Gold Funds Seek Record 3rd Year as Top Performers (Update2)

2003-01-02 16:18 (New York)

(Closes gold price in the fifth paragraph.)

Boston, Jan. 2 (Bloomberg) -- U.S. mutual funds devoted to

gold were the fund industry's best performers for a second year in

2002. Some of their managers expect the winning streak to be

extended this year.

While gold rallied above $350 an ounce in December and

reached a 5 1/2-year high, these managers said the metal and

shares of gold producers were so badly beaten during the 1990s

that they still have room to move higher.

``There hasn't been any big move into gold -- we're not

attracting the hot money,'' said Greg Orrell, manager of the

Monterey OCM Gold Fund. ``We still sense quite a bit of

skepticism. It's still early in this run.''

Orrell's fund rose 92 percent last year and ranked second

among all mutual funds. First Eagle SoGen Gold Fund surged 105

percent to set the pace. Funds investing in gold stocks rose 64

percent on average, according to Bloomberg data.

In the first day of trading this year, gold dropped as the

stock market rallied. The Standard & Poor's 500 Index gained 3.3

percent while gold fell $1.70 an ounce, or 0.5 percent, to $346.50

based on the price of the active futures contract on the Comex

division of the New York Mercantile Exchange.

Gold funds have never topped the charts for three straight

years since Lipper Inc. began keeping track in 1960. Their last

two-year streak occurred in 1986 and 1987, when the U.S. stock

market crashed.

Investors added $612 million to the funds last year after

withdrawing $9 million in 2001, according to Financial Research

Corp., a Boston-based research firm. Gold funds had net assets of

$3.2 billion at the end of November, or about 0.1 percent of the

$2.8 trillion in all stock funds.

Benefits of Weakness

The American Stock Exchange's Gold Bugs Index of 11 producers

more than doubled last year after rising 59 percent the previous

year. The index plummeted 75 percent from the end of 1996 to the

end of 2000, a period when the price of gold dropped as much as 35

percent.

Gold has benefited from weakness in the U.S. economy, stock

market and the dollar as well as a ``flight to quality'' after the

terrorist attacks on Sept. 11, according to Joseph Foster, manager

of the Van Eck International Investors Gold Fund, which gained 86

percent last year.

``There aren't too many investments that do well when others

are doing poorly, and gold is one of them,'' Foster told Bloomberg

Television in an interview.

The economy grew at an annual rate of less than 2 percent in

the first three quarters of 2002. For the full year, the S&P 500

dropped 23 percent, its biggest loss since 1974. The dollar fell

15 percent against the euro and sank 10 percent against the yen.

`Shrinkage of Supply'

Funds also may benefit from reduced gold production, some

investors said. Output will fall 2 percent annually in the next

five years, according to Gold Fields Mineral Service. Production

rose 2 percent a year from 1991 to 2001 after climbing 6 percent a

year from 1980 to 1990, the London-based consulting firm said.

Gold miners cut spending on exploration every year from 1997

through 2000, according to Frank Holmes, manager of the US Global

Investors Gold Shares Fund.

``Imagine if Microsoft or Pfizer had a huge drop-off in

spending on research and development -- that's what it's like,''

Holmes said. ``We're going to have a shrinkage of supply.''

Increasing gold purchases by Chinese investors could bolster

the metal in 2003 as well, Orrell said. China began sales of gold

bullion to individuals last month for the first time since 1949,

when Communists took charge.

Not everyone agrees that gold funds are headed for a third

straight year of outperformance. Vanguard Group has barred new

investment in its fund, the second largest, since the end of June.

The prohibition applies to existing shareholders and retirement

accounts, usually exempted from fund closures.

`Chasing Performance'

During the first five months of last year, investors added

$124 million to Vanguard's fund, which grew to $480 million of

assets. In 2001, the fund received $400,000 in new deposits.

``We were very afraid that investors were chasing

performance,'' said Rebecca Cohen, a Vanguard spokeswoman.

Cohen pointed to the performance of gold funds during the mid-

1990s as a justification for Vanguard's policy. The average fund

rose 9.5 percent in 1995 and 1996, only to drop 48 percent in the

next two years, she said. The Valley Forge, Pennsylvania-based

firm has no plans to reopen the fund, she said.

Fidelity Investments runs the largest gold fund, and its

assets climbed to $504 million at the end of November from $305

million at the end of 2001. The fund gained 61 percent last year.

On the other hand, US Global Investors is gaining only about

$250,000 a day in new deposits for its $150 million fund. In the

mid-1990s, the fund collected $5 million a day and ballooned to

$600 million, said Holmes, the fund's manager.

``At the top of the market, we've always had huge inflows,''

Holmes said. ``We're still not there.''

--Aaron Pressman in the Boston newsroom (617) 338-5822, or

apressman@Bloomberg.net, through the San Francisco newsroom (415)

912-2980. Editors: Wilson, West, Dunn.