Gold-heavy ‘gold’ funds do better in a crisis

12 Nov

By Simon Constable
Over a year ago I warned that certain specialty precious metals mutual funds wouldn’t protect investors during an economic meltdown.

The problem for those funds in question: They didn’t contain enough exposure to gold.

Boy, was I right.

Through the financial crisis, returns on gold funds that held a high percentage of gold and gold stocks did vastly better than those that didn’t.

MW-AB726_gold_MD_20090908022855As gold is the ultimate protection against financial Armageddon, I raised the specific worry about the Vanguard Precious Metals and Minerals /quotes/comstock/10r!vgpmx (VGPMX 19.86, -0.51, -2.50%) , which in the summer of 2008 contained more than a smattering of stocks related to industrial materials.

Vanguard couldn’t be reached for comment. To be fair, Vanguard has never said its fund is meant to be all gold. Last time we spoke, they pointed to the “and” in the fund’s name. But small investors tend to go by the Morningstar category, and when they see “Precious Metals” in the name they expect all gold and silver.

In the period since I wrote my piece last August through the close of business Monday, the Vanguard fund lost 16.5%, according to an analysis from Morningstar. Contrast that with the SPDR Gold Shares /quotes/comstock/13*!gld/quotes/nls/gld (GLD 108.08, -0.13, -0.12%) , which tracks the price of gold bars, or bullion: It returned 31.4%. That’s a difference of 48 percentage points. Annualized, that equates to 40 percentage points of differential per year.

Last summer I quoted Peter Bernstein, author of “The Power of Gold: The History of an Obsession,” and a 50-year veteran of financial markets. He sadly died earlier in June, but what he said then still stands:

“I think you buy gold when everything hits the fan,” said Bernstein. “In an extreme crisis, (coal company) Peabody is not going to behave the same way as a gold stock.”

The real question now: Is the financial crisis over, and is the economic recovery for real?

If it’s over, then nongold industrial stocks will continue to do well, and for that the Vanguard fund is well positioned. Its top-10 holdings include iron-ore miner BHP Billiton Ltd. (BHP 72.07, +0.50, +0.70%) , recycling firm Sims Metal Management Ltd. (SMS 19.74, -0.70, -3.43%) , and ferro-alloy firm Eramet SA (FR:ERA 221.40, -4.50, -1.99%) .

If it’s not, then it might be worth sticking with gold.



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