When Gold Shines, It's Best Held In Dribs And Drabs

Look inside the portfolio of U.S. Global's Global Resource Fund ( 800-873-8637)---up nearly 44 percent year-to-date through September 17, according to Morningstar---- and you'll find a diversified portfolio that's getting some of its dazzling performance thanks to the gold stocks it holds.

Frank Holmes, CEO of U.S. Global Investors and the chief investment officer on the fund, says that gold always performs well when the discount rate--- the interest rate that the Federal Reserve charges member banks for loans--- is below the rate of inflation.

"Gold has always been an inflationary/deflationary hedge, " he says. "But when you earn less on your money market fund---when inflation is 2 percent and you're getting paid 1 percent--- you're losing money keeping cash. When that happens, gold is a good investment."

Something else driving the price of gold up has been an increase in the exploration of this precious metal. After a five-year drought in gold prices, exploration started picking up again at the beginning of this year. "But here's the dilemma, " says Holmes. " It takes seven years from the date of discovery until you get an ounce of new production on the ground."

There is more to the Global Resources fund (PSPFX) than gold, however. Currently, the fund's portfolio holdings are divvied up like this: 35 percent of its assets are invested in basic metals, lumber and some chemical stocks; 30 percent in gas and oil stocks; and 25 percent in gold stocks.

Here's more about the U.S. Global Investors Global Resources fund from Holmes:

Q: Since you've become the fund's chief investment officer, you've changed how the fund is managed. Tell me about that.

A: I took over the role of CIO a couple of years ago and am very quant driven. So, one of the things I did was bring in a lot of quantitative modeling to it. For instance, the other day when gold jumped five or six dollars , we were a net seller.

Q: Why?

A: Because mathematically, whenever gold jumps $5 to $7 in a day, and 10 bucks over a week, historically, with a 97 percent probability, it will correct. So we use a lot of that kind of statistical modeling.

Q: What are the names of a couple of the fund's holdings?

A: One company that we own is called Enerplus. It's a royalty trust that pays a monthly dividend and that stock's price correlates with gas prices. We've also invested in Wheaton River Minerals, a Canadian gold and copper mine.

Q: Some of the other industries that the fund invests in include copper and mining, pipelines, chemicals and plastics. Anything in particular driving those prices up?

A: There are several factors, but the biggest is China, China and China.

China is a huge sucking engine of the world for natural resources right now. Their August industrial production was up 17 percent---almost 10 times greater than American industrial production. They've increased their oil and gold stock piles and are net importers of copper, and platinum as well as gold.

Plus, they have 25 percent of the world's construction cranes and car sales---cash, not (bought) on credit---saw an increase of 100 percent over the past year. So what we are seeing is a huge structural change in a country that has a policy to become a major economic force in the world.

Q: What are the risks of investing in this fund?

A: The risk is that we go into a severe recession. Right now we've got the largest fiscal and monetary stimulus package in our history in place to get the economy going again. But what could change that is if interest rates spike up and there's a slow down in the economy. If that were to happen it trickles down and if things like housing starts were to slow, you wouldn't need lumber for building or copper for air conditioning or plumbing.

Q: Who is this fund ideally suited for?

A: It's for the investor who wants to diversify their portfolio holdings. We suggest gold and natural resources make up 5 to 10 percent of a portfolio.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.