Metals Thunder Among Top Mutual Funds

Precious metals brought big profits to investors in 2010, placing portfolios that focus on silver and gold on top of Bloomberg Rankings' list of top-performing mutual funds. Now, big price pullbacks in the first five weeks of 2011 have some people wondering if the metals rallies have run their course.

The spot price of gold, after surging 28 percent in 2010 to a yearend $1,412.63 per troy ounce, had fallen nearly $100 as of Jan. 28. It has rebounded over the past few days, closing at $1,355.60 on Feb. 3. Gold hit its all-time peak of $850—or about $2,400 when adjusted for inflation—on Jan. 21, 1980, following the second oil-supply shock of the 1970s, Spot silver, which jumped 82 percent in 2010, had given back 13.3 percent of its year-end price of $30.72 per troy ounce as of Jan. 25; it climbed back to $28.95 at the end of trading on Feb. 3. Silver hit an all-time high of $49.45—$139.62 when adjusted for inflation—on Jan. 18, 1980.

Gold is a favorite safe-haven asset when markets are beset by uncertainty, as they have been since the global financial crisis began in 2008. Investor fear of the stock market has largely dissipated, with equity indexes continuing to recover on signs of earnings growth. But doubts about inflation and the efficacy of governments' fiscal and monetary policies have kept driving investors to gold—as well as silver, which typically tracks moves in the pricier metal.

Asians Buy when New York Traders Sell

William Martin, one of the portfolio managers for the American Century Global Gold Fund (BGEIX), dismisses gold's recent slide as profit-taking by speculators on the Comex futures exchange, a division of the New York Mercantile Exchange. They're reacting to breaks below key support levels on technical charts, he says, with their selling consistently offset by physical demand overnight—for gold bars, coins, and jewelry—particularly in China and India. "There's true inflation fears there," he says. "[Buyers] think their governments' official forecasts for inflation are understated."

Martin is confident that the price of gold will be higher at the end of 2011 than it was at the beginning. His fund, which primarily owns large mining companies with rich reserves in the ground, came in third on the 2010 Bloomberg ranking, with a one-year return of 44.8 percent.

To contain inflation, China raised interest rates in January, the country's third rate hike since mid-October. Central banks in India, South Korea, and Thailand also raised interest rates in January. Those moves have been seen as putting more pressure on the near-term price of gold.

Additional metals portfolio managers also express confidence that gold and silver have more room to run. Apart from the specter of runaway inflation—and what American Century's Martin calls "competitive devaluations" in currencies—both metals will get support from concerns that European governments could default on their debts. Support will also come from rising consumer demand for jewelry in Asia, says Shanquan Li, manager of the Oppenheimer Gold & Special Minerals Fund (OPGSX), which ranked second on the Bloomberg list, gaining 54.5 percent in 2010.

As for copper, the price has tripled since 2008. Unlike silver and gold, the metal's price showed no sign of weakening until Feb. 3, when the futures contract for three-month delivery on the London Metals Exchange fell $15 from its all-time high closing price of $9,945 per metric ton on Feb. 2. That peak reflected a rise of more than 64 percent from a recent low of $6,067.75 in early June. China continues to be the primary force behind demand for copper, which is needed for the country's rural building boom. China's imports more than doubled from 2008 to 2009, to 3.2 million metric tons, according to Mike Daly, senior precious metals analyst at PFGBEST, a nonclearing U.S. futures commission merchant in Chicago.

From a technical perspective, all three metals have looked overbought for years, Daly said in a February 2011 article in SFO, a free magazine for stocks, futures, and options traders. Nonetheless, he said, genuine demand has kept their prices moving up.