Another Way to Play Gold

06/15/2010 1:00 pm EST

Focus: FUNDS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Benjamin Shepherd, associate editor of Personal Finance, says a mainstream gold mutual fund has had better returns than the yellow metal itself.

Gold prices have staged a big rally over the past 12 months, rising about 10% on lingering concerns about the strength of the global economy. The intense interest China’s central bank has shown in the metal has also helped.

But the better than 18% return Fidelity Select Gold (FSAGX) has generated over that period is still impressive. Although I expect gold to head higher, fund manager Joseph Wickwire isn’t quite as bullish as I am—but he’s in the ballpark.

Wickwire constructs his portfolio based on his long-term outlook for gold prices: When he’s bullish he’ll overweight junior exploration and production names; when he’s less optimistic, he leans toward established producers such as Barrick Gold (NYSE: ABX) and Goldcorp (NYSE: GG).

Based on the fund’s most recent quarterly report, Wickwire has added to positions in Goldcorp, Barrick, and Newmont Mining (NYSE: NEM) and dialed back exposure to juniors. Despite these shifts, the fund remains overweight on juniors, albeit not as dramatically as in the past.

What puts Wickwire a cut above other managers is that he eschews speculation and momentum trading, avoiding the hot new start ups. Generally speaking, he doesn’t buy unless an operation’s reserves provide the foundation for a shiny future. This focus on quality can weigh on performance in hot markets, but it also limits downside risk when gold isn’t considered the most attractive asset class.

And Wickwire’s investment mandate doesn’t restrict his purchases to gold-related stocks. He occasionally dips into precious metals such as platinum, palladium, and silver and has been known to make bets on coal and steel. But these days, Wickwire remains bullish about gold prices over the long term.

The metal itself might be soft, but the fundamentals remain strong: Production is falling, but demand should continue to pick up in a world where key economies face large trade and fiscal deficits.

Although the fund has its ups and downs—it often lags its category in bull markets—Wickwire’s commitment to quality has generated impressive returns over the long haul. In fact, the fund’s performance ranks it in the top third of its category on a three- and five-year basis.

A track record of success and an extraordinarily low expense ratio of 0.94%—the average is 1.5%—make it a definite winner in the precious metals space.

With more upside for gold prices, Fidelity Select Gold remains a Buy. Because the fund holds only about 5% of assets in bullion, focuses primarily on miners, and occasionally owns names other than gold producers, prospective investors should be forewarned that it isn’t a perfect proxy for gold prices.

And share prices of producers are about twice as volatile as the spot price of gold, so the fund’s net asset value does fluctuate.

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