Nice interview with the manager of the Gabelli Gold Fund (GOLDX...great symbol!). Basic stuff, but a good introduction for the newbies:
thestreet.com
10 Questions With Gabelli Gold Fund Manager Caesar Bryan
By Kevin Burke
Staff Reporter
06/17/2002 07:22 AM EDT
With the global economy struggling to regain its footing, the technology bubble bursted, the threat of terrorist strikes against the U.S., and all-too-frequent reports of corporate improprieties, the value of gold -- that traditional safe haven -- has flourished. Indeed, the price of gold is up some 25% since March 2001, to $319 an ounce.
Talking With:
Caesar M.P.Bryan
Manager,Gabelli Gold Fund (GOLDX)
Sales charge: No-Load Fund
Expense ratio: 2.46%
Managed Since: July 1994
1-Year Return: 71.8%, beats 86% of its peers
3-Year return: 27%, beats 94% of its peers
Top Holdings: Newmont Mining (NEM), Gold Fields (GFI), Harmony Gold Mines (HGMCF)
Assets: $98 million
Source: Morningstar, data current as of 6-13-02
And funds that specialize in precious metals have been some of the few profitable places for investors of late, besting all other stock fund categories over the past three years with an annualized return of nearly 19%. Within that universe, few funds have been better than the Gabelli Gold Fund, managed by Caesar Bryan since 1994. The fund is up 64% so far this year, and its three-year annualized return of 27% beats all but two of its peers.
To some, investing in gold may seem like an esoteric science reserved for gold bugs, especially since it has essentially been mired in a twenty-year slump during which time the stock market has flourished. But for those looking for an insurance policy on their equity investments, or merely a good trading opportunity in these uncertain times, the yellow metal is as good as, well, gold.
Bryan's no-load fund invests primarily in gold production companies, ones that have proven revenue streams and earnings, and avoiding speculative bets on small exploration companies. Despite some recent weakness in gold prices, Bryan is optimistic that we're in the midst of a bull market for gold that could see prices rise as high as $400 an ounce. For more on the fund and the state of the gold industry, please read on.
1. Currently, gold is trading at $319 an ounce. Do you think it can go higher?
It can certainly go higher. It bottomed at $250, but I think that was a really depressed low. Just a few years ago, the price oscillated between $350 and $400, and I don't see why it can't get back to that level. In fact, I think it's going to exceed that level if this is a true gold bull market, which I believe it is.
When people say "gold has had its run and now it's over," it's because that's what has happened in the past, as in 1993 and 1996, when you had these sorts of $70 to $100 moves in gold, then that was it. And if we're in a similar market, then yes, you can make that argument.
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But there's a possibility that this is a bull market rather than a bear market rally for gold. I think that may be the case, because we've had a very long bear market in gold, a very long bull market in equities, bonds, and confidence in central bankers and paper assets in general. And all you need is a small shift.
Who knows what the catalyst of that shift could be? It could be the situation the Western world is now facing, following the terrorist attacks of Sept. 11. It could be a catalyst for more government intervention, or more government spending, or maybe a change in some of those trends that resulted in this terrific market we've seen for paper assets. We needed a small shift into real assets to believe that maybe we'll get a bigger move from gold than in the two previous rallies.
2. In the current economic climate, in which you have the threat of terrorism, the Enron collapse, the conflicts of interest on Wall Street, criminal allegations, etc., does that translate into a sustained period of rising prices for gold?
Very possibly. I don't think any one of those things alone would prompt people to say something like, "Oh, Enron, I need to go buy gold." But what I think they point to is something a little less clear, and that is the super confidence we had in the equity markets and paper assets. That's the result of a very long bull market. It never occurred to most people that something like an Enron could occur.
Now what does Enron mean? I think on one level, it means greater government scrutiny and involvement. And that tends to play into gold and away from free market economics. The second thing is, how does this play with the foreigners, who are very important in financing our current account deficit? Up until now, people haven't cared about the deficit and how it's been financed.
The other element is that up until now we've all been under the impression there was a large and growing U.S. budget surplus. That seems not to be the case right now, because of the weak economy and the amount of money the government is spending on our security.
3. Is there potential for gold to be a sound long-term investment?
Over the last 20 years, gold has been merely a trading opportunity with these very powerful rallies in an otherwise downwards market. If you think that gold is going to be in a basic bear market for the next 20 years or even five years, with these occasional rallies, then you should be selling now. Although, if you go back historically, the rallies tend to be slightly more substantial than the one we're currently experiencing. But if you think there's a more secular change going on, then maybe gold is something you can hold for a longer period of time and actually make some money on it.
Gold is very difficult to understand. It's not like a share of General Electric (GE:NYSE - news - commentary - research - analysis), where you've got an earnings stream, a dividend and a claim on a group of assets. An ounce of gold is an ounce of gold. The value is what you can buy with it -- how many dollars, yen, Deutsche marks, or whatever.
4. Gold funds have all done well recently, but you've done better than most. How have you managed to stay ahead of the pack?
I tend to be invested in the less-hedged companies and I have a greater exposure to pure gold, whereas some of these other funds have other metals and more cash allocation. Essentially, I have good gold exposure. In a good market that may help, but in a down market it would tend to hurt a little bit; so the fund tends to do well in a good market and mediocre in a poor market. I'm not happy with it, but I believe that's a reasonable tradeoff.
All the gold funds own pretty much the same stuff but it's just in different quantities. The moving parts are how much in South Africa, how much in North America; how much in gold, as opposed to other metals; and how much in hedged companies vs. unhedged companies.
5. What criteria do you look for before you go out and buy shares of gold companies?
There are three things. First, there is the asset, in this case the deposit. If you don't have a decent ore deposit, then you start with some difficulties. The second is management -- the various different qualities of the people that are working for you. I guess you can look at their previous track record, but it is at the end of the day somewhat subjective. And the third thing, and the most important, is the financial situation of the company and the extent to which the company is either leveraged or hedged. I'd rather have an unleveraged but unhedged company, than a heavily leveraged and heavily hedged company in my portfolio. And very often the two go hand in hand.
6. What are the main factors that affect the price of gold stocks?
Well, clearly the key driver for gold companies is the price of gold. And the second key driver for these companies would be the discovery of some new deposit. There are other factors which are less important, such as movements of various exchanges against the dollar, which is the revenue that you're getting. So if your cost of production in occurrence is declining against the dollar, that tends to be advantageous, but that's more of a minor item. In terms of the two major drivers, gold prices overseas have been the key factor, rather than any particular excitement in terms of new discoveries, which have been very limited.
7. What stocks do you like the most right now?
My three largest positions are Newmont Mining (NEM:NYSE - news - commentary - research - analysis), Gold Fields (GFI:NYSE - news - commentary - research - analysis), and Harmony Gold Mines (HGMCF:Nasdaq - news - commentary - research - analysis).
They're all reasonably managed, they have a big reserve base and are basically unhedged. Newmont has good upside to high gold prices. In the case of Gold Fields and Harmony, they're both South Africa-based, so they have a very large resource base and have the potential to generate considerable cash flows at a high gold price. And I feel these stocks are just not that expensive.
8. What stocks are you staying away from?
I tend to stay away from the exploration companies, the very small companies. I stick to production. We haven't had a great market and it hasn't been a good market for exploration stocks, so I've stayed away from them. I prefer companies with some revenue and hopefully earnings, depending on the price of the metal.
9. How has consolidation in the mining industry affected companies in your sector?
I don't think it's played much of a role at all, but it certainly limits the choice of a sector fund such as mine. Bear in mind that other mining industries are much less fragmented than gold. The top three or four copper and nickel companies control more than 50% of global production, and in gold that's not the case. So people point to that and say, "Hey, gold is ripe for consolidation." Indeed, that's what's happening.
Is that necessarily a good thing?
There are not that many synergies that come from being large. The ore is where the ore is; you can't move that. If it's a semiconductor manufacturing company or a textile manufacturing company, yes, you can improve, cut costs and scale. But if one company has its mine in Nevada and the other one has its in Peru, you're going to have a cost base in Nevada and a cost base in Peru.
I think consolidation in the gold industry has really been driven by very low prices and a need to lower costs. Had the price of gold been a lot higher, I don't think this would have necessarily happened. It might have, but I doubt it. It's a reaction to the real squeeze that's going on in the industry.
10. Where do you see the price of gold a year from now?
I wouldn't be surprised in a year's time to see gold in excess of $400 an ounce. |
