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Mutual Fund Commentary

The strengthening dollar coupled with weak demand and strong US economic data has caused the yellow metal a lot of trouble. Gold has been struggling of late, much like its 28% fall in value last year. Also, it has been a topsy-turvy ride for the metal. It began the year on a strong note but lost pace around June when gold prices plummeted to $1,244 per ounce in the first week of June as positive U.S. economic indicators boosted the dollar and pushed gold prices in the opposite direction.

The volatility in the gold prices was evident. Such is the case for equities as well. This takes the focus back to mutual funds too, as obviously the precious metals sector is susceptible to the commodities prices. However, before we focus on precious metals mutual funds, let’s take a look at the roller-coaster ride of gold prices and its relation to the dollar.

Volatile Run of Gold Prices

Gold has had its fair share of ups and downs in 2014. After hovering on either side of $1,300 in the second quarter, gold prices plummeted to $1,244 per ounce in the first week of June. Gold’s safe-haven status during times of turmoil was tarnished by the waning concerns about Ukraine. Furthermore, lower demand in China as well as India, in contrast to the record levels last year, also kept prices at check.

Prices regained ground and hit a 3-month high of $1,339 on Jul 10, driven by mounting tensions over Ukraine and Gaza. During most of July, prices remained above $1,300 an ounce but at month-end, prices went down as the US economy picked up steam with stronger-than-expected GDP growth of 4%. In early August, gold prices steadied with the effects of economic data and geopolitical developments appearing to counterbalance each other.

In September, prices remained steadfastly under the $1300 range. As the dollar rose to four-year highs against a basket of currencies and stock markets strengthened, gold prices fell to a nine-month low of $1,207 per ounce on Sep 25.

By mid October, Gold had slumped about 8.4% in the third quarter. On Oct 6, gold had plunged to a 15-month low, again hurt by a stronger dollar that came on the back of encouraging US jobs data. Again, gold spiked to a one month high on Oct 15 on the back of a huge sell-off in equity markets following the release of major disappointing US data. However now, gold snapped its two-week rally in the latest concluded week as strong economic data hampered demand for gold.

Strengthening US Dollar

Growth worries in major economic blocks have negatively impacted their respective currencies. Most of these currencies have become weaker against the U.S. dollar as economic growth in the U.S. has outperformed the sluggish growths in these major economies.

The following chart explains the recent trend of dollar movement against some major currencies over the last three and six months.

Relation Between Gold & Dollar

Gold and the dollar share a somewhat intrinsic correlation between themselves. Higher dollar pulls down gold prices and vice versa. It is almost as if they are seating on the two sides of a see-saw. Gold is no more used as a currency now, but it continues to be a safe haven investment. Gold prices keep impacting value of currencies. Declining dollar value may lead to increased investment in gold as a hedge against uncertainties. So, the rising dollar will pull investors out of the safe haven to invest more in the dollar. The value of gold thus depreciates. It is the investment behavior that creates the inverse relationship.

However, there may be certain other factors that may prove this relation wrong. 

Make Room for Potential Winners: Precious Metals Funds to Buy & Sell

On the positive side going forward, strong physical buying in India due to the festive and wedding season may support gold prices. Gold has entered a seasonally strong period and demand is expected to pick up with the Diwali festival in India, Thanksgiving and Christmas in the U.S. and the Chinese Lunar New Year being around the corner.

Even though strength in the U.S. and European equity markets will distract gold investors, gold prices may get support from retail demand for gold, particularly in India and China. Production pullbacks in response to lower gold prices last year and mining development delays could eventually lead to a supply crunch which would support prices.

Investors ready to bet on the sector banking on these positives may buy the following precious metals funds. These funds either carry a Zacks Mutual Fund Rank #2 (Buy). 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.

Tocqueville Gold (TGLDX - MF report) seeks growth of capital by investing a lion’s share of its assets in gold and gold-related securities. It invests in companies globally that are involved in mining or processing gold. A maximum of 20% of its assets can be directly invested in gold bullion and other precious metals.

The fund carries a Zacks Mutual Fund Rank #2 (Buy) and has returned 7.7% year to date. The fund has an expense ratio of 1.34% as compared to category average of 1.42%. The fund carries no sales load.

Gabelli Gold AAA (GOLDX - MF report) seeks capital growth over the long term. The fund invests most of its assets in domestic and foreign equities issued by companies involved in gold-related activities and gold bullion. The fund invests in undervalued stocks, which nonetheless have the potential for growth.

The fund carries a Zacks Mutual Fund Rank #2 (Buy) and has returned 8.5% year to date. The fund has an expense ratio of 1.57%, which however is more than the category average of 1.42%. The fund carries no sales load.

However, gold is still under the ominous threat of higher interest rates. Investors can sell the following funds from their portfolio to make room for the funds mentioned above. The following funds carry unfavorable Zacks ranks and have negative returns this year.

Oppenheimer Gold & Special Minerals A (OPGSX - MF report) invests almost all its assets in equities of firms that are engaged in mining, processing or dealing in gold or other metals or minerals. The fund has no limit on foreign investments. Apart from investing in domestic companies, it may also invest in developing or emerging markets.

The fund carries a Zacks Mutual Fund Rank #5 (Strong Sell) and has lost 6.5% year to date. The fund has an expense ratio of 1.21%, which however is lower than the category average of 1.42%. The fund carries a max front end sales load of 5.75%.

Deutsche Gold & Precious Metals S (SCGDX - MF report) invests majority of its assets in domestic and foreign firms that are involved in activities related to gold, silver, platinum or other precious metals, and in gold coin and bullion directly. A maximum of 20% of its assets may be invested in high-quality debt securities of precious metals companies or debt securities whose returns are connected to precious metals prices.

The fund carries a Zacks Mutual Fund Rank #4 (Sell) and has lost 3.8% year to date. The fund has an expense ratio of 0.93%, which however is lower than the category average of 1.42%. The fund carries no sales load.

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 in our Mutual Fund Center.

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