Moreover, he argues that a well-run precious metals fund should be considered as part of an institutional or individual portfolio. "We should be seen as a legitimate option, as a minor, alternative asset, just as oil or real estate or private hedge funds are viewed," he says. "This is insurance that many people should have."
First Eagle is a pure play. It owns gold bullion and very little else, rather than a more diversified approach such as owning the gold mining stocks. Some of the latter, Eveillard explains, are often "involved in exploration, but not yet production."
Vanguard's precious metals fund, for example, is more diversified because it invests in more than one metal and focuses on more liquid, long-term companies. First Eagle invests primarily in gold and on producers who don't hedge their exposure to gold prices. The contrast between these two funds can be seen in their betas. First Eagle has one of 0.02, while Vanguard Precious Metals is 0.47.
Both approaches have been shining over the past five years. Still, Brennan argues that the five-year numbers have been "an optical illusion" because the last three years have been the biggest part of these numbers. Whichever end of the precious metals spectrum a manager uses, it has been happy days for this sector for several years.
So does that now mean that the precious materials fund is now more than a form of speculation? And does it mean that advisors should now take another look at precious metals funds for a part of their client portfolio?
"I don't think so. These funds, to me, remain more a kind of speculation than investment," warns Lynn Russell, an analyst with Morningstar. She added that the ten-year numbers of these funds are "not nearly so good as the five-year numbers."
Here the precious metals critics have their strongest arguments. These funds lag the S&P 500 by about2% on a ten-year, annualized basis through the end of September 30 (2.48% versus some 10%). Greenbaum cautions that 15-and 20-year numbers will be even worse. Russell's argument is the same. She says that precious metals funds are inevitably going to underperform and start providing more comic material for "Wall Street Week."
Eveillard agrees that precious metals can be seen by some as a speculation, but he stresses there are many ways of looking at this kind of investing. Ultimately, precious metals funds are a hedge, he argues. But they are less a hedge against runaway inflation as against something else: "A post-bubble economy that takes many years to recover, more than any of the central bankers predicted."
Value Line's Brewer, who says his company recommends precious metals on a very limited basis and for no more than 2% of a portfolio, cautions that this kind of investment is at a dangerous point. "Their performance over the last few years has been very good. That is precisely why you could get misled by how dangerous these funds can be," Brewer says. "There are few investors who I would recommend these funds for, because of how streaky they can be. There are other ways of hedging against the market."
The funds are only appropriate for those who can handle the most volatile of investments, Brewer says; REIT funds would be a better alternative for those seeking a hard asset alternative to standard equities.