EagleWing Research Newsletter on Gold Funds
March 1, 1999
GLOBAL WATCH
Comparing Funds | Comments
Even after the G7 meeting, currency fluctuations remained a major problem, and the markets seemed to answer by slowly pushing the dollar up. Starting the month at 116 yen, the dollar ended near 120 as the Japanese government decided to buy back some of their own bonds, flooding the market with extra yen in an effort to recharge their economy. In Europe the euro continued to slowly slip, dropping from 1.136 to 1.104 dollars. The potential conflict in Kosovo and Serbia has undoubtedly influenced European currencies somewhat, perhaps pushing the euro down slightly. Meanwhile, the London Exchange reached new highs.
The conditions in Russia remained bleak as the economy struggled, still trying to get aid from the IMF. Brazil's devaluation did not remove the threat of default on some of their international loans, and they were still in line for more IMF aid. Petroleum producers such as Venezuela and Mexico continued to remain in trouble brought on by a decrease in revenues. Several South American countries were thinking of using the dollar as their local means of exchange. This would result in a small short term demand for dollars.
The situation in China is indefinite as growth slowed and many traders now believe that the yuan will have to be devalued even after the government stated that it won't be. Stay tuned.
South African gold mines set a production low last seen in 1955, but worldwide gold consumption set a new record.
The U.S. 30 year bond dropped, raising the effective interest rate above 5.55% from 5.08. Someone is selling U.S. debt as the dollar gets stronger, or put another way, the dollar is getting stronger even with someone selling U.S. debt.
The U.S. economy reported a growth rate of 6.1% for the fourth quarter of 1998. With the conclusion of the impeachment trial, one drag on the dollar was removed. U.S. consumers continued an upbeat attitude as the Dow once again tried to break out to new highs but couldn't. The CRB index reached a low not seen since 1975. U.S. inflation was virtually nonexistent, but the U.S. mint couldn't keep up with demand for gold coins in the 4th quarter.
For the month, Gold started at 286.3, made three attempts to break past 291 and settled back to 287.5. As the dollar continued to strengthen against the yen and euro, the price of gold couldn't sustain any rally in dollars. On the other hand, it didn't act like it wanted to fall either. Meanwhile, silver kept an upward bias for the month, pushing from 5.22 to 5.63 after reaching as high as 5.76. Gold mining equities resumed a slide which caused most gold funds to lose value for the month. The XAU index started at 63.2, peaked above 68, and then closed in a downtrend at 60.5.
COMPARING FUNDS
Global Watch | Comments
The following table shows funds ranked by percentage change in net asset value (nav) during November.
fn Fund 1 mo 3 mo 12 mo 2 yr 3 yr
20 PRPFX Permanent Portfolio . 1.0 7.1 3.1 7.6 11.5
18 OPGSX Oppenheimer Gold A . 0.0 48.5 1.5 -30.8 -25.7
23 SCGDX Scudder Gold . -1.4 32.2 -13.9 -49.9 -36.0
9 GOLDX Gabelli Gold . -1.7 44.3 6.2 -52.2 -46.5
8 FKRCX Franklin Gold I . -1.9 37.5 0.4 -37.5 -38.4
5 EKWBX Evergreen Prec Mtls B. -2.0 37.1 -5.2 -45.7 -43.4
28 UNGGX United Gold / Govt . -2.0 14.1 -7.0 -29.0 -27.4
3 INPMX Amer Exp IDS Prc Mtl A -2.1 38.8 -5.6 -54.4 -37.0
31 VGPMX Vanguard Spec Gold . -2.1 37.8 5.8 -39.7 -38.3
6 FSAGX Fidelity Sel Gold . -2.1 47.3 -8.7 -47.5 -35.2
27 USAGX USAA Gold . -2.1 50.4 5.7 -38.1 -36.4
7 FDPMX Fidelity Sel Prec Mtls -2.3 48.5 1.3 -48.7 -44.1
12 STIVX Lexington Strat Invest -2.3 40.0 7.6 -45.5 -48.9
14 LDNBX Lindner Bulwark . -2.4 0.5 0.3 -22.5 6.2
11 LEXMX Lexington Goldfund . -2.4 37.0 4.5 -43.8 -37.3
30 INIVX Van Eck Intl Inv GoldA -3.5 31.0 -8.7 -45.0 -48.2
4 BBGIX Bull and Bear Gold Inv -3.6 7.3 -31.2 -69.7 -66.7
15 EMGSX Midas Fund . -3.7 31.9 -23.8 -70.0 -65.1
13 STSLX Lexington Strat Silver -3.8 16.3 -21.4 -34.9 -33.4
17 METBX Morgan St DW Prc Mtls. -4.0 35.1 -11.6 -52.4 -50.1
21 PIGDX Pioneer Gold A . -4.6 46.2 -5.8 -41.9 -39.8
19 PPMCX PIMCO Adv Prc Mtls C . -4.7 35.6 -1.5 -52.7 -51.7
10 FGLDX INVESCO Strat Gold . -4.7 33.1 -22.4 -67.2 -51.8
16 MNTGX Monterey OCM Gold . -4.8 40.7 -2.2 -39.9 -15.7
2 BGEIX Amer Cent Global Gold. -4.8 45.5 0.8 -45.8 -46.2
24 SGGDX SoGen Gold . -5.4 17.6 -11.0 -39.6 -41.7
29 GRFRX Van EckGold / Res A . -5.6 35.3 -8.5 -47.5 -45.2
22 RYPMX Rydex Prec Metals . -5.7 45.1 -2.7 -43.4 -43.5
1 ASA ASA Ltd . -6.0 41.9 -3.4 -44.4 -44.6
25 USERX US Global Gold Shrs . -6.2 29.7 -32.9 -73.2 -79.2
26 UNWPX US Global World Gold . -6.7 27.2 -13.7 -53.2 -40.8
Gold was unable to sustain a move to break back over 300, falling short near 298 and ending the month in a definite downtrend. The XAU index pushed over 80 twice as money flowed into the larger gold mining stocks. Smaller stocks made a minor effort, but most ended the month down, taking the majority of gold funds down, too. The optimism for metals quickly evaporated midmonth with the third decrease in US short term interest rates. Three month results are still excellent, meaning that most funds are well above their lows set in August. Many are above their net asset value 12 months ago. This shows some resident strength, but also shows there is room to fall from here.
The Position Indicator gives the relative position of a fund between its 52 week high and low. Its high is represented by +100 and its low by -100.
fn Fund pos
20 Permanent Portfolio . 58.0
18 Oppenheimer Gold A . 24.2
12 Lexington Strat Invest 16.1
27 USAA Gold . 15.5
11 Lexington Goldfund . 11.4
31 Vanguard Spec Gold . 6.1
8 Franklin Gold I . 5.9
9 Gabelli Gold . 5.5
22 Rydex Prec Metals . 5.1
16 Monterey OCM Gold . 1.4
7 Fidelity Sel Prec Mtls 0.8
21 Pioneer Gold A . -0.7
2 Amer Cent Global Gold. -2.4
19 PIMCO Adv Prc Mtls C . -9.4
1 ASA Ltd . -14.6
6 Fidelity Sel Gold . -14.9
29 Van EckGold / Res A . -17.3
5 Evergreen Prec Mtls B. -20.6
30 Van Eck Intl Inv GoldA -20.7
3 Amer Exp IDS Prc Mtl A -21.6
17 Morgan St DW Prc Mtls. -24.0
23 Scudder Gold . -25.9
28 United Gold / Govt . -26.7
26 US Global World Gold . -38.3
24 SoGen Gold . -42.5
13 Lexington Strat Silver -46.9
10 INVESCO Strat Gold . -51.4
15 Midas Fund . -54.5
14 Lindner Bulwark . -59.1
25 US Global Gold Shrs . -63.2
4 Bull and Bear Gold Inv -86.5
It is easy to see from this list that there is a big difference in fund managers. Within the past year, some funds have done quite well in the face of a weak gold price, while others are not so hot. This difference is difficult to detect by looking at weekly and even monthly results, but over three to six months the results should speak for the fund manager. At this point, investment in South Africa doesn't appear to be much of a factor, although specific South African stock selection may.
The in-house beta measures the relative percentage movement of a fund's nav over 52 weeks as compared to the group average, 1.0. This number indicates volatility but does not specify the direction of movement, so it is only a measurement of relative activity of the fund.
*** Funds that diversify with government treasuries, bullion or natural resource stocks generally have a lower beta and are less volatile compared to a portfolio concentrating on small capitalization mining companies. A beta over 1.00 is a fund which reacts relatively quickly to news. Funds seem to maintain a consistent relative beta and it doesn't change much from month to month or year to year.
fn Fund beta
25 US Global Gold Shrs . 1.81
15 Midas Fund . 1.67
10 INVESCO Strat Gold . 1.62
6 Fidelity Sel Gold . 1.32
4 Bull and Bear Gold Inv 1.28
3 Amer Exp IDS Prc Mtl A 1.18
7 Fidelity Sel Prec Mtls 1.15
1 ASA Ltd . 1.13
5 Evergreen Prec Mtls B. 1.11
2 Amer Cent Global Gold. 1.11
21 Pioneer Gold A . 1.11
17 Morgan St DW Prc Mtls. 1.10
26 US Global World Gold . 1.05
27 USAA Gold . 1.04
23 Scudder Gold . 1.04
22 Rydex Prec Metals . 1.02
29 Van EckGold / Res A . 1.02
9 Gabelli Gold . 1.00
16 Monterey OCM Gold . 0.96
19 PIMCO Adv Prc Mtls C . 0.94
30 Van Eck Intl Inv GoldA 0.93
18 Oppenheimer Gold A . 0.93
31 Vanguard Spec Gold . 0.85
8 Franklin Gold I . 0.84
12 Lexington Strat Invest 0.82
11 Lexington Goldfund . 0.79
24 SoGen Gold . 0.73
13 Lexington Strat Silver 0.73
28 United Gold / Govt . 0.46
14 Lindner Bulwark . 0.19
20 Permanent Portfolio . 0.11
High or low beta is not a reliable indication of future fund results but instead is only a representation of the stock selection by fund managers. Several of the high beta funds have done well, but others are at the bottom of the results list. An aggressive investor would probably be in a high beta stock, but when the gold market is falling, his selection will plummet more than the low beta conservative fund.
Many of the high beta funds have major holdings in South Africa and may represent currency fluctuations, which tend to increase volatility.
Funds have different policies about distributing dividends or capital gains to shareholders. However, since the net asset value decreases after a distribution, comparing nav changes between funds should also take distributions into account. The following funds made distributions during the past 12 months, most of which were made last December.
fn Fund $/share
1 ASA Ltd . 0.90
20 Permanent Portfolio . 0.70
4 Bull and Bear Gold Inv 0.41
24 SoGen Gold . 0.39
14 Lindner Bulwark . 0.38
2 Amer Cent Global Gold. 0.29
3 Amer Exp IDS Prc Mtl A 0.18
28 United Gold / Govt . 0.15
23 Scudder Gold . 0.14
26 US Global World Gold . 0.14
31 Vanguard Spec Gold . 0.13
8 Franklin Gold I . 0.11
9 Gabelli Gold . 0.06
18 Oppenheimer Gold A . 0.04
10 INVESCO Strat Gold . 0.03
30 Van Eck Intl Inv GoldA 0.03
12 Lexington Strat Invest 0.02
11 Lexington Goldfund . 0.01
13 Lexington Strat Silver 0.01
25 US Global Gold Shrs . 0.01
Several had no distributions.
There is a big difference between fund policies, but the larger numbers are in general due to capital gains recognized by the fund after stock sales from last year. There have not been too many opportunities for capital gains during the last 12 months, and since distributions are usually taxable, they must be considered with each investor's tax situation.
This year gold funds in general have paper losses and will have to make substantial gains in order to be in a position for shareholders to pay tax in the near future. That is one advantage of buying shares in a fund which has been losing value over the previous year.
The following chart shows the approximate size of funds as measured in total assets under management (As of November 30). This is only an approximation as the size changes daily with new purchases, redemptions, and nav changes. Relative positions of the funds don't change much.
fn Fund assets ($mil)
31 Vanguard Spec Gold . 239
1 ASA Ltd . 187
2 Amer Cent Global Gold. 160
8 Franklin Gold I . 141
30 Van Eck Intl Inv GoldA 133
6 Fidelity Sel Gold . 117
7 Fidelity Sel Prec Mtls 90
23 Scudder Gold . 82
26 US Global World Gold . 73
10 INVESCO Strat Gold . 64
20 Permanent Portfolio . 64
27 USAA Gold . 63
15 Midas Fund . 62
18 Oppenheimer Gold A . 55
11 Lexington Goldfund . 40
29 Van EckGold / Res A . 38
3 Amer Exp IDS Prc Mtl A 35
14 Lindner Bulwark . 28
25 US Global Gold Shrs . 26
13 Lexington Strat Silver 22
24 SoGen Gold . 20
17 Morgan St DW Prc Mtls. 18
5 Evergreen Prec Mtls B. 17
22 Rydex Prec Metals . 15
12 Lexington Strat Invest 14
21 Pioneer Gold A . 13
28 United Gold / Govt . 11
19 PIMCO Adv Prc Mtls C . 10
9 Gabelli Gold . 6
4 Bull and Bear Gold Inv 5
16 Monterey OCM Gold . 1
While total assets were depleting as these funds fell, the sum of the sizes as of the end of November was much higher than August. Watching gold stock trading activity also indicated that a sizable amount of cash was entering the market in the larger stocks. Even after the last two months, however, total gold fund capitalization is less than 50% of what it was 15 months ago. This means that many investors have bailed out of the gold market and taken their money with them.
INVESTING COMMENTS
Global Watch | Comparing Funds
Although it is believed that Russia will not sell any of its gold, if conditions get bad enough, I expect there would be a flight to dollars and sales of gold. Therefore, a bad Russian economy is bad for gold. In addition, a Brazilian collapse would result in another flight to the dollar and probably a drop in gold prices. In Japan, it is not the same. Although a flight to the dollar might be caused by a collapsing Japanese economy, they have relatively large amounts of U.S. Treasury bills and selling these would drive the dollar down and probably push the price of gold up in dollars.
As the original victims of the Asian contagion recover, they will need fewer dollars and therefore their recovery is relatively favorable for gold. The worldwide deflationary trend indicated by the recent fall of the commodity index is generally negative for gold and as long as oil prices stay down, gold will have a very hard time rallying.
With the soaring Dow averages and the eternal optimism in American markets, gold is considered fool's gold, and may not have a serious rally until the stock market wakes up to negative signals, such as the lack of earnings in many stocks. When the Dow goes into a sustained decline, then gold may wake up.
The Dow/gold ratio is over 31 and near its all-time high reached in July of just under 32. This indicates the inequalities in market evaluations and also may explain why gold refuses to really test its 274 low set in August. However, after the Dow came off of its high in July, gold stocks cratered in August along with the stock market decline. Therefore, a falling Dow is not necessarily a good sign for the gold market, particularly gold stocks and funds.
Common sense would indicate that the U.S. economy and markets can not continue to ignore the lack of exports to Asia and a national negative saving rate without pausing. Deflationary trends from the rest of the world have helped to keep the U.S. inflation rate very low and aided in keeping gold down. Deflation is generally not good for metal prices.
After the dollar's fall below 115 yen in October, recovery brought it back to the 120 area, where it has been trading between 117 and 124. What was once a fairly reliable indicator of gold values, the dollar/yen value now bounces around with little effect upon metals.
The large trade deficit showed a good sign for one month with increased exports, but it was expected that the deficit would continue to increase into 1999. By the end of 1998 this month, it will be over $250 billion, still increasing, and is expected to reach over $300 in 1999. The markets took no notice, but they will some day.
Plans for the Euro currency introduction in January 1999 were uninterrupted and it appears to be a sure thing. How much this will affect the dollar and gold is a guess because many bank reserve decisions have not been made public. Some analysts think that the banks will retain gold as a reserve, and some say that they may sell it to raise cash.
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