Nearing The Finish

Gold, other commodities 4th-quarter favorites for skittish fund investors

Your Money

October 17, 2004|By ANDREW LECKEY

Tomorrow is another day,M-v declared Scarlet OM-FHara in Gone with the Wind. M-tThe sunM-Fll come out tomorrow,M-v sang the plucky orphan in Annie.

M-tI canM-Ft wait until tomorrow ... M-Fcause I get better looking every day,M-v quarterback Joe Namath wrote in his book with that title.

Tomorrow does not hold such allure for mutual fund investors in 2004.

Tomorrow has become a worrisome destination, where bad things could happen at the gas pump, on the battlefield or in the voting booth. Presidential debates highlighted more problems than surefire solutions. The average stock mutual fund declined 2.2 percent in the third quarter. And so on.

Investors have been seeking cover in mutual funds that invest in gold, natural resources (such as oil, copper and timber) and real estate.

Like ScarletM-Fs beloved home Tara, such tangible investments benefit from scarcity and demand.

As worldwide demand for oil continues to grow, investors are less confident that oil prices will slide back below $50 a barrel once hostilities end in Iraq.

Turmoil has made volatile gold a star again, pushing it well beyond $400 an ounce, though it should be held mostly for diversification and never constitute more than a small portion of an individualM-Fs portfolio.

The mutual fund managers who were at the top of the performance heap in the third quarter predict oil and gold prices will continue higher and believe investor mutual fund holdings should reflect that.

M-tIn the mid- to late 1970s, when the price of oil went up sharply, one reason gold peaked at $810 an ounce was that people in the Middle East were using excess money to buy gold as an investment,M-v said Charles de Vaulx, portfolio manager for First Eagle Gold, up 16.35 percent in the quarter. M-tI suspect this is starting to happen now and will continue as long as the price of oil stays high.M-v

Asian central banks have purchased so many U.S. Treasury bonds the past two years that they may decide to diversify reserves by buying gold.

ThatM-Fs why de Vaulx is high on prospects for such gold-mining stocks as Harmony Gold Mining Co. (HMY) and Gold Fields ADR (GFI).

The natural resources sector, specifically oil, continues its run-up. If youM-Fre a motorist, you already know.

M-tThere is growing demand for commodities, especially energy, from countries such as the United States and China,M-v said Kevin Baum, portfolio manager for Oppenheimer Real Asset Fund, up 16.95 percent in the quarter to lead all mutual funds. M-tWith inventories very low for most commodities, investors with a longterm horizon should expect to see strong long-term returns.M-v

Baum steers clear of stocks, instead investing in such hybrid instruments as futures and options whose moves are tied to price changes in 24 commodities, including energy, metals, agriculture and livestock.

M-tA lot of investors looking at the trade deficit, budget deficit and war in Iraq see a lot of risks in the economy going forward, and thatM-Fs driving them to gold,M-v said Joseph Foster, portfolio manager of Van Eck International Investors Gold, up 15.77 percent in the third quarter. M-tWeM-Fve been in a bull market for gold for three years, which I expect to continue for some time, so itM-Fs not too late to establish a position in gold.M-v

The collapse of the Nasdaq bubble started the move toward commodities to balance portfolios.

Foster, recommending a 5 percent to 10 percent holding in gold mutual funds or gold-mining shares for all investors, expects that gold could push up to $500 an ounce if it can break through the $430-an-ounce level.

Meridian Gold Inc. (MDG) and Placer Dome Inc. (PDG) among larger stocks, plus Miramar Mining Corp. (MNG), Orezone Resources Inc. (OZN) and Wolfden Resources Inc. (WFDNF) among smaller stocks, are Foster favorites.

Latin American funds excelled in the third quarter, as some political uncertainty was resolved in Venezuela, Brazil rebounded, and the U.S. dollar remained weak.

Merrill Lynch Latin America Fund, up 16.82 percent in the quarter and run by William Landers, is banking on conservative stocks, such as oil company Petroleo Brasileiro, telecom Telefonos de Mexico and retailer Wal- Mart de Mexico, for the future.

The U.S. election likely will play a role.

M-tIf current investment caution exists because investors are doing nothing until after the presidential election, the market should get a nice rally until the end of the year, no matter who wins,M-v said Don Cassidy, senior research analyst with Lipper Analytical Services in Denver. M-tIn the meantime, investors are picking up more on the idea of inflation and owning hard assets than are most analysts or government spokespeople.M-v

Investors should expect value stocks M-y selling at lower prices but with strong prospects M-y to outperform growth stocks for a while, Cassidy said.

Andrew Leckey is a Tribune Media Services columnist.

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