Mutual funds are probably the best way for you and your clients to mine gold mining shares. Precious metals mining is a rough-and-tumble industry. Single-stock risk is nosebleed high, at least for the small and mid-sized mining firms, which tend to operate just one mine, or a cluster of mines in the same area. And these areas, and the methods used to mine them, may be among the least palatable. There are always concerns with pollution and political corruption, especially affecting mining areas in developing countries. Make sure your client is comfortable with the notion of buying when blood is literally running in the streets. The smallest firms also have the highest risk that fraud may have pumped up the stock price.
Different companies are also affected by different currencies, by their blend of metals output, and differing policies on leverage and hedging. Finally, advances in technology can have huge effects on these markets, and can make a fund manager’s in-depth knowledge of the stocks highly useful in putting together a portfolio of mining stocks.
For example, palladium has long cost substantially less than platinum or gold. Because it was about half as expensive as platinum, auto manufacturers spent a lot of money figuring out how to use it to replace some or all of the platinum in their catalytic converters. But with the new demand from autos, the price of palladium shot up to where it exceeded that of platinum by 70%. (The move was also partly a speculative bubble, fueled by this same increase in automotive demand.) But last year the bubble popped and industrial demand for palladium crashed, partly due to economic slowdown, but even more so from continued improvements in the technology of catalytic converters, to work well with less metal. (There also was nothing keeping people from switching back to platinum in their converters, albeit with a considerable lead time for any such change.) Since platinum and palladium peaked in January of 2001, platinum is down 14% (to $640 as of June 10, 2002), while palladium is down 69%. For the same period, gold prices are up 22%, and that’s because with gold, investment demand and jewelry demand are both more important than industrial uses.
For advisors and clients urging us to pick precious metals stocks, that can make a big difference in the bottom line. If you didn’t, for example, know that Stillwater Mining (SWC) produced primarily palladium, with about 30% as much platinum, and much lesser values of gold, silver, rhodium, and baser metals, you might have just bought it as part of a general “precious metals” portfolio, when you were thinking gold. Needless to say, while most precious metals stocks are up over the past two years, Stillwater is not. (To be fair, we should point out that Montana-based Stillwater is the only major source of platinum and palladium outside South Africa and Russia, and its stock could, under different industry scenarios, be a sector leader.)
For all the above reasons, mutual funds make sense for precious metals investments. But, as in mining, there are precious few gold funds, and among them, only a few are worth their weight in gold. Not counting up different share classes of the same fund, and the tiniest funds for which quotes are hard to come by, there are just over 20 mutual funds invested in precious metals. All told, these funds’ assets recently totaled $3 billion. That’s less than a thousandth of the money found in all of the U.S.-sold equity mutual funds.
Fidelity Select Gold (FSAGX)
One of these funds is Fidelity Select Gold (FSAGX). The fund was started in 1985 as Select American Gold, to distinguish it from Fidelity’s Select Precious Metals (primarily a distinction that mattered to investors who wanted to avoid South Africa in those days of apartheid). The two funds merged in February of 2000, and you might care to note that Fidelity’s gold-fund management experience actually goes back to 1981 at the old Precious Metals fund.
Select Gold’s manager, Neil Marotta, has run the fund since April of 2000. That’s a fairly short tenure, but he managed Select Industrial Materials from April through December of 2000, and was a Fidelity analyst covering Canadian companies from 1997 to 2000, and both of these areas have significant overlap with Select Gold.