Gold Funds Hoard Cash

With gold headed back toward its highest level in decades, why are so many gold fund managers holding so much cash?

Take Frank Holmes, chief investment officer at U.S. Global Investors in San Antonio. His $250 million (USERX Quote - Cramer on USERX - Stock Picks)Gold Shares (USERX) held 16.4% in cash as of Dec. 31, while the $1 billion (UNWPX Quote - Cramer on UNWPX - Stock Picks)World Precious Minerals (UNWPX) had 14.5% of its assets in cash at year's end.

While it might seem like a fund with that much money on the sidelines would have missed out on gold's rally of 20% from its low of around $560 an ounce last October, Holmes says it has provided much needed flexibility.

"What happens is that when the stocks really get clobbered, I have the money to buy them," the fund manager says.

In particular, when prices fell back in the second quarter of last year, he used the funds to increase his stake in miner Goldcorp(GG Quote - Cramer on GG - Stock Picks), currently the top holding in both funds. He also bulked up on Randgold(GOLD Quote - Cramer on GOLD - Stock Picks).

Holmes' cash levels have actually come down from the end of the second quarter of last year, when they reached 28% for Gold Shares and 20% for World Precious Minerals. Because investors tend to chase performance and buy at the top of the market, he had a lot of new money to put to work at exactly the wrong time. In May of last year, U.S. Global Investors was raking in up to $50 million a day from both retail and institutional investors, most of it into the two precious metals funds.

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