Sensitivity to gold price swings. Gold mining stocks also react to changes in the price of gold, which can bounce around with alarming swiftness. After reaching a record high of $1,900 in September 2011, prices dropped as investors began liquidating their holdings, a possible sign that they've become skeptical about how much more prices can increase. As of mid-April, the metal was selling at around $1,600 an ounce.
"Historically, gold mining shares have had a high and positive correlation to the price of gold, and despite the recent decoupling, that will likely continue to be the case over the long term," Land says.
Currency movements. In general, if the U.S. dollar rises against a foreign currency, investments traded in that currency will go down in value because they will be worth fewer U.S. dollars. Because the Franklin portfolio invests mainly in non-dollar denominated foreign securities, a strengthening dollar has harmed its performance over the past year. However, that means if the U.S. dollar weakens against some foreign currency, investments traded in that currency would increase in value and enhance the fund's returns.
High costs. Gold mining companies face labor shortages and rising wage demands, both from skilled workers, such as geologists and engineers, and from unionized mining workers. Equipment costs are also rising. "There was a long period where gold prices were so low that companies didn't have an incentive to hire that many new workers," Land says. "But since prices have risen, there has been a hiring rush."
Competition from ETFs. Since 2005, there has also been increased competition for investor dollars from exchange-traded funds, which provide a more direct play on gold prices than mining stocks. Land sees the popularity of these investments as a positive, since they help support gold prices by making it easier for the average investor to make bets on the price of the yellow metal.
With the ETFs readily available and transaction costs for gold bullion down significantly over the last few years, stocks of gold mining companies "are now viewed as more than a proxy for gold prices," he says. "Investors want to see some value in the companies they are buying."
For contrarians willing to take on the risks inherent in the stocks in exchange for historically low valuations and a shot at capital appreciation if a rebound takes hold, the Franklin fund offers a mix of gold and precious metals mining companies from around the world with multiple mines, strong production and reserves, and active exploration programs. About half of his companies are based in Canada, with most of the rest in Australia, South Africa and the U.K.
Although the portfolio invests in companies located in different countries, Land points out that many of them, regardless of their home base, have operations in mineral-rich but politically unstable locations such as Africa. "A company's base of operations does not necessarily strip out political risk," he says. "In Australia, there are discussions about increasing taxes on royalties from mineral deposits."
Nonetheless, he sees potential growth in companies such as Australia-based Newcrest Mining, one of the world's leading gold producers and the fund's largest holding. The company boasts a portfolio of predominantly low-cost, long life operating mines; a string of projects in the pipeline; and expertise in block caving, a mining method in which the ore collapses from its own weight. Land says this technique enhances production and offers lower costs than traditional open-pit mining.
The fund also owns a smattering of platinum and palladium miners, including South Africa's Impala Platinum Holdings. Platinum prices have followed a pattern similar to that of gold, reaching a high of $1,904 an ounce in August but then settling to about $1,600 an ounce by April as investors mulled the possibility of a slowdown in world economic growth. Such a retrenchment could harm the sale of automobiles and electronic goods, which use platinum as a key component. Land believes that limited supplies, coupled with a strong demand for catalytic converters to satisfy cleaner worldwide emission standards, will help both the price of industrial metals and Impala's stock.