Central Fund of Canada (CEF)

[sumisu]

Gold bullion is the way to go:

How a Gold Fund Has Held Up
Mr. Eveillard Bought Bullion, Stuck to Veteran Miners

DECEMBER 14, 2008, 6:29 P.M. ET

By ALLEN SYKORA

WALL STREET JOURNAL

http://online.wsj.com/article/SB122929697856605179.html

The First Eagle Gold Fund has roughly a third of its assets in gold bullion, avoided the base metals before their free fall, and tends to invest in shares of more-established producers rather than junior mining companies, said manager Jean-Marie Eveillard.

This approach enabled it to hold up better than many other gold-oriented funds during a recent downturn in share prices of mining stocks and a general weakness in commodities.


Jean-Marie Eveillard

As of Friday, the Philadelphia Gold Silver Index of mining shares was down around 40% in 2008. As a result, many precious-metals funds were down by around 50% or more.

By contrast, First Eagle Gold was down by about 25%, according to fund researcher Morningstar. Morningstar gives the New York-based fund its top five-star rating among funds specializing in precious metals.

"The fact that we were 30% to 35% in bullion helped, to the extent that bullion until a month ago acted much better than gold-mining stocks," Mr. Eveillard said.

While mining shares went into a free fall, spot gold was down by a more modest 7.4% since the end of 2007.

At the end of November, the First Eagle Gold Fund had assets of $765 million, including all share classes, Mr. Eveillard said. Since its creation in August 1993 through the end of October, the gold fund has provided a compounded annual return of 6.5%, while the Financial Times index for gold mines compounded at minus 1.5%, Mr. Eveillard said.

Mr. Eveillard has been portfolio manager for most of the fund's history, retaking the reins after a two-year retirement in the spring of 2007. The fund was established as insurance against cataclysmic events in the financial system, he said. "Gold is the only asset that is completely outside of the credit system and the only asset that has no liability," Mr. Eveillard said.

Thus, the fund didn't dabble in base metals when they ran up more sharply than gold for much of this decade. "Base metals have nothing to do with gold and nothing to do with the insurance that in my mind gold represents," he said. And base metals have fallen further than gold this year, with copper losing around 51% since the end of 2007.

"We are very reluctant to buy stocks of junior gold-mining companies that sit on a deposit that has not been turned into a mine yet," Mr. Eveillard said. "In the extreme, if a deposit cannot be turned into a mine, then the price of gold could go to $3,000 an ounce [but] the stock would be worth zero."

Meanwhile, Mr. Eveillard said, First Eagle is one of the few gold funds to hold a large percentage in bullion, not relying upon exchange-traded funds. As of this past week, 35% of the fund's holdings were in bullion. "If you look at gold as insurance, then gold bullion is preferable to gold-mining shares," he said, since it avoids the risks facing mining companies themselves.

When looking at mining stocks, First Eagle focuses on assets still underground and the cost of mining them, said Rachel Benepe, the fund's analyst.

Mr. Eveillard and Ms. Benepe said they like Royal Gold Inc., a company that relies upon royalties and thereby avoids mining costs. Stocks of royalty companies tend to be "somewhat expensive," Mr. Eveillard said, "but we're willing to live with that."

The fund holds Randgold Resources Ltd., which has mines in French-speaking central Africa. The company is knowledgeable about the region and its politics, and tends to rely upon organic expansion, or the development of mines, rather than acquisitions, Mr. Eveillard said.

Randgold is good at every stage -- from finding to building to operating mines, Ms. Benepe said. By contrast, she said, many mining companies might have only one strength.

Mr. Eveillard said he is "extremely positive" about the longer-term prospects for gold. "What passes for the monetary system world-wide is fraying at the edges," he said.

President-elect Barack Obama has signaled that his administration will use fiscal policy to stimulate the economy at the same time the Federal Reserve is doing the same with monetary policy. But ultimately, all of these plans are likely to prove to be inflationary, Mr. Eveillard said. And investors often buy gold as a hedge against inflation.

Write to Allen Sykora at [e-mail].>