Dateline: 10/19/98

The continued unsettled markets have reduced the number of Power Performers from five to four this month. All of these have managed to hold on to a decent one year track record, whereas most of the funds that have fallen off the list over the last few months (such as AIC Advantage) have fallen because the short term declines have wiped out their one year gains. That these four have survived shows them to be solid performers indeed.

Meanwhile, it is interesting to contrast the top three month performers and the top one month performers. Bond funds continue to dominate the three month charts for the second month in a row. 19 of the top 25 three month performers are bond funds.

By contrast, 23 of the top 25 one month performers are precious metals funds and of the two that aren't, one has a heavy weighting in precious metals stocks.

One of the fascinating chart collections on the Internet is The Vancouver Sun's monthly listings of the Top 25 Funds for the one month, three month, one year, three year and five year periods. It's one that I refer to every month and from which I archive the three month chart here at Investing (Canada) (along with my Power Performers chart). I archive the whole file (all five charts) on my hard drive for later reference and research.

This week, let's look at the Precious Metals Funds in more depth.

The Precious Metals Funds

23 of the top 25 one month performance mutual funds to the end of September are precious metals funds. And as noted above, one of the other two has a heavy weighting in gold mining companies. The returns vary from a low of 20.26% for the First Heritage Fund to a high of 44.17% for the Scotia Excelsior Precious Metals Fund. Wow! Sounds like something worth getting into, right? Not so fast, there. Let's check out some other factors.

Despite the solid one month returns, every single one of those funds with a longer track record has a loss for the one year period. And not little losses. We're talking whopper losses. They range from a low of -24.01% for CSA's Goldtrust to a high of -48.72% for the Global Stratgey Gold Plus Fund. Despite the huge one months gains, not one of these funds have gained back their previous losses of the past year!

In fact, nearly all of them have losses for the five year period and many have losses or teeny weeny gains for ten years. Precious metals investing is not a long term proposition.

Nevertheless, this is not a market to overlook. Gold prices have a cyclical nature. The trick is to figure out the cycles.

Most precious metals pundits seem to be universally bullish on gold. In fact, they're always bullish on gold. They cite things like increasing demand and decreasing supply for the yellow metal, but they rarely consider such things as declining production costs. Further they focus almost exclusively on gold as a backing for currency. They believe that unbacked currency must eventually become worthless and gold prices will soar. The fact that central banks, which hold such huge amount of gold in reserves, are periodically selling off those reserves and depressing the gold price, is often seen as some grand conspiracy of the central banks orchestrated by the U.S. government.

I don't buy into that notion at all. I believe, as the late Julian Simon did, that the real price of all commodities trends downward in the long run. Gold, while originally serving as a backing for currency, has now taken a minor role in financial matters and is, to a large extent, merely a commodity again.

But there is a danger in the current global monetary situation, and that is that unbacked currency is more subject to political manipulation than ever. There will always be a very real danger that governments lose control of their currencies, or get greedy and start the inflationary wheels turning again. For that reason, many people will continue to look at gold and precious metals as a safe haven in times of turmoil.

Today we are in such "times of turmoil". And along with the severe market slump of the last few months, we have seen a resurgence in the price of gold. From a low of $270, it has jumped to over $300, which is now proving to be a resistance level for further upwards movement.

If gold breaks out from that price, it could really take off. Then again, a sell-off by the Russians, for example, could drop the price right back to $270 again. In fact, this is the second time this year that gold has moved from around $270 to $300. Last time the gold pundits said it was the beginning of a bull market in the metal but were proved wrong. I've always believed in holding about 5-10% of your portfolio in precious metals as insurance, not as an investment. Astute investors may have increased their holdings over the last two months. Precious metals often gain when stock markets decline.

Although markets took a strong upward spike with the drop in the bank rate last week, I don't believe we've seen the end of the bear market yet. At this time, a cautious increase in your precious metals holdings would be judicious (if you haven't already done so). Perhaps a gradual shift fom cash into precious metals on a dollar cost averaging basis over the next two months will prove beneficial.

For the conservative investor, 10% of your holdings in precious metals should be the limit. For more aggressive types, 20% is not out of the question.

Now, more than ever, a balanced portfolio is essential. Some carefully selected equity funds (the ones still on the Power Performers list come to mind), some bond funds - particularly international bond funds, some precious metals funds and a substantial amount of cash or money market funds are the order of the day for now.

Portfolio Review

Portfolio # 1 (Buy Strategy - Fund must be in the Top 25 Performers for a Three Month period and the One Month performance should not be negative nor excessive compared to the Three Month. Sell on 5% slide.)

Last month we converted this portfolio from cash into global bond funds based on our buy criteria. It turned out to be a successful move as the portfolio gained around $1500 for the month. In fact, if you look at the Top 25 Three Month Performers chart you'll see that bond funds continue to dominate for this time frame. All six of the funds we bought are still on the list. We will continue to hold our position for now.

Portfolio Value at 10/16/98: $ 30,984.17 - up 23.9% since inception (12/22/97)

Portfolio # 2 (Buy Strategy - Same as Portfolio # 1 plus the fund must have a better than 15% performance for the One Year, Three Year and Five Year periods. Sell at 5% slide)

This more conservative portfolio found no funds fitting our "buy" criteria. It remains 100% in cash.

Portfolio Value at 10/16/98: $ 27,875.61 - up 11.5% since inception (12/22/97)

Portfolio # 3 (Buy Strategy - Fund must be a Power Performer and it must have positive Three Month and One Month figures. Sell on 5% slide.)

Last month we sold our small equity holding and converted completely to cash. This month, one of our four Power Performers qualifies for purchase, AIM Global Health Sciences (the same one we sold off last month.). We actually would have been better off holding the fund rather than selling it then and buying back now, but since we are applying a formula to our purchasing decisions, so be it.

Portfolio Value at 10/16/98: $ 29,707.78 - up 18.8% since inception (12/22/97)

Controls: (2 Funds purchased to buy and hold as benchmarks for our portfolios.)

The three portfolios can be characterized as aggressive, conservatively aggressive and conservative. The aggressive Portfolio # 1, because it was the only portfolio invested in anything last month, was the only one able to move in position, and it did, shooting ahead of Portfolio # 3 to take the lead in our tally.

Investing (Canada) Notes

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Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions. The author holds interests in a number of the funds mentioned in this article.

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