Ron,
Your "Since 98% of mining stocks have dropped between 50% to 90%, picking one only involved being able
to figure out which ones were mining stocks and which weren't." is right on.
Seems that gold mutual funds understand. -Bob
Last week gold lost another 2%, or more than $6, after the new European
Central Bank announced it will hold no more than 15% of its reserves of
about $55 billion in gold when it takes over European monetary policy in
January. That was at the low end of the market's expectations; some
estimates of gold's portion of ECB reserves ran as high as 30%. Gold prices
have declined by over $20 in the past six weeks, with the active August
contract settling Friday at $287.30 an ounce.
The immediate future is no brighter. No one knows what will happen to, and
who has control over, the remaining 12,000 tons of gold -- roughly equal to
five years' mine production -- held by the 11 member participants in
European economic and monetary union that may be excluded from the
ECB's reserves.
So, who wants to own gold these days? Even the people in the business of
being long gold, namely the gold mutual funds, are moving away from the
industry. In fact, many gold funds' top stock holdings today are not gold
companies at all.
The funds have been burned by bad performance. The average gold fund is
down over 33% for 12 months through the end of the first quarter in 1998.
Declining assets have resulted not only from sub-par returns, but also from
redemptions.
Kjeld Thygesen, manager of the Midas Fund, has seen his assets cut in half,
to $120 million from $230 million in 1996, due to poor performance. His
fund's negative return was nearly 60% last year.
Thygesen recently decided to boost his cash holdings to 10% of the fund's
assets and has actually shifted the weighting of the stocks in his portfolio so
that 10% of the fund is not even in gold stocks. Some of his holdings: Reliance
Steel & Aluminum, Asarco, the copper company, and Mueller Industries,
which manufactures fabricated steel products.
"These companies are not directly correlated to metal prices," Thygesen says.
"On occasion, we've been in other areas before, but never like this."
Caesar Bryan at the Gabelli Gold Fund can empathize. He's seen his
performance, and thus his fund's assets, dwindle, too. His fund's assets now
stand at just $14 million after returns of nearly minus 60% last year.
His major holdings are also not in gold mining. They include Stillwater Mining,
a platinum and palladium play, and two royalty companies, Euro-Nevada and
Franco-Nevada, which collect an annuity-like return on leases of gold
properties.
"We have no credibility left," says Bryan. "I thought gold could have bottomed
a long time ago."
Indeed, not only have the gold-fund managers lost credibility, but these moves
show their desperation. By shunning their own sector of the market, these
gold funds have become market timers. Should gold rally, they may now
underperform.
But at least the Midas and Gabelli funds are still in business. Many others
have closed or merged. Morgan Stanley no longer has an institutional gold
fund. Blanchard merged its fund with Evergreen and SoGen's Gold Fund
manager is talking of closing his fund too.
Even worse, at Lexington Strategic, with assets over $100 million, no one is
currently running the company's three gold funds. The manager resigned and
the company hasn't found a replacement.
Investors in Lexington's funds should know that their traders have been told
simply to hold the gold funds' positions and not to do anything while the
company decides their fate, in part because it may close at least one fund. The
South African gold fund simply does not have enough companies left in its
universe to be diversified anymore because below-breakeven gold prices
have forced consolidation among South African firms.
Even companies known for their bullish bias on gold, like Friedberg
Mercantile Group, are not mentioning their gold funds to potential investors
who inquire about the company's fund selection. "No one wants to hear about
gold," says Friedberg trader Danny Gordon. "We don't even discuss the
funds. We can't market them. We can't even keep the minimum number of
investors required to make it eligible for retirement plans anymore."
A contrarian might see this as a bullish sign for gold, but the real message may
be about the mutual-fund industry. If gold funds are closing, merging and can't
be marketed in a bear market, what may happen to the fund industry when
the stock market as a whole turns down?
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