EagleWing Research Newsletter on Gold Funds
October 1, 2001
GLOBAL WATCH
Comparing Funds | Comments
The most influential factor for September was obviously the crash and destruction of the World Trade Center. Following that we began to see the partial unraveling of a delicate international financial structure which has kept the U.S. dollar dominant for years. The amount of damage to be suffered by the U.S. economy is anyone's guess, but the conditions are certainly ripe for a major recession. The economy had already begun to show signs of age even a year after the market peak, and the WTC was like a hammer on top of a sore thumb. Now it really hurts. And it's infected so it will hurt for some time.
Following the Fed's lead of pushing the short term rate down to 3.00%, other short term rates dropped all around the globe, including in Japan and Europe. All major world stock markets tumbled into areas not seen for years, and the world began to realize that after the WTC disaster, the U.S. economy will need time to adjust to the new rules. Since the U.S. economy has been the engine which drove the global economy, the entire global economy is in trouble.
Although the monthly trade deficit improved from past months, it is still a substantial drain of money out of the country and must be balanced by returning investment capital. With the market dropping, and real estate values peaking, we may see this returning cash flow slow down, which would in turn put downward pressure on the dollar. With the Federal Reserve pushing rates lower, Congress talking about even more tax cuts, and the Fed pouring billions of dollar reserves into the banking system, the money supply is soaring. These are all financial attempts to hold up a faltering market system which has become bloated with excess capacity and inventories. The WTC disaster has in effect put a tremendous brake on all economic activity in the Western world. This will produce more layoffs and unemployment, which will produce late mortgage payments, foreclosures and bankruptcies. The years-long surge in new family homes has already peaked, and the real estate market has turned down in many areas as in Silicon Valley last year. This in turn removes large sums of refinanced capital from investment markets.
Gold funds have been in a fairly strong sustained climb since the low points in June and July, even as gold has not really done much. Although surging to 300 for one day, the price of gold closed the month at 292.4, up from 274.4. It, however, showed little sign of taking off, and gold funds demonstrated this when many hardly moved for the month. The XAU index barely advanced from 56.5 to 57.7. Most commodity prices fell, including oil. Silver, on the other hand, made one of its patented knee-jerk surges, climbing from 4.16 to 4.64. The long term bond fell for a few days, pushing the long bond rate up as if investors were abandoning the dollar debt, but it was very short lived. Money quickly moved back into the dollar, and the gold rally stalled.
COMPARING FUNDS
Global Watch | Comments
Funds ranked by percentage change in net asset value for September.
fn Fund 1 mo 3 mo 12 mo 2 yr 3 yr
6 SGGDX First Eagle SGen Gold. 7.5 10.2 23.1 -6.3 -0.4
2 BGEIX Amer Cent Global Gold. 6.9 8.9 32.1 -19.2 -14.9
22 INIVX Van Eck Intl Inv GoldA 6.4 7.9 20.6 -22.0 -24.1
20 UNWPX US Global World Gold . 5.7 1.1 -0.6 -44.7 -46.1
8 GOLDX Gabelli Gold . 5.7 3.4 25.6 -6.1 2.6
12 MNTGX Monterey OCM Gold . 5.5 10.2 31.7 -8.3 -7.3
1 ASA ASA Ltd . 5.3 -3.2 13.5 -4.9 0.5
15 LEXMX Pilgrim Prec Metals A. 4.7 4.4 21.2 -14.2 -6.4
17 SCGDX Scudder Gold . 4.7 6.1 25.1 -1.5 9.3
21 USAGX USAA Gold . 4.4 6.2 31.5 -4.4 13.2
23 VGPMX Vanguard Gold/Pr Mtls. 4.3 1.3 19.2 -4.3 19.8
4 EKWBX Evergreen Prec Mtls B. 4.3 3.6 27.4 -6.7 2.5
9 FGLDX INVESCO Strat Gold . 4.2 5.5 16.2 -18.1 -14.0
19 USERX US Global Gold Shrs . 4.1 -1.1 6.9 -34.7 -31.7
16 RYPMX Rydex Prec Metals . 3.6 6.3 23.3
18 TGLDX Tocqueville Gold . 3.4 0.9 17.4 -6.2 16.6
10 MIDSX Midas Fund . 2.2 4.5 5.7 -40.3 -44.6
5 FSAGX Fidelity Select Gold . 1.7 1.3 20.2 -13.1 3.1
11 MIDIX Midas Investors . 1.0 2.5 7.9 -27.2 -34.2
3 INPMX AXP Precious Metals A. 0.7 -3.6 18.5 -15.1 -4.1
13 OPGSX Oppenheimer Gold A . -0.7 -1.1 16.8 -16.1 4.6
14 PRPFX Permanent Portfolio . -1.6 1.3 -0.5 -3.1 -0.4
7 FKRCX Franklin Gold A . -1.9 -3.9 14.9 -9.1 10.9
The top fund for the month was First Eagle SoGen Gold Fund (SGGDX), but there were many other funds with gains over 4%. One recent market study showed that of over 4000 major mutual funds, only 220 were up for the year. It didn't mention that 30+ were gold funds. Gold fund owners still get no respect.
It appears to me that the major gains were in portfolios more receptive to smaller capitalized equities and therefore more affected by the recovery of these same stocks from very low prices.
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 nav(9-28)
6 First Eagle SGen Gold. 95.7 6.28
22 Van Eck Intl Inv GoldA 87.6 5.33
2 Amer Cent Global Gold. 83.4 5.27
12 Monterey OCM Gold . 83.2 4.98
21 USAA Gold . 74.8 6.35
9 INVESCO Strat Gold . 58.6 1.72
15 Pilgrim Prec Metals A. 57.1 3.09
5 Fidelity Select Gold . 56.4 14.11
4 Evergreen Prec Mtls B. 55.7 12.24
17 Scudder Gold . 54.1 7.17
8 Gabelli Gold . 51.4 6.33
23 Vanguard Gold/Pr Mtls. 44.4 8.32
18 Tocqueville Gold . 41.0 12.91
16 Rydex Prec Metals . 39.7 21.53
14 Permanent Portfolio . 27.6 18.22
10 Midas Fund . 25.9 0.92
13 Oppenheimer Gold A . 22.8 9.80
11 Midas Investors . 20.6 2.06
3 AXP Precious Metals A. 10.7 5.39
19 US Global Gold Shrs . 8.5 2.80
7 Franklin Gold A . 3.5 9.27
1 ASA Ltd . 1.1 18.53
20 US Global World Gold . -11.5 5.34
Every fund but one is above its yearly average, and any small rally in gold in the coming month will result in many of these punching up to new annual highs. Perhaps the financial press will notice then.
The following chart shows the approximate size of funds as measured in total assets under management in $millions. (As of Setember 28) 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. The largest remain the largest.
fn fund assets
23 Vanguard Gold/Pr Mtls. 323
5 Fidelity Select Gold . 216
2 Amer Cent Global Gold. 181
1 ASA Ltd . 178
7 Franklin Gold A . 160
22 Van Eck Intl Inv GoldA 107
17 Scudder Gold . 102
21 USAA Gold . 79
9 INVESCO Strat Gold . 64
13 Oppenheimer Gold A . 57
14 Permanent Portfolio . 53
15 Pilgrim Prec Metals A. 50
16 Rydex Prec Metals . 45
20 US Global World Gold . 42
10 Midas Fund . 34
3 AXP Precious Metals A. 31
19 US Global Gold Shrs . 23
8 Gabelli Gold . 13
12 Monterey OCM Gold . 13
18 Tocqueville Gold . 12
6 First Eagle SGen Gold. 10
4 Evergreen Prec Mtls B. 6
11 Midas Investors . 3
This statement deserves repeating, again: The total sum of these funds and other related gold funds is barely over $2 billion, a paltry sum in world markets. Once demand for gold equity investments picks up, an increase of $2 billion more would cause these fund values to skyrocket. There are only so many valid gold equities and a pickup in gold demand would result in major advances.
The beta indicator measures the relative volatility of a fund's net asset value(nav) movement over 52 weeks as compared to the gold fund 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.
fn fund beta
16 Rydex Prec Metals . 1.30
12 Monterey OCM Gold . 1.29
1 ASA Ltd . 1.26
2 Amer Cent Global Gold. 1.21
21 USAA Gold . 1.17
4 Evergreen Prec Mtls B. 1.16
6 First Eagle SGen Gold. 1.14
13 Oppenheimer Gold A . 1.09
8 Gabelli Gold . 1.08
3 AXP Precious Metals A. 1.08
5 Fidelity Select Gold . 1.06
17 Scudder Gold . 1.04
7 Franklin Gold A . 1.02
15 Pilgrim Prec Metals A. 1.01
23 Vanguard Gold/Pr Mtls. 0.92
9 INVESCO Strat Gold . 0.92
18 Tocqueville Gold . 0.84
22 Van Eck Intl Inv GoldA 0.84
19 US Global Gold Shrs . 0.82
20 US Global World Gold . 0.76
11 Midas Investors . 0.75
10 Midas Fund . 0.72
14 Permanent Portfolio . 0.23
The beta for each fund changes monthly as the fund advances and declines, but the relative position on the ladder doesn't change much, except as a reference to other funds. As you can see, there is a big difference between management policies of different funds.
*** 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. These numbers have remained stable, changing little within the past eight months.
INVESTING COMMENTS
Global Watch | Comparing Funds
With a seriously faltering stock market, it is still difficult to predict the action of precious metals and gold funds, but it pays to review history. A similar world economic situation of slowing economies was brought on by the oil price shock of 1973. In that case, interest rates suddenly went up, the market peaked, then cratered, and we even had a war in the Middle East. The domestic political picture was infected by Watergate and the U.S. investing psyche took two years to recover. Mutual fund salesmen went broke from lack of sales. Meanwhile, gold made an unrelenting climb to new highs. It did not reach extreme highs (over 800) until 1980, but the mental acceptance of precious metals was brought on by its climb from 35 to over 200 in just a few years after President Nixon disconnected the dollar from gold in 1971. For that to happen today, gold would advance from 260 to 1700 and every gold equity would look like Yahoo and Amazon of a few years ago. Since the market places many more restrictions on gold equity prices than were put on the dot-coms, I don't expect that to happen unless the dollar dies, which would spell worldwide depression. That is not even a consideration.
With that said, the unrelentingly increasing money supply created by large domestic debts, and now the Fed, spell an inflated dollar in the next few years, if not sooner. Since the 80's, the Fed under Chairman Greenspan discovered that liquidity rescues markets, and therefore, put large sums of money into the system when it faltered until it recovered. So much of that money has gone overseas that we have a similar glut of dollars like the late 60's waiting to be redeemed for gold. Today the world is not yet requesting redemption as the market still prefers the dollar, and redemption is represented by buying another currency or by purchasing gold with dollars. If signs show up that the dollar index is dropping, other currencies are gaining, and the long bond rate is increasing when short term rates are still being artificially held low by government decree, then it may be time to take gold seriously.
Of course, by that time, gold will be over 300 and funds will be punching out new highs. Gold fund owners will then get some respect and every financial consultant on TV will be telling you to buy an American Eagle for your grandkid's future.
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