the rates of exchange applicable on the valuation date. Investment Transactions, Income and Expense Recognition Bullion transactions are recorded on a trade date basis. The realized gain or loss on sale of investments is calculated with reference to the average cost of the related investments. The Fund follows the daily accrual method of recording investment income and expenses. Expenses specifically related to each class of units are charged directly to the class. Income, expenses and realized and unrealized gains (losses) are allocated to each class of the Fund based on the class s pro-rated share of total net assets of the Fund. Foreign Currency Translation Purchase and sales of investments are translated into Canadian dollars at the exchange rates prevailing on the dates of the transactions. Calculation of Net Asset Value ("NAV") Per Unit The NAV of each class of units of the Fund is calculated in Canadian dollars at 4:00 pm (Eastern Time) on each day on which The London Stock Exchange and The Toronto Stock Exchange are open for trading. The NAV per unit used for purchases and redemptions is the same as the financial statements net assets per unit. A separate NAV is calculated for each class of units of the Fund by taking the class proportionate share of the Fund's common assets less that class proportionate share of the Fund's common liabilities and deducting from this amount all liabilities that relate solely to the specific class. The NAV per unit for each class is determined by dividing the NAV of each class by the number of units of that class outstanding at the valuation date. Income Taxes Any net taxable investment income and net realized capital gains during the year are distributed to the unitholders such that the Fund is not subject to income tax. Accordingly, no provision for income taxes has been recorded in these financial statements. Financial Statements 45

48 NOTES TO FINANCIAL STATEMENTS (continued) Increase (Decrease) in Net Assets From Operations Per Unit Any increase (decrease) in net assets from operations per unit in the Statements of Operations represents the net assets from operations attributable to a class of units for the year divided by the weighted average number of units of that class outstanding during the year. 3. REGULATORY DEVELOPMENTS Credit Risk and the Fair Value of Financial Assets and Liabilities In January 2009, the Canadian Institute of Chartered Accountants ( CICA ) issued Emerging issues Committee Abstract 173 Credit Risk and the Fair Value of Financial Assets and Liabilities ( EIC 173 ). EIC 173 provides guidance on how to take into account credit risk of an entity and counterparty when determining the fair value of financial assets and financial liabilities. As required by EIC 173, the Fund has applied the new guidance retrospectively without restatement of prior years to all financial assets and liabilities measured at fair value in these financial statements as at December 31, The adoption of EIC 173 did not have any impact on the financial statements. Classification of Fair Value Measurements The Fund adopted the recent amendments to CICA 3862, Financial Instruments Disclosures. The amendment is effective for years ended after September 30, No comparatives are required in the year of adoption. The amendments require the Fund to classify fair value measurements using a three-tier hierarchy that reflects the significance of the inputs used in making the measurements as follows. Level 1 Level 2 Level 3 Unadjusted quoted prices in active markets. Inputs other than quoted prices included in level 1 that are observable either directly (i.e. prices) or indirectly (i.e. derived from prices). Unobservable inputs. Adoption of the amendments did not affect the valuation of assets and liabilities held by the Fund as bullion trades in highly active markets and is classified as Level Bullion Management Services Inc.

49 NOTES TO FINANCIAL STATEMENTS (continued) Future Accounting Changes The Canadian Accounting Standards Board has announced plans to converge Canadian generally accepted accounting principles ( GAAP ) with International Financial Reporting Standards ( IFRS ), over a transition period expected to end in The Manager has been reviewing the transitional requirements and comparing IFRS with current Canadian standards as the initial steps in its changeover plan to meet the 2011 timetable. Key elements of the plan include disclosures of the qualitative and quantitative, if any, impact in December 31, 2009 and 2010 financial statements, and the preparation of the December 31, 2011 financial statements in accordance with IFRS. Based on the Manager s current evaluation of the differences between Canadian GAAP and IFRS, the Manager does not expect that net assets attributable to units or NAV per unit will be impacted by the changeover to IFRS. The manager expects that the impact of IFRS on the Fund s financial statements will result in additional disclosure and presentation changes. 4. UNITHOLDERS' EQUITY Each unit of each class of the Fund represents an interest in the assets of that class of the Fund. All units of a class of the Fund generally have the same rights and privileges. Each unit of each class of the Fund is entitled to one vote at any meeting of unitholders of the Fund. Each unit of each class of the Fund is also entitled, subject to any management fee distributions, to participate equally in any distributions by the Fund. Fractional units of a class of the Fund are proportionately entitled to all the same rights as other units of that class of the Fund, except that they are non-voting. All units of each class of the Fund are fully paid when issued, and are generally not transferable. Units of each class of the Fund are redeemable at the option of the unitholder owning such units. The number of units of the Fund which may be issued is unlimited. The units of each class of the Fund are issued and redeemed at the NAV per unit of that class of the Fund. Financial Statements 47

50 NOTES TO FINANCIAL STATEMENTS (continued) Unit transactions during the years ended December 31 were as follows: Class A Class E Balance, beginning of year 19,354,086 11,038,996 16,188 36,945 Issued 7,439,370 10,931,477 45,965 29,286 Redeemed (4,173,592) (2,616,387) (4,212) (50,043) Balance, end of year 22,619,864 19,354,086 57,941 16,188 Average units outstanding 21,945,323 15,061,426 15,683 21,675 Class E10 Class E Balance, beginning of year 50, , ,221 Issued - 50, ,746 - Redeemed (19,404) - (150,204) - Balance, end of year 30,639 50,043 1,275, ,221 Average units outstanding 46,098 50, , ,221 Class E12 Class E Balance, beginning of year ,845 - Issued - 217,372 44, ,620 Redeemed - (217,372) (5,518) (462,775) Balance, end of year , ,845 Average units outstanding , ,768 Class F Class G Balance, beginning of year 1,417,843 1,024,903 1,852,500 1,062,143 Issued 1,017, , , ,950 Redeemed (482,738) (495,499) (134,073) (129,593) Balance, end of year 1,952,322 1,417,843 1,868,188 1,852,500 Average units outstanding 1,649,768 1,202,402 1,904,546 1,366,948 Class G05 Class G Balance, beginning of year 114, , , ,956 Issued 8, , , ,598 Redeemed (8,574) (151,351) (256,785) (88,487) Balance, end of year 113, , , ,067 Average units outstanding 113, , , , Bullion Management Services Inc.

51 NOTES TO FINANCIAL STATEMENTS (continued) Class G10 Class G Balance, beginning of year 181, , , ,946 Issued - 51,698 31, ,780 Redeemed - (10) (142,678) (85,137) Balance, end of year 181, , , ,589 Average units outstanding 181, , , ,508 Class G Balance, beginning of year - - Issued 27,662 - Redeemed - - Balance, end of year 27,662 - Average units outstanding 27, MANAGEMENT FEES AND SALES COMMISSION The Manager is responsible for the day-to-day activities of the Fund, providing or arranging for all required administrative services and arranging for the distribution of units of the Fund. For these services, the Fund pays the Manager annual management fee rates set out below. The fees are payable monthly in arrears and based on the average daily net assets of the Fund. Class A 2.25% Class G % Class E % Class G % Class E % Class G % Class E % Class G % Class E % Class G % Class E % Class G % Class F 1.25% A sales commission may be charged by a registered dealer or representative at the time investors buy Class A units, Class E units or Class G units of the Fund. The maximum amount of the sales commission is 5.26 percent of the net amount invested. The sales commission is negotiable. No sales commission is charged for the other classes of units of the Fund. The Manager paid trailer fees to dealers of $2,038,083 [2008: $1,341,172] Financial Statements 49

52 NOTES TO FINANCIAL STATEMENTS (continued) 6. RELATED PARTY TRANSACTION The Manager held units in the following Class as at December 31: Class E15 20,193 20, INCOME TAX LOSS CARRYFORWARDS The Fund has non-capital loss carry forwards of approximately $11,141,000 [2008: $11,516,000] available to offset future years' taxable income. Non-capital losses expire in the taxation year ending December 31: Year $ 2010 $23, $857, $914, $888, $3,432, $5,027, FINANCIAL RISK MANAGEMENT The Fund s financial instruments consist primarily of cash, subscription receivables and bullion investments. The Fund s cash and bullion holdings are exposed to various types of risks including market risk, credit risk, liquidity risk, interest rate risk and currency risk. These risks and related risk management practices employed by the Fund are described below: Market Risk Market risk is the risk that the fair value or future cash flows of bullion investments will fluctuate because of changes in market prices or transaction timing. The market price of gold, silver and platinum is impacted by a variety of factors including demand, supply, international events and economic events. The Fund employs a purchase and hold investment strategy with purchases allocated one-third to each metal. Since the Fund does not lease bullion, the only future cash flows will be from dispositions of bullion. Dispositions of bullion will be necessary to pay redemptions when cash reserves are not adequate. 50 Bullion Management Services Inc.

53 NOTES TO FINANCIAL STATEMENTS (continued) As at December 31, 2009, the impact on the Fund s net assets if there were a 5 percent increase, or decrease, in the price of gold, silver and platinum bullion, with all other variables held constant, would be an increase, or decrease, of $14,552,896 [2008: $10,183,143] or 5.02 percent [2008: 4.95 percent]. The actual results will vary depending upon the quantity of bullion held and other factors and the difference may be material. Credit Risk As at December 31, 2009 the Fund had no significant investments in debt instruments and/or derivatives. The Fund limits its exposure to credit loss by placing its cash and cash equivalents in high credit quality issuers. Dispositions of bullion, if any, are with a major Canadian Chartered Bank (or subsidiary thereof) which is a recognized dealer in bullion. The Fund may have credit exposure to the Canadian Chartered Bank (or subsidiary thereof) to the extent of any unsettled trades. Liquidity Risk The Fund is exposed to daily cash redemptions of redeemable units. The Fund aims to retain sufficient cash and cash equivalent positions to maintain liquidity. In addition, bullion is readily realizable and liquid. Therefore the Fund s liquidity risk is minimal. All liabilities are payable within a year. Interest Rate Risk The majority of the Fund s financial assets and liabilities were non-interest bearing as at December 31, Accordingly, the Fund is not directly exposed to significant risk due to fluctuations in the prevailing levels of market interest rates. Currency Risk Bullion is generally quoted and traded in U.S. dollars and, as a result, the Fund is subject to foreign currency risk. The Fund does not hedge its foreign currency exposure. The Fund holds cash in Canadian and U.S. dollars to pay redemptions and operating costs. The Manager monitors the cash balance on a daily basis and only purchases bullion when surplus cash is available. Normally the cash balance is less than 5 per cent of the assets of the Fund. As at December 31, 2009, percent [2008: 99.6 percent] of the Fund s net assets were exposed to U.S. dollars. If the exchange rate with the Canadian dollar increased or decreased by 1 percent, with all other variables held constant, net assets would have increased or decreased, respectively, by approximately $2,912,051 [2008: $2,047,390]. The actual results may differ from this sensitivity analysis and the difference could be material as the price of bullion tends to be negatively correlated with the U.S. dollar. Financial Statements 51

54 FOREIGN CURRENCY EXPOSURE 2009 US Canada Total $ $ $ Cash 198,230 (324,525) (126,295) Bullion 291,057, ,057,926 Other Net Assets (51,087) (725,598) (776,685) Net Assets 291,205,069 (1,050,123) 290,154, % -0.4% 2008 US Canada Total $ $ $ Cash 1,167,153 1,146,657 2,313,810 Bullion 203,662, ,662,863 Other Net Assets (91,010) (264,218) (355,228) Net Assets 204,739, , ,621, % 0.4% 52 Bullion Management Services Inc.

55 CORPORATE INFORMATION MANAGER Head Office Bullion Management Services Inc. 60 Renfrew Drive, Suite 280 Markham, ON L3R 0E1 Tel: / info@bmgbullion.com Vancouver Office Park Place Burrard Street Suite 500 Vancouver, BC V6C 3P6 Tel: x44 CUSTODIAN ScotiaMocatta The Bank of Nova Scotia 40 King Street West Scotia Plaza, 68th Floor Toronto, ON M5W 2X6 ADMINISTRATOR RBC Dexia Investor Services Trust 155 Wellington Street West, 3rd Floor Toronto, ON M5V 3L3 AUDITORS KPMG LLP Bay Adelaide Centre 333 Bay Street, Suite 4600 Toronto, ON M5H 2S5 LEGAL COUNSEL Fasken Martineau DuMoulin LLP 66 Wellington Street West Suite 4200, Toronto-Dominion Bank Tower Box 20, Toronto-Dominion Centre Toronto, ON M5K 1N6 The BMG Group of Companies includes the parent company, Bullion Management Group Inc., and its wholly owned subsidiaries, Bullion Management Services Inc., Bullion Marketing Services Inc. and Bullion Custodial Services Inc. These companies are referred to here both collectively and individually by the overall brand BMG. The forward-looking information, opinions, estimates and projections contained herein are solely those of Bullion Management Services Inc. (BMS), a BMG Company, and are subject to change without notice. BMS makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BMS assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Commissions, trailing commissions, management fees and expenses may all be associated with an investment in BMG Funds. Please read the prospectus before investing. BMG BullionFund and BMG Gold BullionFund are not guaranteed, their units fluctuate in value, and past performance may not be repeated.

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