Conservative Gains in Gold

04/28/2006 12:00 am EST

Focus:

Ivan Martchev

Editor, Vital Resource Investor and Global Viewpoints

One of my favorite panels at each Money Show is held by the editorial team at KCI Communications. One of those team members is fund expert Ivan Martchev, who is also a specialist in metals. Here’s his conservative approach to the sector.

"When it comes to gold, buying on the faith that someday it will be worth more just doesn’t cut it for us. Instead, just like everything else we buy and hold, there had better be solid proof behind growth expectations and/or we need to be well paid to be patient holders. Knowing more about the metals markets than just the hype and knowing the best and most-consistent means of making and keeping our investments is crucial.

"Gold is money’ are probably the most famous words that J. Pierpont Morgan, the legendary US financier, ever uttered. Gold, which used to be dubbed the anti-dollar investment, is anti-dollar no more. In fact, the US dollar was up substantially in 2005, even though gold also rallied quite nicely. A couple of years ago this would have been unheard of.   Gold, though, has found another interesting friend—oil. Oil has done tremendously well in the past three years. And a big chunk of those numerous petrodollars are being parked in precious metals as a store of value. As long as the energy markets stay strong, the underlying demand for precious metals is likely to surprise to the upside.

"Long-term investors in the precious metals sector need to be concerned about the volatility inherent in precious metals stocks. They’ve had spectacular rallies in the past five years as well as spectacular sell-offs. The most conservative way to invest in precious metals is to own the metals themselves. It used to be that it was difficult to buy gold and silver bullion; but now with the introduction of exchange traded funds, people can invest directly in the metals.

"For our purposes, streetTRACKS Gold Shares (GLD NYSE) and iShares Comex Gold Trust (IAU ASE) are two acceptable ETFs that facilitate the direct ownership of gold bullion and both are buys at current prices for conservative investors seeking gold exposure.  The ETFs pay no dividends and trade at a tenth the price of gold. They charge only 0.40% in expenses for their operations.

"The next low-risk approach is to own a precious metals mutual fund. We’ve been recommending a precious metals mutual fund on and off in both our Growth and Mutual Fund Portfolios for the past several years. This has been a great approach to get conservative exposure to the yellow metal that will allow you to stomach the inevitable pullbacks and not be shaken out every time. Use regular monthly investments after you take an initial position and consistently add to your precious metals mutual fund. No one is smart enough to sell at the top and buy at the bottom.

"Our current Mutual Fund Portfolio holding American Century Global Gold (BGEIX) has been a great performer with annualized returns of 76.8%, 35.7%, and 36.9% during the last one, three, and five years, respectively. The fund holds established precious metals mining companies and some smaller, more leveraged investments. It’s far better to leave a professional manager to venture out into the wild world of gold mining stocks than to do it yourself.

"The most-conservative precious metals fund is Vanguard Precious Metals (VGPMX), which tends to invest primarily in large mining companies and sometimes even takes positions in industrial metals companies that have smaller gold mining operations. The fund boasts similar returns to American Century Global Gold, with the tendency to decline less in selloffs and appreciate less on rallies. Both American Century and Vanguard Precious Metals are buys for investors who want exposure to the precious metals sector. 

"After getting the core exposure to gold in our preferred funds, if you want to buy gold stocks, we steer you toward the largest miners as core investments and the smaller mines as speculations. The only gold stock in the S&P 500 is Newmont Mining (NEM NYSE). If institutional investors who benchmark against the S&P 500 get interested in gold, this is where they’ll go by default. Newmont is primarily a gold producer, but it also produces the silver that many times appears as a by-product in gold mines. Newmont is a buy up to 60.

"Even more conservative is Barrick Gold (ABX NYSE), which has one of the best records for long-term shareholders in the industry. The reason: Barrick sold gold forward when it was declining in the mid-1990s at better prices than its competitors. The same hedging strategy backfired on the way up as Barrick stock underperformed.

"However, on balance, Barrick has been better for its shareholders during long periods of time than most large gold mining stocks. The stock has recently underperformed due to a merger. With hedges coming off, Barrick is bound to play catch-up with the sector. Barrick is a buy under 35 for those seeking additional direct gold exposure."

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