Fund Watch
Play Rising Gold Prices With This Fund
John Hathaway, manager of Tocqueville Gold, says fretful investors could drive the price of this precious metal higher for years to come.
By Elizabeth Ody, Associate Editor, Kiplinger's Personal Finance
March 4, 2009
With stocks in free-fall, many investors are searching for solid ground, and few investments are more solid than gold. After all, an ounce of gold today will still be an ounce of gold in ten years, even if the intervening years bring financial Armageddon. Plus, the yellow metal offers a hedge against a falling dollar and inflation -- neither of which is an immediate concern, but both of which could be major headaches over the long term. At $912 an ounce on March 3, gold isn't far off its all-time high of $1,030, which it struck one year ago. But many experts believe it still has plenty of potential to rise.
John Hathaway, manager of Tocqueville Gold (symbol TGLDX), says investor fear could drive prices higher for years to come. "As long as the banking system is in shambles, the economy is uncertain and stocks are performing poorly, there's going to be a bid for gold, primarily from people trying to protect capital," says Hathaway, who has run the fund since its inception in 1998.
Over the past year, the price of gold has fallen 7%. But stocks of mining companies -- and gold funds generally invest most of their assets in mining stocks -- have done far worse. Over the past year through March 3, Tocqueville Gold plunged 43%, putting it roughly in the middle of the pack among precious-metals funds. Over the same period, Standard & Poor's 500-stock index surrendered 46%.
This is not the way things are supposed to work. Stocks of gold producers normally behave like bullion on steroids. Their prices usually soar when gold is rising and typically plunge when it's falling. "Gold shares are considered to be riskier than gold itself," Hathaway explains. "They bear all the considerable risks of mining and, while connected to gold, are not precisely the same asset class as gold." So, he says, in the second half of 2008 and early 2009, a period marked by extreme aversion to risk, investors drove the prices of the stocks down much further than the price of the metal.
Because of the stocks' poor performance, Hathaway thinks mining shares are now undervalued relative to bullion. Usually, he says, the benchmark Philadelphia Gold and Silver Sector Index (XAU) is valued at about 25% of the spot price of gold. But the index, which closed March 3 at $113.19, is now trading at about 13% of the price of gold. By that reckoning, Hathaway thinks mining stocks could gain 40% to 60% even if the price of bullion held steady.
But Hathaway thinks gold is heading higher. "We've just had the first decade since the 1930s of zero returns in financial assets," he says. "Psychologically, it takes a long time for that to sink in." And even if the market were to turn around tomorrow, stocks would show negative trailing long-term results for years to come. He won't give a price target, but he says if present investor fear persists then the price of gold could advance into the "multiples of thousands" over the next three to four years.
If you simply want to own gold, one of the easiest ways to do so is to invest in the exchange-traded SPDR Gold Shares (GLD). The SPDR product is a trust, not a fund, as each share represents an ownership claim on roughly one-tenth of an ounce of gold stored in the vaults of the Trust's custodian, HSBC. Expenses are a modest 0.40% per year.
But over the long term, Tocqueville Gold has far outpaced bullion. The fund has returned 17% annualized over the past ten years through March 3, compared with an annualized 12% advance in the price of gold and the S&P 500's decline of 4% a year. Tocqueville Gold's annual expense ratio is 1.43%, which is about average for the category.
Reader Comments (9)
Posted by: minnie at 03/04/2009 07:37:56 PM
i purchased shares this fund back in 2003&2004...i have seen my investment of 8010 go down to 6775 as of last month's statement.. this fund is no better then anything else I own right now.. I am just too scared to sell!! the fees of 1.43 only add insult to injury!!
Posted by: arkok_99 at 03/05/2009 02:19:19 PM
I'm curious and skeptical but want to buy gold. Not sure if I get you...You start off saying to own gold but then say to do this buy Gold "Funds". The gold buying books I read say buy gold directly. The funds are NOT the same as owning Gold directly and seem to have an added level of risk + cost. And what if there is a Madoff type fund manager...he can say he has the largest gold mine in the planet Earth backing his fund but who is checking on him? Who scrutinizes what these funds actually own??
Posted by: Elizabeth Ody at 03/06/2009 11:55:36 AM
Hi Arkok, this is the author of the story. You're absolutely right that buying a gold fund is not the same as buying gold itself. I think the argument for investing through a fund, such as Tocqueville Gold, is that the manager has provided better historical returns than has the price of gold. I do like the iShares product for exposure to bullion because it is low cost and user friendly. And as I said in the article, shares of GLD do represent literal ownership of bullion. But if you want to own something you can actually kick you could find a dealer in your area, with a little research, or go through an online dealer (I like www.gold101.com and www.blanchardonline.com). Regarding the second part of your comment, Morningstar recently published an excellent article on why Madoff-type fraud is unlikely to occur in the world of mutual funds. I can give you the url in this reader comment box, but you can find it on the Morningstar Web site. Hope this helps.
Posted by: worriedinvestor100 at 03/06/2009 12:49:58 PM
I agree with arkok_99. Tell us how to own gold directly without paying heavy commissions, and having assurance of its physical existence and protection without us having to take delivery and put it under our mattresses. And don't make fun of us for our concerns -- there was a time in our own country when holding gold was made illegal by our paternalistic government.
Posted by: Rodger Malcolm Mitc at 03/08/2009 11:00:14 AM
Nations of the world no longer are on any form of gold standard, so gold has no relationship to money. It merely is a commodity, similar to copper, tin, uranium, diamonds or pure water. Gold has limited utility, mostly for jewelry and less for dental and electrical uses. The world easily could live without as much gold as it already has, let alone any new ore that is recovered. So what is there about gold that makes people believe it is a safe investment? I suspect one day, someone will wake up and say, "Why am I paying storage fees for a nearly worthless product that pays no interest and is hard to ship and expensive to insure?" Purchasers of gold seem to rely on the "greater fool" theory of investment...
Posted by: KEVIN J KROUPA at 03/11/2009 11:30:26 PM
This is a Question I commented on a few months ago.Five years ago I had a rather large sum of money to invest and I bought both Silver and Gold bullion in coin and bar forms.Gold was around $400 an ounce and silver was $6.00. Last year when gold hit $1050, I sold a few pounds of each,earning $650 per ounce of gold, and $19.00 an ounce silver, earning $13.00 an ounce,all without paying one cent fee or commision.I had physical control at all times, so there was no shock or surprizes when I wanted to sell. In the same time frame, my stock portfolio tanked and I lost alot of its paper value.I guess to each his or her own.
Posted by: WSM at 03/16/2009 04:02:58 PM
In response to 'worriedinvestor100', Ms. Ody wasn't making fun of anyone. On the contrary the article is a concise and informative summary of different ways for individual investors to gain exposure to gold. I'll go ahead and make fun of you, though. "Tell us how to to own gold directly without paying heavy commissions, and having assurance of its physical existence and protection without us having to take delivery and put it under our mattresses..." Sounds like you're asking for a free lunch. Also, mutual funds are regulated by the SEC and FINRA, unlike Madoff. If you really believe in the long-term appreciation in gold, a fund such as the one Ms. Ody suggests is the best way to play it, since it is a levered play on physical ownership.
Posted by: anon at 03/22/2009 08:24:25 PM
To Roger: The difference is that gold is denser than any of the commodities you listed (therefore takes up less space) and does not corrode (diamonds do not either but their valuation is based too much on subjective factors whereas gold's purity and mass can be objectively and inexpensively quantified). Another benefit is that it sports a long term correlation to stock returns of near zero, which is even less than bonds. Portfolios of assets with low correlation to each other will have less standard deviation than those with high correlations (all things being equal). To Ms. Ody: My beef with funds like these is that they still have somewhat high correlation to stocks (especially when stocks are getting smashed which is precisely the time when non-correlated assets are desired), although they are more closely correlated to gold prices. Going back to Oct 2004 (earliest common period for all three funds used in this example): SPY and GLD have a correlation of .04, SPY and TGLDX have a correlation of 0.38, and GLD and TGLDX have a correlation of 0.79. As far as Mr. Hathaway's comments are concerned I'd like to hear more about this so-called 25% relationship between XAU and spot gold because it sounds interesting. (what type of regression analysis he did to support this claim, is there any logical basis to the relationship, and if so what is TGLDX's beta to XAU's underying index)
Posted by: Gilliland at 09/16/2009 10:17:24 AM
Rodger is right for sure. I'm dumping all of my gold. Paper money is where all of your wealth is. You can use it to blow your nose, start a fire...I'm converting everything to paper money.