All That Glitters (Redux)

The returns are in. And gold is the winner. Only, I don’t understand the contest.

Of the five best performing mutual funds for 2010, three of them were gold funds. Three mutual funds with almost $8 billion in assets grew about 50% last year. They capitalized on gold’s 30% rise and added gold mining shares from around the world. For this they charged around 1.5%, and they have early withdrawal penalties.

To their credit, two of the funds have been around a while. Both Oppenheimer and Tocqueville have offered their gold-focused fund since mid-1998. And since that time, both funds have soared. A thousand dollars invested in the Tocqueville fund back then would be worth $13,800 today. By contrast, a thousand in gold would be worth $4700, and a thousand in the S&P 500 would be worth $1400.

But past performance is not predictive of future performance. In fact, we’ve seen several examples of how past outperformance seems to be predictive of future underperformance. In this case, the problem is compounded by the fact that no one can tell me what gold is, economically.

I know that it’s an element with the symbol Au with an atomic number of 79 that historically has been used for monetary purposes. But in our modern economy, its use for jewelry and certain industrial processes is minimal. Some governments like to keep gold reserves, but that’s more for political or historical reasons. If I invest in something, I like to have more than just a sentimental reason.

The sad thing is that these “Top Funds” lists always attract performance-chasing behavior, which usually ends badly. Because the trend is your friend, until the bend at the end.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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