>>>" G'maw'nin' Lorne, rest well? FWIW...I just tried clicking through on That Sterling M/F physical vs equities URL you proferred, and it came up blank just now. Would you consider posting it in its entirety under the "Fair Use, etc." doctrine on this thread. "<<<
A moment in the Sun
Leading gold fund manager Sterling discusses rebound
By Justin Wiser, CBS.MarketWatch.com
Last Update: 11:48 AM ET June 21, 2001
MOUNTAIN VIEW, Calif. (CBS.MW) - It's been a long time since gold investors had much to smile about, but the volatile sector has left most of the market in the dust this year.
American Century Global Gold manager Joe Sterling has been among the sector's top stock pickers. The $163 million fund (BGEIX: news, msgs, alerts) gained 22 percent through Wednesday, making it the third-best performer in the group year to date.
Thus far in the second quarter, Sterling tops the charts with a 26 percent gain.
The average precious metals fund tracked by Lipper Inc. is up 14 percent since the beginning of the year. Meanwhile, the Dow shed 0.5 percent and the S&P 500 dropped 7.4 percent.
While this year's rally has been sweet for investors in the Global Gold fund, its portfolio whipsawed along with the entire sector over the past decade. In 1999, for example, it jumped 29 percent in the third quarter, then fell 18 percent in the fourth to finish down for the year.
In fact, 2001 would be the first time Sterling's fund posts a positive year since 1995 if it remains in the black through December.
CBS.MarketWatch.com recently caught up with Sterling to discuss the recent rebound in the gold market and the prospects for the metal's future.
Q. Many people are under the false impression they are buying gold when they invest in a gold fund. Can you describe the investments in a typical gold portfolio?
Some people do think the fund actually invests in bullion, although very few people actually do. Some funds might buy bullion or some other form of index-linked notes linked to bullion, but that's a pretty small part of the fund -- probably less than 10 percent in most cases. We don't own any bullion.
Most of the funds would be all in equity shares of gold-mining companies and perhaps some other precious metals companies like platinum or palladium.
We try and run our fund as a pure play on gold. A lot of the funds sometimes will invest in different kinds of asset classes, i.e. they might go more toward platinum or palladium or maybe diamonds. A few funds might invest in some of the integrated oil companies, not take a big percentage but enough to shade your returns. When gold prices head higher, we like to be very leveraged so that you get everything. But you've got to understand that when they're going down, you're going to get everything, too. That's our philosophy of doing things.
Q. Are the gold-mining companies you invest in often involved in mining other precious metals as well?
It depends on the type of mine that they have. Lihir Gold (LIHRY: news, msgs, alerts) , which is in Australia and based in Papua New Guinea, is pretty much all gold, but you'll have a company like maybe Placer Dome (PDG: news, msgs, alerts) that has some other metals that come out of the gold mining process. So it just kind of depends. What we try and do is stay leveraged to the gold price, so we're looking for companies that predominantly are gold miners.
Q. How closely do the prices of these mining stocks mirror the price of gold itself?
It's a fairly tight correlation. As you can imagine, your earnings and value is all wrapped in gold so as bullion pricing goes, so go your earnings and the value of your reserves in the ground. It's probably on the order of at least 80 percent.
Q. Gold funds lead the entire fund universe year-to-date. What's been driving the rally we've witnessed this year?
It's been driven pretty much by lower producer hedging, coupled with some renewed investor demand. You've seen some of the big shorts out there turn into long positions. That has helped the sentiment change.
Central banks have been net sellers over the past several years but now the banks seem to want to control their forward sales a little bit more, so that's kind of positive. And there's not as much incentive for the producers to forward-sell with lower interest rates. You've also had some write-downs of some reserves at a couple of big producers -- Barrick (ABX: news, msgs, alerts) and Placer Dome.
It appears the actual total mine supply around the world has peaked because of the maturity of most of the mines, so you're looking at lower production potentially going forward. At these prices, not too many people are going to be gung-ho about trying to go out and find new mine supply, so that's a positive.
Q. Prior to this year's rally, gold investors really suffered -- on an annualized basis, your fund has lost 15.8 percent a year over the past five years. What's kept gold prices down?
The biggest thing has been a lot of central bank selling of gold over the last several years. That and you really haven't had any inflation. You've had a period of long economic growth with good productivity, which has kept inflation in check.
Q. So there's been plenty of supply and little demand?
Yes. You've had a lot of central bank sales, as I said, and also you've had some producers selling forward, which adds to liquidity as well. So yes, the general supply-demand equation says you've got too much supply and not enough demand and things are going to go down.
There's also been a bit of investor disinterest. The perception of a lot of people is that gold has lost its reserve currency role, and that's probably played a part in some of the sentiment factors. If you remember, gold didn't really do anything through the Gulf War, it didn't do anything in the Brazilian currency crisis, and then Long Term Capital Management, it kind of didn't do anything there either. So it's like, what's it going to take?
Q. If inflation returned to normal levels or above-average levels, would you naturally expect the price of gold to rise?
Yes, I think you'd expect that as inflation came back. You could expect some kind of a move because paper assets are less attractive in inflationary periods. You certainly would hope you'd get something.
Q. How do current valuations for these stocks compare with historical norms?
Since the end of October 2000, the Toronto Stock Exchange Gold Index is up about 39 percent, and gold was not up quite as much. On a net asset value basis, the gold companies are trading at around 1.7 to 1.9 times their NAV, and that's considered fairly to fully valued on a historical basis.
Q. How do you like the prospects for gold looking forward?
It depends on how this U.S. market gets resolved. The dollar's been very strong. There's also a correlation between the trade-weighted dollar and the price of gold. As the dollar has been strong over the past three to four years, gold has been very weak, so a weakening dollar would help. Some form of inflationary pressures would help. We're getting the interest rate decreases that I think we need. When you lower the interest rates, there's just less demand or interest in forward sales. Gold lease rates actually tend to rise in that environment. There seems to be some discipline in the central banks' selling behavior, so you're not just seeing the central banks come out and dump gold into the market.
There are some fundamental underpinnings to see things getting better going forward. It's hard to see things get worse.
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