Gold mutual funds thrive with tiny assets

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By Thom Calandra, Editor
CBS.MarketWatch.com
Friday, June 28, 2002

Gold mutual funds compiled returns of as much as 32
percent and no less than 13 percent -- all in a
second-quarter stock market that dropped 15 percent.

Against a U.S. equity landscape devoid of profits,
precious metal funds dominated the top ranks of
second-quarter performers. If short-selling mutual funds
are set aside, the gold names made up nine of the top
10 equity funds for the quarter ending Friday.

"Clearly, gold was the place to be, but I can't say I am
entirely pleased," said Caesar Bryan, manager of the
$98 million Gabelli Gold Fund (GOLDX), which rose 13
percent for the quarter, as of Thursday. "I think the gold
price should be higher right now, so I am a little
disappointed."

Gold is selling for $320 an ounce, some $18 above
where it started the quarter in April. Yet gold fund
managers, and gold investors, had high expectations
for the rallying metal this spring. Many of the metal's
backers, expecting Nasdaq havoc and accounting
blow-ups to drive Main Street investors away from the
stock market and into gold, had forecast a
$325-an-ounce or greater price for the start of
summer.

At one point, Middle East turmoil and talk of an all-out
war between India and Pakistan drove spot gold's
price within 70 cents of $330 an ounce, its highest since
October 1999. The metal's June slide took a toll on
gold mining stocks, one of the stock market's biggest
gainers this year.

"Look at Harmony," Bryan said about Harmony Gold
Mining (HGMCY), a South African producer. "It's come
from $18 down to $14. It's been quite an adjustment."

The lucky few investors who owned gold mutual funds
in the second quarter were skittish, taking their profits in
June after some of the funds had produced gains of 80
percent and more since January.

Gold mutual funds are still relatively undiscovered, fund
managers say. Combined, the assets of America's 41
gold mutual funds come to $4 billion, or about the size
of a battered telecommunications company these days,
like Qwest (Q) or Lucent Technologies (LU). Overall,
equity mutual funds of all types amount to $3 trillion.

Ned Davis Research in Florida discovered this month
that the largest gold mutual fund, the $750 million Fidelity
Select Gold Fund (FSAGX), accounted for less than 4
percent of the assets of all the Fidelity Select funds.
The 13-year mean is 9.4 percent. "Growth funds are no
longer greatly over-owned and gold funds are no longer
greatly under-owned, but the reversion to the mean
probably has further to go," Ned Davis said in his firm's
report. The Fidelity gold fund is up 49 percent since
Jan. 2.

Still, precious metal fund managers say Main Street
investors are slowly warming up to gold. Fund managers
report growing interest from individuals who have
become disenchanted with the overall stock market,
which has erased about $1.5 trillion of wealth since Jan.
2.
John Hathaway is a leading proponent of the view that
gold's price, manipulated by hedged producers, bullion
and central banks, is headed far higher in coming years.
Hathaway manages the Tocqueville Gold Fund (TGLDX),
which rose 14 percent in the June quarter and is up 66
percent since Jan. 2. "Our fund has grown quite nicely,"
Hathaway says from New York. "Assets are about $140
million and we have had daily inflows averaging around
$1 million, mostly from places like Schwab. So I assume
it's mainly retail."

Hathaway says larger investors are also showing interest
in the rallying gold group, albeit slowly. "I have made
presentations to three or four institutions who have shown
interest, but so far have not made any commitments,"
Hathaway says. "I attribute their inaction partly to the
natural sclerosis of the committee process, partly to the
concern that they are too late, and partly to the difficult
ramifications of concluding that there is still significant
upside -- the threat that would imply to everything else
they own."

U.S. Global Investors Funds' World Gold Fund
(UNWPX) topped the gold funds in the second quarter
with a 32 percent gain. The $127 million fund is up 97
percent since January, reflecting the tremendous rally
in gold-mining shares. Yet at one point in June, the fund
was up 114 percent.

Eric Sprott of Sprott Asset Management in Canada
manages some $750 million, much of it in gold assets.
Unlike most U.S. mutual funds, Sprott is a buyer of actual
bullion, not just gold-mining equities.

"Disappointment is the theme for most gold investors
right now, but they have nothing to be ashamed of,"
Sprott says from Toronto. "Gold is still the best-performing
asset class this year." In the United States, the net asset
value of 41 gold mutual funds has gained almost 60 percent
as a group since Jan. 2.

Growing disgust with traditional stocks, and a continued
decline in the U.S. dollar, will spark another gold rally,
Sprott says. "The endgame is to own gold because
ultimately it will outperform everything, including the
gold-mining stocks," he says.

Adrian Day, a Maryland money manager who has spent
more than two decades investing in gold mining companies,
says gold mutual funds are often volatile and leave
investors unhappy. "By their nature, mutual funds in volatile
sectors such as gold -- or for that matter emerging markets
-- tend to underperform the sector," Day says. "This is
because investors tend to pile in at the top and withdraw
money at the bottom. The result is that the poor manager
has to buy at the top and sell at the bottom."

Day says one standout in the mutual fund field is First Eagle
SoGen Gold Fund (SGGDX). The $62 million fund is up 82
percent since Jan. 2 and sports an annualized return over
three years of 34 percent, best in the field. Next best over
three years are Hathaway's Tocqueville fund and Bryan's
Gabelli fund, each with 29 percent annualized returns.

"The First Eagle manager, Jean-Marie Eveillard, has
done a superb job during the bad years," says Day. "He
may not be the top-performing fund in a strong up market,
but he'll participate and at modest risk."