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Value Line’s Precious Metals objective group consists of funds 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 over 50% of their assets in these investments. 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 are also a small number 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 strategic 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 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 May 31, 2012, the group had an annualized gain of 11.6%, while the S&P 500 reported an annualized gain of 4.1%. For five years and three years, the group had returns of 3.7% and 1.9%, respectively, while the S&P 500 reported a slight loss of 0.9% and a gain of 14.9% respectively. In the past 12-month period, the Precious Metals objective group reported a loss of 28.7%, compared to a slight loss of 0.4% 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 May 31, 2012 is the Gabelli Gold Fund A (GLDAX). The fund invests at least 80% of its net assets in equity securities of foreign and domestic issuers principally engaged in gold-related activities and gold bullion.

Gabelli Funds, LLC, the Fund’s investment adviser (the “adviser”), focuses on stocks that are undervalued, but appear to have favorable prospects for growth. Factors considered in this determination include capitalization per ounce of gold production, capitalization per ounce of recoverable reserves, quality of management, and the issuer’s ability to create shareholder wealth.

Because most of the world’s gold production is outside of the United States, the fund expects that a significant portion of its assets may be invested in securities of foreign issuers, including those located in developed as well as emerging markets.

Another fund with a relatively stronger year-to-date return is Tocqueville Gold Fund (TGLDX). This fund seeks long-term capital appreciation. The Gold Fund seeks to achieve its investment objective by investing at least 80% of its net assets in gold and companies engaged in mining or processing gold. The Gold Fund may also invest in other precious metals, however, no more than 20% of the Gold Fund’s total assets may be invested directly in gold bullion and other precious metals.

The investment strategy of the fund is value oriented and contrarian. It seeks to invest in companies that have good long-term business fundamentals but are temporarily out of favor with investors, and hence have a market value lower than their intrinsic value.

In assessing intrinsic value, the portfolio manager’s judgments are based on a comparison of a company’s stock market value with various financial parameters, including historical and projected cash flow, book earnings, and net asset value. In general, the portfolio manager seeks companies that are characterized by strong management, competitive position, financial structure, and free cash flow.

In general, the portfolio manager acquires his investment ideas by identifying stocks that have lagged the market. The portfolio manager then analyzes the quality of their business franchise and long-term fundamentals and makes a judgment regarding their intrinsic value. Alternatively, the portfolio manager may identify companies with strong long-term business fundamentals and then wait for them to fall out of favor with investors in order to buy them at a discount to intrinsic value.

A third fund with a better than the overall objective group’s year-to-date return is DWS Gold & Precious Metals Fund A (SGDAX). Companies in which the fund invests may be involved in activities such as exploration, mining, fabrication, processing and distribution of precious metals. 

While the fund invests mainly in common stocks, it may invest up to 20% of net assets in high-quality debt securities of companies in precious metals and minerals operations and in debt securities whose return is linked to precious metals prices. The fund may invest in securities of foreign issuers, including issuers located in countries with new or emerging markets. The fund may invest in other types of equity securities such as preferred stocks or convertible securities. 

In choosing securities, portfolio management uses a combination of two analytical disciplines:

1- Bottom-up research. Management looks for companies that it believes have strong management and highly marketable securities. They also consider the quality of metals and minerals mined by a company, its fabrication techniques and costs, and its unmined reserves, among other factors.

2- Growth orientation. Management generally looks for companies that it believes have above-average potential for sustainable growth of revenue or earnings and whose market value appears reasonable in light of their business prospects.

In the table below, we have listed 10 top-performing funds through May 31, 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

Van Eck Global Hard Assets A

GHAAX

-9.76

-14.29

-20.22

-16.50

-0.79

  

First Eagle Gold Fund A

SGGDX

-13.48

-7.57

-19.46

-23.59

8.86

  

Gabelli Gold Fund A

GLDAX

-13.98

-9.01

-22.75

-25.49

5.15

Tocqueville Gold Fund

TGLDX

-13.95

-9.13

-21.98

-22.90

7.96

  

Invesco Gold & Precious Metals Fund A

IGDAX

-14.44

-10.15

-23.52

-25.51

5.16

  

DWS Gold & Precious Metals Fund A

SGDAX

-15.00

-9.06

-23.01

-26.88

0.77

Rydex Precious Metals Fund A

RYMNX

-15.31

-9.77

-23.22

-26.84

-0.44

  

American Century Global Gold Fund A 

ACCGX

-15.35

-7.29

-22.49

-27.16

3.91

  

Wells Fargo Adv. Precious Metals Fund A

EKWAX

-15.52

-9.24

-22.52

-27.18

6.65

  

US Global Inv. Gold and Precious Metals Fund

USERX

-15.78

-9.92

-23.49

-26.57

4.10

Precious Metals Objective Group

  

-15.25

-9.73

-22.88

-25.88

3.67

  

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