Gold Funds Still Shine in September

September was the month that the unthinkable happened. Terrorists launched an unprecedented attack on the United States. And the effect on markets was palpable. They tumbled. In fact, 3300 of the 4000 mutual funds tracked by Morningstar Canada posted losses in September.

Which funds made money? Not surprisingly, specialty funds and precious metals funds came out the big winners. Of the Top 25 funds for the month as reported at The Vancouver Sun's Top Funds page, 14 were precious metals funds, 10 were specialty funds and the last was a US bond fund.

Specialty funds are a mixed bag. Some are hedge funds. They use options and short selling as strategies where appropriate. Others are futures funds and play commodities. And still others are bear funds, investing with the expectation that the market will drop.

Since the end of the month, however, the price of gold has dropped ten dollars to $282 from its peak of $292 on October 8th. Gold analyst Steven Jon Kaplan (Gold Mining Outlook), who always has an interesting take on gold, predicts the yellow metal will drop as low as $260 and maybe lower. The reason, he avers, is that hedge funds will unload their positions.

Always contrarian minded, Kaplan argues that "when analysts say that 'gold is likely to remain in a trading range,' expect renewed downward pressure. When they proclaim nervously that 'gold is fine as long as it remains above $262,' the yellow metal is very close to plunging below that mark. When they insist that 'gold is headed hopelessly lower with no recovery in sight in the foreseeable future,' you will know that it is time to buy heavily."

In private correspondence, I suggested that another terrorist attack could take the price of gold up quite quickly so it's probably a good bet to stay invested, just for insurance. But that, he says, is the reason he expects the metal to drop. "If everyone is buying gold 'just in case'," he says, "then the price is surely going to decline."

Maybe so. Nevertheless, I'm reluctant to sell. On the plus side, he expects gold to climb to over $335 next year.

Meanwhile, technology stocks are making a comeback and it would not be surprising to see tech funds edge out the bear and precious metals funds for top spots in October. The NASDAQ is up 14.9% already in October.

The three month performance rankings have bond funds overwhelmingly on top with a smattering of precious metals funds and specialty funds along for the ride.

Rank	Fund	Type	1 Month	3 Month	1 Year
1	Friedberg Diversified Fund	Specialty	17.18%	16.37%	90.83%
2	IUnits S&P/TSE Canadian Gold Index Fund	Precious Metals	13.97%	25.05%	n/a
3	Dynamic Equity Hedge Fund	Specialty	11.94%	n/a	n/a
4	Friedberg Futures Fund	Specialty	9.90%	10.10%	59.91%
5	Royal Precious Metals Fund	Precious Metals	9.87%	10.55%	23.71%
6	All-Canadian Resources Corporation	Precious Metals	9.41%	14.11%	19.23%
7	ADA Diversified Futures Fund Limited Partnership	Specialty	8.48%	3.08%	48.89%
8	Friedberg International Securities Fund	Specialty	7.98%	-2.14%	85.36%
9	All Points U.S. Bear Fund	Specialty	7.31%	15.84%	47.58%
10	Dynamic Precious Metals Fund	Precious Metals	6.98%	9.52%	36.63%

We've had four months now without a Power Performer. And the number of Strong Performers has dwindled to a paltry three. Two of those three are RRSP eligible but they also take large minimum investments.

Despite slumping stock prices, the P/E ratio for the S&P 500 hit an all-time high of 35.99 recently. That's because trailing earnings are slumping even faster than share prices. This could spell further trouble ahead.

But market internals, according to the Cabot Market Letter, are improving. They've just moved from a 100% cash position to 33% invested as of Oct. 16th.