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Value Line’s Precious Metals objective group consists of funds with the stated policy of investing at least 50% of their assets in gold and/or precious metals stocks or bullion. In reality, most funds in this group place well more than 50% of their assets in these groups. That said, there tend to be two types of funds here, those that invest almost exclusively in gold, and those that invest more broadly in precious metals (though, in reality, even these funds will have material exposure to gold and gold stocks). There is also a small collection of funds that offer “inverse” performance to the price of gold.

In general, the Precious Metals objective group is fairly small, and most of the funds have very similar goals and performance. The exception, of course, is the “inverse” style of fund. The similarity in the funds and performance is driven by two factors. First, there simply aren’t all that many ways to invest in gold and precious metals—the list of stocks is about as short as the list of funds. Second, gold and precious metals are commodities, and their price swings can be extreme.

That said, precious metals, particularly gold, are often considered a “store of value” in times of inflation and, for the more extreme times, in case society falls into chaos. Thus, some recommend a small gold component for all portfolios. Small, however, is a key word, as most asset allocation models, including Value Line’s, don’t recommend more than a few percentage points of exposure to this category. It is also important to note that gold and precious metals stocks and funds are very different from owning gold or precious metals directly in the form of bullion. Indeed, if society did happen to fall into chaos, owning shares in a gold fund isn’t going to help anyone to buy a loaf of bread.

At the end of the day, gold and precious metals funds can fill an important niche. But it is a niche and a volatile one at that. Investors should be cautious about how much exposure they maintain here.

Over the long term, the Precious Metals objective group has been a very strong performer relative to the broader market, as measured by the S&P 500.  For the 10-year period ended November 30, 2012, the group had an annualized gain of 15.6%, while the S&P 500 reported an annualized gain of 6.3%.  For five years and three years, the group had returns of 2.4% and -0.1%, respectively, while the S&P 500 reported gains of 1.3% and 11.2% respectively. In the past 12-month period, the Precious Metals objective group reported a loss of 17.5%, compared to a gain of 16.1% for the S&P 500.  The group has an average Risk Rank of 5, indicating a very high level of risk. This reflects the dramatic up-and-down moves that the group has experienced over the past 10 years.  

One fund with a better return than the objective group through November 30, 2012 is Invesco Gold & Precious Metals Fund (IGDAX).  This fund seeks growth of capital. It pursues this objective by investing, under normal circumstances, at least 80% of its assets in the equity securities and equity-related instruments of companies involved with exploring for, mining, processing, or dealing and investing in gold, gold bullion, and other precious metals such as silver and platinum.

Up to 100% of the fund’s assets may be invested in foreign securities. It may also invest up to 10% of assets directly in gold. The fund focuses on both established companies with good free cash flow and fundamentals, as well as junior and intermediate exploration companies from around the world. It will also use futures and options to enhance its return and/or reduce risk. As of September 30, 2012, the fund was more than 91% invested in equities and 9% in cash and other. Also, as of the same date, the fund’s top-10 holdings accounted for 50% of assets.

Another fund with a relatively good year-to-date return is American Century Global Gold Fund (ACGGX). This fund seeks to realize a total return, (capital growth and dividends), consistent with investments in securities of companies that are engaged in mining, processing, fabricating, or distributing gold or other precious metals throughout the world.

It pursues this objective by investing, under normal circumstances, at least 80% of its assets in the stocks of foreign and U.S. companies principally engaged in the exploration, mining, development, fabrication, processing, marketing, or distribution of metals or minerals. 

In buying or selling stocks, the fund uses a quantitative model to assess the risk characteristics of the fund’s holdings relative to all stocks considered to be candidates for the fund. Management uses this risk model to determine which stocks will provide the optimal balance between risk and reward. Up to 100% of the fund’s assets may be invested in foreign securities. It may also invest up to 20% of its assets directly in gold, silver, or other precious metal bullion and coins. The fund focuses on selecting junior and intermediate exploration companies from around the world.  

A third fund with a better than the overall objective group’s year-to-date return is Wells Fargo Advantage Precious Metals Fund A (EKWAX). The fund seeks long-term capital appreciation. To achieve its objective, the fund invests at least 80% of its total assets in investments related to precious metals. It may invest up to 100% of assets in equity securities of foreign issuers, including ADRs, and up to 25% in debt securities, including preferred shares, linked to precious metals.

Management takes a disciplined approach to risk management through top-down macroeconomic analysis and bottom-up stock selection. Among the macroeconomic influences considered include geopolitical risks, the strength of the U.S. dollar, jewelry demand, inflation expectations, and the seasonality of gold and precious metals demand. The fund also looks for high-quality companies that are positioned to improve their relative value over time.

Management may reduce a holding if the stock reaches a predetermined valuation target, the underlying fundamentals of the company are deteriorating, or a more attractive investment opportunity is identified.

In the table below, we have listed 10 top-performing funds through November 30, 2012 that we follow in our Fund Advisor database.

10 Top Precious Metals Funds Performance

 

Fund Name

Ticker

% Year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

Gabelli Gold Fund A

GLDAX

7.63

-2.53

22.59

13.85

3.42

Invesco Gold & Precious Metals Fund A

IGDAX

6.12

-1.92

21.26

11.44

4.34

  

US Global Inv. Gold & Precious Metals

USERX

5.63

-1.26

21.98

12.98

3.04

Rydex Precious Metals Fund A

RYMNX

5.37

-1.35

23.90

12.27

-1.05

  

American Century Global Gold Fund A 

ACCGX

4.04

-1.98

24.04

13.96

2.64

  

Wells Fargo Adv. Precious Metals Fund A

EKWAX

4.02

-2.16

22.17

11.75

4.83

  

PIA OCM Gold

OCMGX

4.23

-1.68

24.33

13.42

5.01

Van Eck Intl. Investors Gold A

INIVX

3.62

-2.61

24.03

13.10

5.55

First Eagle Gold A

SGGDX

3.18

-2.16

15.65

10.23

6.81

Oppenheimer Gold & Special Minerals A

OPGSX

3.32

-2.34

23.59

11.24

2.89

Precious Metals Objective Group

  

1.61

-2.16

19.15

8.23

1.83

  

At the time of this article's writing, the author did not have positions in any of the funds mentioned.