Gold fund man­agers ad­vise cau­tion

Pre­cious metal hav­ing its best year since 1980

Daily Local News (West Chester, PA) - - BUSINESS - By Stan Choe AP Busi­ness Writer

Gold has gone gang­busters this year, ris­ing with jit­ters about ev­ery­thing from a weak global econ­omy to the pos­si­bil­ity of a Pres­i­dent Trump.

After gold’s best first-half of a year since 1980, gold-re­lated funds are piled atop the leader­board for re­turns. The av­er­age fund that in­vests in stocks of gold min­ers has re­turned more than 70 per­cent in 2016, for ex­am­ple. Such glit­ter­ing per­for­mance has drawn even more in­vestors, and nearly $21 bil­lion has poured into funds that buy ei­ther gold bars or the stocks of min­ing com­pa­nies in the year to date through Au­gust,

ac­cord­ing to Morn­ingstar. In 2015 in­vestors pulled $2 bil­lion out of those same funds.

But man­agers of gold funds have a warn­ing for any­one seek­ing a way to quick riches: Don’t ex­pect th­ese types of re­turns to con­tinue. Think of gold more as a type of in­sur­ance, they say, some­thing that will hold up when other parts of your port­fo­lio are crash­ing. As such, it should prob­a­bly be only a small part of your port­fo­lio, maybe 5 per­cent.

“We of­ten find our­selves need­ing to re­mind in­vestors that just be­cause we’re up 100 per­cent doesn’t mean that you should be load­ing up,” says Dan Den­bow, se­nior port­fo­lio man­ager at the USAA Pre­cious Met­als

and Min­er­als fund, which nearly dou­bled in the first six months of the year. “Hav­ing a win, you should con­sider it as a time to re­con­sider, not to dou­ble up.”

This year’s turn higher for gold has snapped a years­long string of dis­ap­point­ing per­for­mance. After hit­ting a record at roughly $1,900 per ounce in the sum­mer of 2011, when wor­ries peaked about the Euro­pean debt cri­sis and the first-ever down­grade of the U.S. credit rat­ing, its price dropped for years. It sank as low as $1,050 per ounce late last year. Many gold in­vestors ex­pect the metal’s price to keep pace with in­fla­tion over the long term, and in­fla­tion has been only mod­est.

This year, the price of gold re­cov­ered as in­vestors grew rat­tled about the global econ­omy. Gold has tra­di­tion­ally been one of the

fall­backs for in­vestors look­ing for a safe place to park their money, along with bonds. And gold has ben­e­fited as bonds look less at­trac­tive, given how lit­tle in­ter­est they pay. The yield on a 10-year Trea­sury note hit a record low this sum­mer.

Early in the year, in­vestors were wor­ried about the weak global econ­omy, par­tic­u­larly China’s sharp slow­down. Then in June, Bri­tain’s vote to leave the Euro­pean Union shocked mar­kets around the world. Re­cently, the tu­mul­tuous U.S. pres­i­den­tial cam­paign has height­ened un­cer­tainty, which has sent even more in­vestors into the per­ceived safety of gold.

“I think a lot of peo­ple are get­ting very ex­cited about the elec­tion,” says Tom Win­mill, port­fo­lio man­ager at the Mi­das fund. “I think there could be dis­ap­point­ment that the world has not

come to an end after the elec­tion, and there could be a correction in gold.” A correction is what traders call a 10 per­cent drop in price for an in­vest­ment.

It’s one of the ironic fea­tures of gold: In­vestors buy it hop­ing for safety, but its price can swing sharply and very quickly.

Part of the rea­son is the di­verse set of buy­ers who set its price. Over the last five years, just over half the de­mand for gold has come from jewelry, ac­cord­ing to the World Gold Coun­cil. An­other 20 per­cent comes from cen­tral banks buy­ing it for their vaults, elec­tron­ics com­pa­nies putting it in wir­ing and den­tists us­ing it for crowns.

But re­cently, in­vestors have be­come the most im­por­tant part of the mar­ket. Those buy­ing gold bars, coins or ex­change-traded funds now ac­count for the

largest share of gold de­mand. This year is the first time on record that in­vestors have been the big­gest buy­ers of gold for two con­sec­u­tive quar­ters.

That means, in the short term at least, the price of gold can swing sharply on the whims and ex­pec­ta­tions of in­vestors. On Tues­day, the price of gold sank 3.3 per­cent on spec­u­la­tion that higher in­ter­est rates would mean lower de­mand for gold. It oc­curred after a Fed­eral Re­serve of­fi­cial, one who does not cur­rently have a vote on mone­tary pol­icy, sug­gested the Fed should be quicker to raise in­ter­est rates.

On the other hand, all it would take for gold to go scream­ing higher again is, say, an in­va­sion some­where in the world or some other un­ex­pected con­flict. Gold min­ing com­pa­nies, mean­while, typ­i­cally see their

stock prices move dou­ble or triple gold’s move­ments. That’s be­cause many of th­ese com­pa­nies’ costs stay the same re­gard­less of gold’s price, so changes can quickly am­plify their prof­its and losses.

Such volatil­ity is one rea­son fund man­agers rec­om­mend keep­ing only a small por­tion of your port­fo­lio in gold-re­lated funds. Hold­ing gold can make a port­fo­lio more di­ver­si­fied, but when it makes up 10 per­cent or more of a port­fo­lio, it can be­come overly dom­i­nant.

“We al­ways say you don’t want too much of it,” says USAA’s Den­bow, whose fund owns gold min­ing stocks. “Be­cause of all the volatil­ity, the tail starts wag­ging the dog, and you lose the di­ver­si­fi­ca­tion ben­e­fit be­cause the volatil­ity swamps what the rest of your port­fo­lio is do­ing.”

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.