Gold glowed when stocks dimmed.
Gold is suddenly glowing again. And this time, one can't call it a one-year fluke or blame it on high gold prices or runaway inflation rates. That's because precious metals funds, which in the past have generally been one-year wonders and the target of endless jokes on Wall Street Week, have suddenly achieved good long-term numbers.
Precious metals funds, for example, were up 36.3% annualized over the three-year period that ended September 30, according to Morningstar. But these funds can go farther out than that and still show strong numbers. Indeed, in the five-year period through September 30, the median performance of precious metals funds was plus 14.9% on an annualized basis. Those numbers were decidedly better than the average domestic stock fund. General domestic stock funds, in the same five-year time frame, were ahead on average only 3.9%.
"We are experiencing a natural resources global bull market," says Frank Holmes, chief investment officer for U.S. Global Investors, which runs several gold funds. Typical is U.S. Global Gold Shares, which was up 42.6% for the year ended September 30. The three-and five-year numbers were also impressive-plus 36.2% and 10%.
Nevertheless, precious metals skeptics abound. "I would say a three-year period of viewing these funds is just tomfoolery and a five-year period also isn't enough," says Gary Greenbaum, a certified financial planner licensee in Old Tappan, N.J. Greenbaum will not use precious metals funds.
Nevertheless, another advisor concedes that, regardless of the debate over their effectiveness, precious metals funds have become popular. "I've been getting lots of phone calls about them recently," says Gary Schatsky, a financial advisor who heads his own firm in New York. This kind of investment-no matter the approach to precious metals, whether a fund uses just one or multiple metals-has been racking up big numbers across the board, notes one fund observer.
"Even the worst of these funds, over a five-year period, was up about 8%," comments Gregg Brewer, a fund analyst with Value Line. The category obviously has benefited in part from this year's run-up in the price of gold, which has gone from about $320 an ounce earlier this year to about $380 recently.
U.S. Global Funds' Holmes says "it feels like $400 an ounce by the end of the year." And he adds that the price will likely be $500 in two years. Holmes' rationale? With the United States on a war footing, with new strong demand from China and with the overregulation of the U.S. economy because of new environmental factors, the re-creation of the high inflation of the 1970s is now "inevitable."
Other precious metals funds executives, citing the weakness of the dollar along with the poor performance of the stock market in a three-year span through last year, argue that gold and precious metals are proving their case as an insurance policy against hard times. "Gold is simply a good diversifier. It is a diversifier that, if conservatively used and put in the right portfolio, will give an investor great protection," says Joseph Brennan, an executive vice president with the Vanguard Group, overseeing its Vanguard Precious Metals fund. That fund was closed earlier this year, but its five-year number is outstanding: up 18.2% annualized over five years through September 30, which puts it about 3.5 percentage points ahead of the average fund in this group.
But even though the group numbers have been great, the way in which these funds have turned in this performance is as noteworthy as the numbers themselves. This kind of investing is not for those with high blood pressure or sensitive stomachs.
For example, at the beginning of this five-year period, in 1998, precious metals funds were down 10.4% for the year. In the following year they gained 6.7%; both numbers trailed the S&P 500 by a wide margin. In 2000, it was another disappointing year for precious metals funds. They lost 16.6%. Jokes about these funds were rampant.