Dian's Column
Dian's Archive



Amidst the market's downturn, gold funds glitter

Sift through any rubble and you're bound to find something that shines. For the mutual fund investor, that would be gold funds.

The trading week beginning Monday, September 17 and ending on Friday, September 21, was the worst in 61 years. While the Dow Jones Industrial Average reported a percentage point loss of 14.25 percent, and point drop of 1,369.70, when Lipper's mutual fund performance reports came out on Thursday, September 20, the news was ugly but not quite as grim: The average stock fund was down more than 10 percent.

But down didn't mean everything was out. Of the 44 different equity and mixed equity investment objective categories, there was one bright spot---gold oriented funds. For the week ending Sept. 20, the average gold fund was up 3.97 percent; over the prior four weeks it was up 1.99 percent; and year-to-date, up 17.36 percent.

Frank Holmes is the CEO and chief investment officer of U.S.Global Investors, a San Antonio, Texas based fund family offering two different gold funds, U.S. Global Investors Gold Shares Fund (USERX), up 8.05 percent year-to-date, and, U.S Global Investors World Gold Fund (UNWPX), ahead 4.75 percent through September 21.

Holmes will be the first one to tell you that the performance of gold runs in volatile cycles; it doesn't have a place as a core holding in one's portfolio; and, that investors would be wise to limit their exposure in this asset class to between five and 10 percent of their total holdings. But if you're wondering whether or not it's too late to play gold's game this time around, Holmes' thinks otherwise. Understanding the risks involved when investing in any type of sector or specialty fund, what follows are some of his reasons why:

Q: What drives a gold cycle?

Holmes: Two things. First and foremost, when short-term interest rates fall to the inflation rate so that you have a zero real interest rate, gold takes off.

Then, if you have a financial crisis in which the government has to put money into the system to bail out some part of the economy, you'll see a sustainable move in gold. And that's the history of it.

Now, we have the government bailing out the airline industry, because of the World Trade Center disaster. So Greenspan has to keep rates down to get the economy turned around and he has to put money into the system to make sure it's going. And that is the best fundamental backdrop for a rising gold market.

Q: How long do you think the gold rally will last?

Holmes: For the next six to 12 months and until you start to see the interest rates on T-bills rising. Then it will be time to start to lighten up on your gold holdings.

Q: Is war bullish for gold?

Holmes:It's only good if you're in inflationary times. So, if the government had to borrow a lot of money say to buy arms, and it started running big deficits to fund a war, then war is good for gold.

Q: Do you think that's possible?

Holmes: It's possible but I'm not going to bet on it unless I see it happening. What I am going to bet on is, when interest rates are falling and the government is putting billions of dollars into the economy--- and is committed to bailing out the airlines business as is being done right now-- I know that in the past that kind of scenerio has always bullish for gold.

If past market performance is any indication of the future, here's some good news.

Ibbotson Associates, a Chicago-based investment research company, has put together a chart showing how the U.S. market-- as represented by the S & P 500 --has performed after four national tragedies: The attack on Pearl Harbor in 1941; President Kennedy's assassination in 1963; when Iraq invaded Kuwait in 1990; and the World Trade Center bombing in 1993.

In all four instances, three years afterwards the S & P 500 had rallied substantially. For example, one month after the attack on Pearl Harbor, the S & P 500 was up 1.6 percent; six months later it was down one percent; one year later, up 20 percent; and three years afterwards up over 81 percent.

To view the chart and see how the S & P 500 performed during various time frames for all incidents, visit www.allaboutfunds.com.

To read more articles, please visit the column archive.

[ top ]