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Number Cruncher

Gold-related equity funds left in bullion's dust Add to ...

What are we looking for?

Given soaring gold prices amid fears of the U.S. government defaulting on its debt, let's see how brightly precious metals equity funds are shining this year. Gold futures in New York closed Friday at $1,628.30 (U.S.) an ounce.

The screen

We ranked the year-to-date returns of these funds to July 28. U.S. dollar, segregated and duplicate versions of the funds were excluded. We did not include bullion funds.

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What did we find?

Tarnished returns.

Sentry Mining Opportunity Class, the best performer so far this year, lost 1.8 per cent, while the biggest loser, CIBC Precious Metals, shed 21.1 per cent. Precious metals equity funds have lagged their bullion-fund cousins, which have posted gains this year.

Gold stocks sold off earlier this year as the market seemed to believe that the ending, on June 30, of the U.S. Federal Reserve Board's quantitative easing program to stimulate the economy would be bad for gold bullion, said Kevin MacLean, a portfolio manager with Sentry Investments.

The thinking was that the end of QE2 would mean the end of money printing and currency devaluation, but "we did not share this view," he said. Instead, bullion has steadily increased because of the continued deterioration in the U.S. government's balance sheet, he noted. "Gold prices are rising as investors anticipate a necessary devaluation of the U.S. dollar to deal with chronic spending."

The recent rise in gold prices is not translating into gains for precious metals stocks because the market is still jittery about the possibility of the U.S. government defaulting on its debt, he added. "Gold mining equities are equities first, and gold companies second."

Mr. MacLean's Sentry Mining Opportunity fund has been helped by being more defensive as it has held between 10 to 12 per cent in cash this year. It is also more diversified than its peers with a 50-50 split between precious metals and base metals companies. This year, he has taken profits in copper stocks such as Taseko Mines Ltd., Hana Mining Ltd. and Thompson Creek Metals Co.

He also runs Sentry Precious Metals Growth, which is off 5 per cent. He has been shifting away from exploration companies to ones that mine and produce gold such as AuRico Gold Inc. and also Perseus Mining Ltd., which will be in production soon. Producers are constantly improving cash flow and operating margins so "a rising gold price will force those shares higher" eventually, he said.

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