Gold Fever?

Gordon Pape does have some excellent insight. His most recent piece focuses on the prescious metal, Gold, and is worthy of a read.

Gold fever

by Gordon Pape

The price of bullion has experienced a huge run-up in the past decade. In 2000, you could have purchased an ounce of the yellow metal for less than $300 (U.S.). By early 2008, it had broken through the $1,000 an ounce barrier, only to pull back to below $750 in the fall of that year. But once stock markets went into a deep dive and the recession took hold, bullion rallied strongly. It moved back over $1,000 in late summer 2009 and by year-end had topped the $1,200 mark. After another pull-back early this year, it recovered its momentum and hit a record high of over $1,250.

Investors who had added precious metals funds to their portfolios were delighted as the profits piled up. The average fund in this category advanced almost 38 per cent in the year to July 31 and several returned more than 40 per cent.

There could be more gains to come. I have never been a gold bug but I now think there is at least a 50-50 chance that bullion could top $1,400 by the end of 2011. Some forecasts are much more aggressive; one commentator pointed out that in order to match the $850 price reached in the 1980s in inflation-adjusted terms, gold would have to trade around $2,250. That is a real possibility, he suggested.

While I don't expect we'll see that level any time soon, gold appears to have more upside at this stage. One reason is the on-going weakness of the American dollar. Bullion and the greenback have an inverse relationship and Washington's unofficial devaluation of its currency has been one of the main drivers in gold's rise. There is no reason to expect that policy to change soon as the U.S. struggles to raise its exports and recapture lost overseas markets. A weaker currency will help greatly.

In these circumstances, you may want to consider adding a precious metals fund to your portfolio, if you don't already have one. There are two in particular that I like.

RBC Global Precious Metals Fund. This is a long-time favourite of mine (my family owns units) and one of the best in the category. Chris Beer has done a great job with the fund, producing handsome profits in every year but two since he took over the managerial duties in 2003.

Gold fell into a slump in 2004, Beer's first full year at the helm, and like all funds in the category this one struggled. However, it rebounded strongly in 2005 and 2006, gaining 25 per cent and then 52 per cent. It tailed off in 2007 and after gold passed US$1,000 an ounce in March 2008, the bottom fell out of the market and the fund ended the year with a loss of 26.2 per cent. But 2009 was a different story with the fund gaining almost 66 per cent and it added almost 30 per cent more in the first eight months of 2010. The one-year return to July 31 was 37.6 per cent but the real eye-popping number is the ten-year average annual compound rate of return of 28.4 per cent. Long-term results of that magnitude are almost unheard-of in the fund industry.

The portfolio is heavily concentrated in Canadian mining stocks (86 per cent) with Australia, the U.K., and the U.S. the only other significant geographic positions.

Sentry Precious Metals Growth Fund/Class. This fund turned in an amazing performance over the 12 months to July 31 with a gain of 67.6 per cent. The 10-year average annual compound rate of return is 22.9 per cent, not as good as that of the RBC entry but impressive enough.

The portfolio is quite different from that of the RBC fund. You won't find any of the major companies such as Agnico-Eagle and Goldcorp in the top 10 holdings (they account for about 10 per cent of the assets in the RBC fund). Instead, manager Kevin MacLean places large bets on a few small companies. For example, the largest single holding at more than 20 per cent of the portfolio is Semafo Inc., a Canadian company that operates three gold mines in West Africa. The fund also has large positions in Red Back Mining (12.2 per cent of assets) and Golden Star Resources (10.8 per cent). Those stocks have all been doing well but that kind of concentration makes this fund riskier than one which is more diversified. So this fund is likely to be much more volatile – it is not for faint-hearted investors who will undoubtedly feel more comfortable with the RBC fund.

Of course, precious metals funds can be volatile at times so they won't be appropriate for anyone who is extremely risk-averse. But the long-term returns speak for themselves – the 10-year average annual gain for the category is 21.4 per cent. So the potential rewards are high but you must be willing to live with the inevitable ups and downs. Talk to your financial advisor about whether this type of fund is right for you.

by Gordon Pape

www.saveriomanzo.com

About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.
In addition, I truly belive in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.


About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.