Clashes in Ukraine among other factors have helped safe havens see a significant surge in investment. Eventually, gold prices recently hit a new three-week high. On Monday, on the Comex division of the New York Mercantile Exchange, Gold for June delivery rose to $1,327.50 an ounce. Currently, it stands at $1, 314.10. This reflects over 10% jump year to date. On the other hand, May Silver prices now stand at $19.80.
Vagueness in the pace of the Fed’s QE taper and the resultant volatility in the dollar, some downbeat U.S. economic data and geopolitical tension over Ukraine and Russia have sapped the demand for risky assets and bolstered the need to invest in safe havens. This flight to safety has sharpened the safe haven status of gold and silver and resulted in such enormous gains. (Read: Russia Mutual Funds to Watch on Ukraine Crisis).
In simple words, increases in prices of the yellow metal or silver will benefit miners. So, it looks an opportune moment for investors to add some gold and silver mining mutual funds in their portfolios. However, before recommending some of the names that may get the best returns for investors, let us take a look at the industry events and what the road ahead possibly is.
Mining Industry – A Brief Overview
Exploration and mining is a time consuming and expensive endeavor. Given its scarcity and remote location of deposits, exploration for new deposits is difficult. Once an economically viable deposit is identified, bringing a mine on line can take a decade or more, and it requires substantial capital investment.
Moreover, the mining industry is subject to several risks and hazards such as political conflicts, environmental hazards, industrial accidents, unexpected geological conditions, labor disruptions, unavailability of materials and equipment among others. However, once the mine development project is successful, returns can be enormously high, which more than offsets the risks and the capital invested.
What Affects Prices?
Prices of Gold or Silver fluctuate on a daily basis and are influenced by industrial and jewelry demand, demand as an investment, central bank lending, volume of recycled material available in the market, speculative trading; and costs and levels of global gold production by gold producers.
There are a number of economic factors as well that influence prices. Over the past few years, the price of gold has shown an inverse correlation with the U.S. dollar. In the wake of dollar weakness, investors opt for gold as a safe haven.
What May Happen to the Prices Now
Expectations of the future rate of inflation, interest rates; and global or regional, and political or economic uncertainties also affect prices.
On that note, the Ukraine crisis and the eventual Russia-West standoff seems far from resolved. Thus, the geopolitical tensions may help the prices move further up. Also, the Fed will sooner or later wind down its massive QE stimulus program, which in turn should push up the dollar against a basket of various currencies.
However, Goldman Sachs is still bearish about the Gold prices. Goldman Sachs believes that gold prices would drop to $1,050 an ounce by year end. According to a Bloomberg report, Jeffrey Currie, chief gold analyst at Goldman Sachs, said: “While further escalation in tensions could support gold prices, we expect a sequential acceleration in both U.S. and Chinese activity, and hence for gold prices to decline”.
Performance This Year, Commodities Sector
Market Vectors Gold Miners ETF (NYSEARCA:GDX) has risen 16% year to date. Global X Silver Miners (NYSEARCA:SIL) too recorded over 16% jump in the same time frame. The uptrend indicates the bullish stance in the sector.
Also, on a broader basis, commodities turned out to be among the best investment options in the first quarter. Commodities were reported to have secured the best gains among all asset classes since 2012. The Thomson Reuters/Core Commodity CRB Index ended the first quarter with gains of 8.7%. The S&P 500 scored gains of just 1.3% in first-quarter 2014. (Read: 5 Commodity Mutual Funds to Watch in 2014)
3 Funds to Buy
It is not always easy for individual investors to decide on which mutual funds to buy. It’s a good idea to focus on mining mutual funds that have a healthy year-to-date return. Two of the funds also have relatively lower expense ratio. Then one should zero-in on funds that sport a Zacks Mutual Fund Rank #1 or #2. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
Vanguard Precious Metals and Mining (VGPMX - MF report) invests a lion’s share of its assets in domestic and foreign companies that are mainly involved in mining, exploration and distribution of metals. All of its assets may be invested in foreign companies. A maximum of 20% may be invested in gold and silver apart from precious metal bullion.
The fund has returned 7.16% year to date. The fund has an expense ratio of 0.25% as compared to category average of 1.41%. Currently, the fund carries a Zacks #2 Rank (Buy).
American Century Global Gold (BGEIX - MF report) invests in securities of those global companies whose operations are related to mining, processing and distributing gold or other precious metals. Investments are made with the purpose of attaining growth in capital and dividends by investing mostly in companies which are involved in processing, mining, fabricating and distributing gold.
The fund has returned 14.29% year to date. The fund has an expense ratio of 0.68% as compared to category average of 1.41%. Currently, the fund carries a Zacks #1 Rank (Strong Buy).
Oppenheimer Gold & Special Minerals B (OGMBX - MF report) invests in companies engaged in activities such as mining, processing or dealing in the yellow metal and other metals or minerals. It invests in both domestic and foreign companies including ones from the developing or emerging economies.
The fund has returned 8.69% year to date. However, the fund has an expense ratio of 2.09% as compared to category average of 1.41%. Currently, the fund carries a Zacks #1 Rank (Strong Buy).
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank.
Read the analyst report on VGPMXRead the analyst report on BGEIXRead the analyst report on OGMBXRead the analyst report on View All Zacks #1 Ranked Mutual FundsZacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>