Gold ringer
Fund manager says the case for gold transcends Iraq
By Jonathan Burton, CBS.MarketWatch.com
Last Update: 12:02 AM ET March 25, 2003
SAN FRANCISCO (CBS.MW) -- Gold fever has been running high, bringing out the speculators, the hustlers and the strike-it-rich pikers. Not quite the behavior you'd expect around such a conservative, defensive-minded investment. But that's forever been the alluring power of gold -- always coveted, not always respected.
The controversial metal saw a huge price run-up lately as war with Iraq loomed, but took a big hit as war became imminent and the smart money switched to U.S. stocks in expectation of a quick, decisive outcome. Gold futures soared roughly 20 percent in the few months leading up to the war, only to relinquish most of that gain in the two weeks before hostilities began.
Yet if much of the speculative excess has been wrung out of gold, then investors should ask two key questions: Does the case for gold transcend geopolitical events? If so, is now a good time to buy?
Yes on both counts, says John Hathaway, manager of Tocqueville Gold (TGLDX: news, chart, profile), a $211 million mutual fund that invests entirely in gold and gold-related stocks.
Of course, Hathaway is a longtime gold bug, so his bullishness about the bullion is hardly surprising. Nonetheless, his views on this volatile investment and how his experiences with gold guide his managerial decisions are worth noting.
For Hathaway, the investment case for gold is straightforward: "The overriding driver of money into gold is the loss of confidence in financial assets," he explains. "If you think that's going on, then you should have gold."
As Hathaway sees it, the reason to own gold is not the battle for Baghdad, but the battered U.S. dollar. The declining value of the dollar against the euro and other major currencies signals that U.S. trading partners are losing confidence in the greenback as the preferred store of value in a crisis.
Investors worldwide are increasingly troubled by the weak U.S. economy and ballooning budget deficits, Hathaway asserts -- which the Iraq war and any subsequent rebuilding effort will only exacerbate.
"People can see that the economic policies that have been pursued to date have not helped," Hathaway says. "They haven't given us any economic upturn. Consumer confidence and corporate profits are not recovering. We're in a muddling, unsatisfactory environment."
At the extreme, this breach could precipitate a deeper sell-off among dollar-denominated paper assets, namely equities, corporate bonds and government debt, spiking interest rates and sinking living standards for Americans.
In short, a bleak scenario tailor-made for gold, Hathaway contends.
Into the mines
Tocqueville Gold is an anomaly among its peers. Hathaway runs his fund with a sharp focus on valuation. He buys low price-to-sales stocks on pullbacks, sells into rallies, and seeks opportunities among the gold market's dustier corners.
"I'm very careful about what I pay," Hathaway says. "If the market is running, I don't chase it."
The tactic controls downside risk, though gold's pillar-to-post nature assures Tocqueville Gold shareholders a wild ride. The fund soared 83.3 percent in 2002 but has tumbled 13.4 percent since Dec. 31, reports investment data firm Morningstar.
Indeed, the fund's volatility is roughly twice that of the S&P 500 Index. Yet adding even a small amount of gold to an investment portfolio can mitigate stock-market risk, since gold has an inverse relationship with stocks. For most investors, experts agree, 5 percent or 10 percent gold exposure is plenty.
Hathaway has profited from gold companies that don't hedge against gold-price volatility. Unhedged producers including top Tocqueville holdings Gold Fields (GFI: news, chart, profile) and Harmony Gold (HMY: news, chart, profile) are fully exposed to fluctuation in gold prices, an aggressive stance that boosted the fund's return handsomely.
When Hathaway decided last year that gold stocks were becoming too richly priced, he bought the metal itself. About 6 percent of the fund -- roughly $13 million -- is now in gold bars tucked in a Swiss bank vault.
Holding the metal hedges against overvaluation in the shares, Hathaway explains. But now he's buying gold stocks again.
"Shares are too cheap relative to the metal," he claims. "If I have money coming in, I favor the shares over the metal."
Hathaway has 3 percent of the fund in Randgold Resources (GOLD: news, chart, profile), which mines in West Africa and trades at a 25 percent discount to estimated net asset value. He first bought shares in April 2002 at an average of $8.95 a share. The stock closed Monday at $11.68.
He also likes Wheaton River Minerals (WHT: news, chart, profile), which has interests in gold and silver mines in Mexico and copper and gold mines in Argentina. Wheaton is reducing costs and allocating capital to exploration, Hathaway says. He's been purchasing shares since the summer of 2002 and has paid an average of 72 cents; Wheaton closed Monday at 79 cents. |
