Dear Partners,

For the month of August, Caravel returned +4.10% compared to +3.49% for the benchmark (+2.03% for the S&P 500 & +4.96% for the SPTSX)¹. This brings year-to-date total net return to +17.95% for the fund and +14.19 % for the benchmark, respectively.

August marked the end of a satisfactory summer for Caravel. The month was carried by our equity long-short (+3.2% gross), commodities (+2.2% gross), and fixed income (+0.3% gross) strategies. Our merger arbitrage and hedge books were minor drags, costing the fund approximately 0.1% and 0.7%, respectively. The nature of merger arbitrage positions between deal announcement and closing sometimes produces slightly negative returns month over month, indicating that spreads are widening and return profiles are improving. We react to these instances by first evaluating whether anything has changed about a deal’s risk profile, and then adding to positions where prospective forward returns have improved and risk conditions have not deteriorated. We continue to be pleased with our equity long-short and commodity portfolios, which have contributed the majority of our year-to-date returns despite net exposures of less than 20% each of the fund’s assets. This, in combination with our hedge book, has enabled us to keep our net equity market exposure low while exceeding our absolute return targets so far in 2025. In other words, we feel very comfortable with the amount of risk we have taken, and continue to hold, to get to this point in the year. However, as Kobe Bryant once said, job's not finished. 

In fact, we are far from finished. In this business, you’re never finished, and you’re not rewarded for stopping to enjoy the view while climbing towards your investment goals. We relish this condition. We continue to believe we are in the early innings of a strong cycle for several sectors to which the Canadian stock market has significant exposure, including materials and industrials, where we have spent much of our time over the past year and a half looking for (and finding) attractive opportunities. 

To focus on just one of these factors, we thought we’d weigh in on the recent surge in gold prices and the stocks that stand to benefit from it.

Over the last two years, gold has nearly doubled from $1,900 per ounce to over $3,600 per ounce and recently reached an all-time high. A multitude of factors have influenced this run, but we think it's fair to attribute most of the credit to two of them:

1) A global interest rate cutting cycle, which has decreased the opportunity cost of holding non-yielding assets such as gold and other commodities, and

2) US trade and foreign policy, which has forced foreign governments and central banks to decrease their dependency on the US dollar in favour of other safe-haven assets, including gold.

We believe we are somewhere in the middle of the game in terms of factor 1. The US and Canada just cut rates again this week. We believe the Fed is still slightly above the neutral rate, and that more cuts are forthcoming. Trump’s continued pressure on the Fed, which we wrote about in last month’s letter, has only added to the yellow metal’s appeal. For example, the most recently appointed Fed member, who was handpicked by Trump, has (predictably) emerged as the committee’s most dovish member by a wide margin. All else equal, the Fed cutting rates by more than the market is currently expecting would be bullish for gold.

In terms of factor 2, we think we are still in the early innings. If Caravel is, true to its name, a small and nimble exploration vessel (we try to be), then foreign central banks and governments are aircraft carriers. They can’t stop or change direction on a dime. Their wallets weigh them down. As such, we expect a widespread shift away from the US dollar in favour of other assets to be measured in years, not weeks or months. Only about 10% of the world’s gold is held by non-US governments and central banks, vs. over 1/3^rd of U.S. government debt. US treasuries, however, are a much more liquid market than is physical gold. We believe a continued rotation could have an outsized impact on the price of gold vs. the U.S. Treasury yield curve.

What does this mean for investors? Typically, gold producers and developers outperform the gold price during bull markets for the metal. The GDX (the go-to gold miners ETF) is up 136% in the past two years, 50% more than gold bullion and 85% more than the TSX Index over the same period. 

Even better returns can be found through careful analysis and selection. Caravel first started accumulating shares in ARTG two years ago at a C$1B market cap and sold when it was C$7B. We very much enjoyed that experience and wish to repeat it as many times as possible during this gold cycle. We have several similar gold stocks in the book at present that we believe can follow in ARTG’s footsteps. If you have been reading our letters, you know some of them by name. These stocks have already started to move, and have contributed meaningfully to the fund’s returns in recent months. However, like us, we believe they still have a long way to go. We look forward to updating you on their performance in the future.

I try to keep the language of these letters accessible to people without a finance background, but understand I have fallen short in this pursuit (if dinner conversations with my grandparents are any indication). So, if you’re ever looking for a plain English translation of anything in our letters, please give us a call. We are highly passionate about what we do and are always happy to discuss what’s happening at our fund with our partners. 

We thank you for your continued support,

Jack and Glen

Managing Partners, Caravel Capital

 _{1 Benchmark = 50/50 weighting of S&P 500 & SPTSX Composite Indices}