Prospecting for profits: gold funds soared 22.7% in first quarter, topping other sectors

Black Enterprise, August, 1996 by Juliette Fairley

Leery investors, anticipating a rise in the prices of goods and services, are now looking to put their money in hard assets--namely gold. The top-performing mutual fund sector in the first quarter of 1996 was gold. According to New York-based Lipper Analytical Services, which tracks the performance of mutual funds, gold funds soared 22.7%. These funds seek capital appreciation by investing at least two-thirds of their assets in the shares of gold mining concerns.

"People tend to invest in gold funds if they're worried about inflation and interest rates are low," says Jon Teall, a research coordinator with Lipper. (The Federal Reserve Bank lowered the interest rate in January, from 5.5% to 5.25%.)

The top-performing mutual fund year-to-date (as of March 31) was the Midas Gold Fund. The $190 million fund was up 74.58%, according to Lipper. The minimum initial investment for this no-load fund is $500, but you can also make monthly payments of $50. For a prospectus, call 800-400-MIDAS.

The following is an interview with James Turk, strategic advisor, and Kjeld Thygesen, fund manager, for the Midas Gold Fund.

BE: At the beginning of the year, the price of gold rose because there was higher demand and less supply. How did this affect the fund?

THYGESEN: Basically, the move in gold above $400 had a positive impact on gold-producing stocks, although it was also felt to a lesser extent on some of the older exploration development companies.

BE: You invest in North American and South African gold-mining shares. What are some of the key distinctions between companies based here compared with South Africa?

THYGESEN: South African gold companies are primarily influenced by movements in the gold price and factors such as currency, labor and costs. But it is the highest cost industry sector in the world compared with North American mining companies and Australian gold mining companies.

BE: South Africa tends to reap the benefits from surging gold prices. What is your outlook for future growth in this area?

THYGESEN: We're fairly cautious about South Africa. We have 10% in South Africa right now, which compares with none last year. We increased it at the beginning of this year with the rise in the gold price. If the rise in the gold price is sustained over $400 an ounce, it's likely that we will increase the South African exposure. South Africa, with its underground mining, has a different cost structure than most of the North American and Australian mines, which are huge holes in the ground. These differences can affect performance.

BE: What's the investment breakdown of the fund?

THYGESEN: The majority of the portfolio is invested in the intermediate gold producers, small-to-medium producers who are in the process of expanding by exploration or acquisition. They have a good strong growth profile. We do have a minority portion in the major producers. These include the big market cap stocks such as Barrick Gold, Newmont Mining and Homestake Mining. Along with the other major producers, they're a quarter of the portfolio. Then, there's the 25% in the new project, resource companies.

BE: What areas will you focus on for the rest of 1996?

THYGESEN: We're trying to add some of the newer producers, which are looking to increase production, and are trying to find more smaller cap new project companies. They are primarily based in North America, but they are exploring and developing globally, literally worldwide. For instance, there's an enormous exploration development boom in South America, Southeast Asia, Indonesia, West Africa and Tanzania. And then in Russia, there are vast gold deposits, but it's much more complex to do business there with all the mining codes and tax laws that haven't been finalized yet.

BE: What is the benefit of investing in gold funds in general and Midas in particular?

TURK: Gold is a natural hedge against inflation. It's the only thing we produce that's for accumulation; everything else, such as crude oil and soybeans, is produced for consumption. It looks like we're moving into an environment where rates of inflation will tend to increase.

By spreading over a large number of companies, we're able to achieve the diversification that an individual investor may not get if he doesn't have 50 or 60 names in his portfolio.

BE: What criteria do you use when evaluating mining companies?

THYGESEN: We look at people, projects and pricing--the three Ps. We look at management, who they are, what they've done and if they have a successful track record in terms of exploration and discovery. We'll do a technical analysis of the project, using a geological or metallurgical consultant to establish that the project has the right environmental, metallurgical and geological characteristics. Third, we look at the pricing or market capitalization, which is more subjective.

BE: Which companies would you say are noteworthy in terms of performance?

THYGESEN: Two new companies are Fairmile Gold, which is developing a gold project in Nevada, and Minorca Resources, which has an indirect minority interest in a project in Indonesia. We bought Fairmile for $1.50 Canadian and it's trading at $4.20 Canadian now. Minorca we bought for $1.25 and now it's trading at $5.10.