Play Rising Gold Prices With This Fund
With stocks in free-fall, many investors are searching for solid ground, and few investments are more solid than gold. After all, an ounce of gold today will still be an ounce of gold in ten years, even if the intervening years bring financial Armageddon. Plus, the yellow metal offers a hedge against a falling dollar and inflation -- neither of which is an immediate concern, but both of which could be major headaches over the long term. At $912 an ounce on March 3, gold isn't far off its all-time high of $1,030, which it struck one year ago. But many experts believe it still has plenty of potential to rise.
John Hathaway, manager of Tocqueville Gold (symbol TGLDX), says investor fear could drive prices higher for years to come. "As long as the banking system is in shambles, the economy is uncertain and stocks are performing poorly, there's going to be a bid for gold, primarily from people trying to protect capital," says Hathaway, who has run the fund since its inception in 1998.
Over the past year, the price of gold has fallen 7%. But stocks of mining companies -- and gold funds generally invest most of their assets in mining stocks -- have done far worse. Over the past year through March 3, Tocqueville Gold plunged 43%, putting it roughly in the middle of the pack among precious-metals funds. Over the same period, Standard & Poor's 500-stock index surrendered 46%.
This is not the way things are supposed to work. Stocks of gold producers normally behave like bullion on steroids. Their prices usually soar when gold is rising and typically plunge when it's falling. "Gold shares are considered to be riskier than gold itself," Hathaway explains. "They bear all the considerable risks of mining and, while connected to gold, are not precisely the same asset class as gold." So, he says, in the second half of 2008 and early 2009, a period marked by extreme aversion to risk, investors drove the prices of the stocks down much further than the price of the metal.
Because of the stocks' poor performance, Hathaway thinks mining shares are now undervalued relative to bullion. Usually, he says, the benchmark Philadelphia Gold and Silver Sector Index (XAU) is valued at about 25% of the spot price of gold. But the index, which closed March 3 at $113.19, is now trading at about 13% of the price of gold. By that reckoning, Hathaway thinks mining stocks could gain 40% to 60% even if the price of bullion held steady.
But Hathaway thinks gold is heading higher. "We've just had the first decade since the 1930s of zero returns in financial assets," he says. "Psychologically, it takes a long time for that to sink in." And even if the market were to turn around tomorrow, stocks would show negative trailing long-term results for years to come. He won't give a price target, but he says if present investor fear persists then the price of gold could advance into the "multiples of thousands" over the next three to four years.
If you simply want to own gold, one of the easiest ways to do so is to invest in the exchange-traded SPDR Gold Shares (GLD). The SPDR product is a trust, not a fund, as each share represents an ownership claim on roughly one-tenth of an ounce of gold stored in the vaults of the Trust's custodian, HSBC. Expenses are a modest 0.40% per year.
But over the long term, Tocqueville Gold has far outpaced bullion. The fund has returned 17% annualized over the past ten years through March 3, compared with an annualized 12% advance in the price of gold and the S&P 500's decline of 4% a year. Tocqueville Gold's annual expense ratio is 1.43%, which is about average for the category.