Gold Has Good Days as Other Assets Fall
By KENNETH N. GILPIN
The bad news that has engulfed financial markets in the last year or so has been a salve for gold mutual funds. Over the last five quarters, no sector of the fund universe has done better.
Consolidation in the mining industry has helped lower costs, but fundamentals in the gold business are much unchanged. Share prices have been driven higher by the instability and uncertainty caused by factors like the downturn in the global economy, the events of Sept. 11, the fall of Enron (news/quote) and concern about the stability of the Japanese financial system.
"I don't think anything in particular has occurred with mine output, jewelry demand or the fundamental guts of the gold business," said John Toumazos, an analyst at Prudential Securities. "Other asset classes are fundamentally less attractive, and that has made people look at gold."
This year through March, the 39 gold-oriented funds tracked by Lipper were up by 35.2 percent. That came on top of a strong performance in 2001, when the funds rose more than 18 percent.
The gains in the stock prices of gold mining companies have flowed from an increase in the price of bullion.
After bottoming at $252 an ounce in the third quarter of 1999, gold prices averaged $270 an ounce in 2000 and $272 last year. As of the end of March, the metal was trading at $302.60 an ounce.
"There is a better feel to the market now," said Caesar Bryan, manager of the Gabelli Gold fund.
An improving economy and rising interest rates could cause the good feeling to dissipate. Barring further calamity, some analysts said gold mining stocks, which are trading at high price-to-earnings multiples, may have had their day.
"Gold funds typically do the best when the economy is the worst," said Christopher Davis, a mutual fund analyst who follows precious-metals funds at Morningstar Inc.
"If you think a global collapse is imminent, then you would want to own them," he said. "But I don't see a good role for these funds, especially for long-term investors."
In fact, the good performance by gold-oriented funds over the last 15 months has made a dismal five-year record only somewhat better.
Through the end of March, Mr. Davis said, the average precious-metals fund had lost 4.8 percent of its value a year, on average, over the last five years.
"That is a spectacularly poor record," he said.
Managers of gold funds acknowledge that performance has not been stellar. But they said the argument for owning gold funds was strengthening, partly because of weak returns offered by the broader stock market.
"Gold is an insurance policy, and a cheap one, against something going bad," said Jean-Marie Eveillard, portfolio manager of the First Eagle SoGen Gold fund, which over the last five quarters has been the best-performing fund in the group, according to Lipper.
"The idea that stock prices go up all the time is not exactly helpful to gold, Mr. Eveillard said. "The cult of equity will not die overnight. But eventually it will die. Two years ago we had a big break, with the bursting of the technology bubble."
MR. EVEILLARD said a banking crisis in Japan or a sharp drop in the value of the dollar would likely push gold prices higher. Neither of those possibilities can be ruled out, given Tokyo's continuing economic difficulties and the enormous current account deficit of the United States.
"It was only a few years ago that the XAU was at 140 or 150," Mr. Bryan said, referring to the ticker symbol for the Philadelphia Stock Exchange Gold and Silver index. "Could it go back to where it was? Why not? Gold at $350 to $400 an ounce would easily do it."
The index, which bottomed at 41.85 on Nov. 17, 2000, closed the first quarter this year at 70.89.
Peter Ward, an analyst at Lehman Brothers (news/quote), says he is not optimistic about gold's near- to medium-term future.
Gold prices have climbed over the last year, he said, partly because companies that had hedged themselves in the forward market have bought back the positions they had established.
"That is not a sustainable source of demand," he said.
Moreover, he said, demand for jewelry, which absorbs about 85 percent of available gold supply each year, tends to soften when prices exceed $300 an ounce.
"This is not natural gas or copper," he said. "Every time gold has spiked up, consumers have walked away."
Mr. Ward says he is "neutral to modestly bearish" on gold as a commodity but "very negative" on the stocks.
"At this point, stocks like Newmont Mining (news/quote) have fully discounted a gold price rally and are therefore unattractive," he said. "If you are that sure gold is going to $400 an ounce then we recommend you should buy gold outright."
There is another hurdle. Not only are stocks of gold mining companies trading at hefty multiples, but gold mutual funds generally carry large management fees — and their yield is quite small.
According to Mr. Davis at Morningstar, the expense ratio, on average. for precious-metals funds is 2.09 percent, well above the average of 1.5 percent for international equity funds or about 1.2 percent for a domestic equity fund.
"They are really expensive, mainly because their asset bases are so small and researching the companies is more expensive," he said.
"In the late 1970's and early 1980's, there was a much more compelling case for owning these funds," he added. "But inflation was such a persistent problem back then. A lot of the factors that drove inflation in the past nobody foresees coming back."
nytimes.com |
