A "Stack" of Gold...

08/12/2005 12:00 am EST


James Stack

President, Stack Financial Management

Jim Stack focuses on sound risk assessment as the core of his money management and portfolio decisions. Thus, while he will reach for growth when appropriate, he also focuses on defensive positions. Here, he looks at gold as a portfolio hedge.

"We view gold a valuable part of our defensive strategy. Since April 2001, the price of gold has risen over 70%. Much of this is due to a dramatic weakening in the US dollar, which has fallen 24% since early 2001. Historical analysis shows that a sharp increase in short-term interest rates, such as we’re experiencing today, tends to have a powerful stabilizing effect on the falling dollar. Thus, while downward pressure on the dollar may ease as interest rates rise, we see little risk that the dollar will appreciate dramatically given the considerable imbalances in today’s economy.

"Additionally, there are other reasons to consider a gold hedge, such as increasing global geopolitical tensions, potential terrorist attacks, and renewed inflationary pressures. Since gold investments are viewed as a repository of value, investors flock to them in times of crisis. Think of our limited gold position as part of a broader insurance policy and as part of a defensive strategy. Mutual fund investors or those who want diversification within the sector should consider our latest featured investment, American Century Global Gold (BGEIX).

"In choosing a gold mutual fund, we are looking for one which invests predominantly in gold mining companies. American Century Global Gold is one of the few pure gold funds in this category and has been one of our top gold fund recommendations for many years. The fund began in 1988 and now manages over $550 million in assets. Since 1992, the fund has been managed by Bill Martin, giving him one of the longest tenures in the category. Mr. Martin works with co-manager Joseph Sterling, who has been a member of the Global Gold team since 1995. Both managers have been employed by American Century for over 15 years.

"Together, the managers run a fairly concentrated portfolio of 62 stocks. The top ten holdings comprise over 60% of the portfolio, and the two principal positions, Newmont Mining and Barrick Gold, represent 20%. The fund concentrates on larger cap gold stocks with over 85% of the portfolio in mid- to large-cap issues. Though smaller exploration stocks may rally more when gold prices increase, this fund should keep pace with the broader gold market but with less volatility. Management is not constrained to investing in any one geographic region and typically holds companies from North America, Australia, and South Africa. Currently 80% of the stocks are foreign domiciled and 20% are domestic.

"We also like BGEIX because it is offered with no load and boasts a very low expense ratio of only .68%, which is one of the lowest in the category. This fund is traded without a transaction fee at most major brokerage houses, though there is an early redemption fee of 1% if sold within 60 days. It is very affordable with a minimum initial investment of only $2,500 for taxable accounts, and as low as $1,000 for tax-deferred and custodial accounts. If American Century Global Gold is not available at your brokerage, investors may substitute Fidelity Select Gold (FSAGX ). Note, however, that Fidelity Select Gold may hold other precious metals producers, like platinum and palladium, in addition to gold.

"Gabelli Gold (GOLDX) is another essentially 'pure gold' investment alternative. We also continue to recommend Newmont Mining (NEM NYSE), the world’s largest gold producer. as our primary gold company for those who invest in stocks. However, those preferring exchange traded funds may use streetTRACKS Gold Shares (GLD NYSE), which invests in gold bullion and should be less volatile than precious metals funds and mining stocks because it tracks the price of gold."

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