— Gold is making a comeback after its biggest
single-day price plunge in three decades. The sell-off
happened almost two weeks ago as investors became less
concerned about inflation.
precious metal has become a popular way for investors
to protect themselves from the threat of sharply
rising prices. Many experts consider that a possible
scenario in coming years as central banks pump cash
into their stalled economies to fuel growth. Those
policies are a key reason why an ounce of gold trades
at nearly four times the price it did 10 years ago.
with little concern about inflation on the immediate
horizon, is gold's run finally over? No, say the
managers of two mutual funds that invest in stocks of
gold mining companies. Both see the recent price
decline as a buying opportunity, and say long-term
inflation risks remain.
thesis for maintaining exposure to gold and gold
mining stocks hasn't changed," says John Hathaway
of the Tocqueville Gold fund. "If anything, with
the price decline, the thesis has improved."
not unusual to hear wild predictions about gold
because it is a notoriously volatile investment.
latest flash point came April 15, when gold tumbled 9
percent to $1,361 an ounce, its largest drop since
1983. Over two trading days, the price fell a total 13
percent to the lowest level in more than two years.
of the ground has been made up. On Thursday, gold
posted its biggest gain in 10 months, to $1,462.
still not yet back to its pre-April 15 price, but it's
far above the $300 to $500 range that gold traded for
in the 1980s and '90s.
recent decline started when the government reported a
drop in inflation. Other factors that may have
influenced the decline: data suggesting the slowdown
in China's economic growth is worse than had been
forecast, and fears that distressed European countries
like Cyprus might start selling gold reserves to
finance their bailout packages.
next? Here are the outlooks from two fund managers who
are eager to see gold prices rebound. Like most
precious metals funds, these two have lost more than
30 percent year-to-date.
interviews this week, Hathaway and Dan Denbow
discussed the factors that drove gold prices down
sharply last week, as well as their outlooks. Below
JOHN HATHAWAY, Tocqueville Gold (TGLDX) - 4-star
rating from Morningstar
investors, including hedge funds and the trading desks
at some big banks, saw weakness in the gold market and
exploited it. They were like sharks smelling blood.
central banks in the U.S., Europe and Japan are all
basically printing money to stimulate their economies.
Japan has begun doing it on a scale that's unheard of,
relative to the size of its economy and the central
bank's balance sheet. The currencies in these
countries are backed by nothing but the actions of
central bankers and politicians who have their own
agendas. These monetary policies will turn out very
badly, and the buying power of liquid assets like bank
deposits will decline after inflation.
policymakers may be running out of options. Economic
growth is stagnant on a global basis. These stimulus
policies might have prevented us from getting into a
deeper hole. But they haven't resulted in the kind of
growth we need to grow out of these debt burdens.
These fiscal deficits are intractable and there's no
appetite for austerity.
prices have languished recently because stock market
returns have been good since 2008, and inflation
remains tame. We no longer have the scary headlines
like we had a few years ago to support gold prices.
But there are potential flash points that could drive
investors back to gold. With gold, you have to focus
on the long term.
DAN DENBOW, USAA Precious Metals and Minerals (USAGX)
- 4-star rating
latest disappointing numbers on China's economic
growth spooked everyone. But gold prices had been on
weak legs for a couple months. Mostly, it's due to a
lack of interest in gold from investors, who have
focused on the strong recent performance of stocks.
a big change from six months ago, when it was hard to
find an expert who was bearish about gold. Everybody
was worried about the U.S. government hitting its debt
ceiling limit, and the potential for a ratings
downgrade, and the automatic government spending cuts
that are now in effect. But the worst-case scenarios
didn't occur, and people didn't worry too much. That's
when they started selling gold.
the short term, I expect more volatility, depending on
what we'll hear from central banks about policy
issues, and inflation and growth. In the U.S., demand
remains strong for physical gold, such as American
term, gold prices can go higher. Consider the impact
of monetary policy in the U.S., and more recently in
Japan. Currencies like the yen have weakened as a
result. All the major central banks have accommodative
monetary policies, and eventually that has to lead to
inflation. They all think they can effectively manage
the shift from supporting growth to reducing the risk
of high inflation. But it has always proven difficult
to get the timing right.
hard to say when we'll see an increase in inflation.
But that's the scenario where you'll want to own gold.