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Gold Mutual Funds Deliver Strong Performance as Prices Soar

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If investing was a popularity contest—and in many ways it is—gold looks set to be voted class president for 2010. Shunned by investors during the 1980s and 1990s as inflation rates decelerated, gold, and investor interest in gold, began to revive in 2005, when it rallied convincingly past $400 an ounce for the first time in decades and never looked back. Since then, gold prices have defied even the most bullish predictions, rocketing to a record high $1,388 an ounce, and drawing new predictions for even further gains.

Standard & Poor’s Equity Analyst Leo Larkin cites “several reasons” for his positive 12-month fundamental outlook for the gold industry, even though gold is already at its highest nominal price ever.

The low interest rate environment means there is little opportunity cost for holding gold, Larkin says, making it much more attractive. Also, “despite the higher gold price, global mine production has been declining for over a decade,” he says. Production levels will probably “remain stagnant for the next several years, as old mines are becoming depleted and are not being replaced to the extent needed to raise output.” Furthermore, heightened volatility in currency markets will likely lead to increased gold demand, he says.

Mutual fund investors have yet another reason to like gold: gold funds have been performing exceptionally well, even during the financial crisis of 2008 and 2009. Of the thousands of funds that have a five-year track record, the top, third, and fourth best average annual returns over that time have been delivered by gold funds, with each of them topping 25% annually.

There are about two dozen mutual funds targeting gold mining companies, and to find the most attractive, we screened for precious metals funds aimed at retail investors that are open to new investors and had a five-star rank from Standard & Poor’s. Just four funds met that …



that criteria, while another two had a four-star rank.

Among these six funds, one stands out from all the others for its reasonable costs, strong performance, and unique portfolio holdings: the Tocqueville Gold Fund (TGLDX). For investors, the reason is simple: it is the only four- or five-star ranked fund that doesn’t charge an upfront 5.75% sales load or restrict who can buy shares. TGLDX does, however, charge a 2.0% redemption fee to those who hold their shares for less than four months.

While its five year average annual return is slightly lower than some of the other highly ranked funds, the Tocqueville Gold Fund has the top three-year and one-year returns among its peers. Also, the fund is one of the few gold mutual funds that actually owns gold bullion: physical gold was its largest holding as of September 30, accounting for about 6.5% of assets. The gold mining companies it owns, which it buys through a value investing approach, are somewhat smaller, junior miners compared with the large-cap gold companies most funds own. With about $2.2 billion in assets, it is one of the larger gold funds.

The USAA Precious Metals and Minerals Fund (USAGX) doesn’t charge an upfront sales load, but it is only available to USAA registered users—usually former or enlisted military members or their families. The fund owns the second-best five-year average annual return, and the third-best three-year return, and charges one of the lowest expense ratios of the group. With just 48 holdings, USAGX is one of the less diversified gold funds; it has about $2.1 billion in assets.

For those willing to pay an upfront sales load, the Van Eck International Investors Gold Fund (INIVX) offers a blend of strong historical performance and reasonable cost. The fund had the best five-year average annual return among gold funds as well as among all mutual funds aimed at retail investors—not a bad resume item. INIVX ranked second over the past three years and fourth over the past one-year period in annual returns, and its annual expense ratio is slightly below its 1.50% peer average. It is slightly smaller than the others with about $1.2 billion in assets.

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