Fund managers see opportunity in gold's price drop

By Mark Jewell
AP Personal Finance Writer

BOSTON (AP) — 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.

The 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.
So 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.

“The 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.”

It’s not unusual to hear wild predictions about gold because it is a notoriously volatile investment.

The 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.

Some of the ground has been made up. On Thursday, gold posted its biggest gain in 10 months, to $1,462.

It’s 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.

The 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.

What’s 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.

In interviews this week, Hathaway and Dan Denbow discussed the factors that drove gold prices down sharply last week, as well as their outlooks. Below are excerpts:

— JOHN HATHAWAY, Tocqueville Gold (TGLDX) - 4-star rating from Morningstar

Opportunistic 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.
The 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.

The 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.

Gold 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

The 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.

It’s 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.

In 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 Eagle coins.

Long 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.

It’s hard to say when we’ll see an increase in inflation. But that’s the scenario where you’ll want to own gold.