Fund Managers Go For The Gold

March 11, 1995|By David Conn | David Conn,Sun Staff Writer

Richard H. Fontaine has gold in his eyes.

The Baltimore money manager, whose firm manages almost $10 million in three mutual funds and more in private accounts, lost his faith in the U.S. dollar years ago. The dollar's accelerated decline during the past week was no surprise to him.

"I'm a big believer that the government has been printing money in order to keep interest rates unusually low the past five years," said Mr. Fontaine, a former T. Rowe Price executive who now runs Richard Fontaine Associates Inc.

So what was his reaction to the dollar's pratfall this month? He bought more gold stocks. If one accepts the premise that gold retains its value, then the dollar's 20 percent decline against major currencies in the past year, coupled with no movement in the dollar price of gold, means gold is 20 percent underpriced now.

"It doesn't take a Herculean leap of logic," Mr. Fontaine said.

The dollar's fall against the European and Japanese currencies has started to produce winners and losers. The clear losers are people who sold Japanese yen or German marks and put that money in, say, Canada or Mexico, whose currencies have fallen even against the greenback. The winners include those who bet against the dollar.

"The week has been good," said Jeffrey Reckseit, institutional sales director at Campbell & Co., a Towson-based futures investment firm.

"We've been short since the beginning of February," said Mr. Reckseit, meaning his firm has been betting on a decline in the dollar's value. "Our systems perceived a little bit of weakness in the dollar, never dreaming that it would go this far."

But the list of winners and losers includes far more than currency and precious metals traders.

Companies that export to Europe and Japan and manufacturers with operations in those countries have a stake in the direction of the dollar, as do international investors of all kinds.

If the dollar remains weak for years, Baltimore companies with overseas operations may find it far more difficult to expand abroad, because their dollar earnings will buy less for them overseas. And because many area pension funds have some international exposure, the ripples of the currency fluctuations may touch thousands of people without them even knowing it.

To be sure, some companies stand to profit directly from the currency turmoil. "I'm delighted," said Peter A. Bowe, president of South Baltimore dredge manufacturer Ellicott Machine Corp. International, which sells its goods overseas but quotes prices in dollars. "We are a manufacturer who exports capital equipment, our principal competition is Europe-based, and they price in deutschmarks."

Also affected by the dollar's plunge, though they may not know it, are thousands of area workers with interests in pension funds, many of which have some international exposure.

The dollar at its worst point this week had fallen to a record low of 1.3455 marks on Wednesday. It hit a post-World War II low of 88.76 yen on the same day.

The U.S. currency has since recovered a bit, based in part on a stronger-than-expected employment report yesterday that spurred speculation that the Federal Reserve will raise interest rates again soon. Higher rates would draw money to dollar-based securities.

It was America's persistent budget deficits and its involvement in Mexico's fiscal crisis, coupled with hints from the Fed that interest rates were about to head down, that helped spark the exodus of investment funds from the U.S. currency and into countries such as Germany.

"The German central bank has a goal, and that is to keep inflation under wraps," said Peter Askew, an executive vice president of Rowe Price Fleming International in London. While the Federal Reserve is often fighting for its independence here, Germany's "credibility is undiluted," said Mr. Askew, who runs two mutual funds for T. Rowe Price's international joint venture partner.

Rowe Price Fleming has done little to react to this week's currency movements, Mr. Askew said. He, like Mr. Reckseit and Mr. Fontaine, has been bearish on the dollar.

Not every investor has been so lucky. The Mexican crisis has helped drive T. Rowe Price's Latin America Fund down 45 percent since Dec. 20, when Mexican President Ernesto Zedillo devalued the peso by 20 percent.

"What this has been is a period of loss for anybody who's had investments in Mexico," said Mr. Fontaine. It also has been potentially bad news for foreign companies whose U.S. operations have generated dollars that are now worth less, such as Elkton-based Terumo Corp., a medical supply company whose parent is located in Japan; and Baltimore's Maryland Casualty Co., a subsidiary of the Swiss-based insurer Zurich Insurance Co.

Towson-based Black & Decker Corp., by contrast, derives about 35 percent of its revenues in Europe. So translating those sales back into dollars will boost reported earnings, explained Vice President and Treasurer Kathleen W. Hyle.

"But obviously you can't extract every penny from your [foreign] operations," Ms. Hyle said.

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