Gold Funds Hoard Cash

So Holmes let the cash pile up.

He's not alone in his penchant for cash. Other specialty gold funds also seem to hanker after the green stuff as much as the yellow, albeit to a lesser degree. (FSAGX Quote)The Fidelity Select Gold Fund (FSAGX) held 11.9% of its $1.5 billion in cash at the end of 2006, down from almost 15% in March.

Other than cash, the fund's top holdings at year's end included Newcrest Mining, Meridian Gold(MDG Quote) and Barrick Gold(ABX Quote).

And as recently as June, the $1.1 billion (SGDX Quote)First Eagle Gold Fund (SGGDX) had 14% of its holdings in cash and other short-term, cashlike securities, although that figure had dropped to 5% by year-end.

The fund's largest holding by far is bullion, at 26% of total assets, followed by Newmont Mining(NEM Quote) at 10% and Barrick at 8%.

To put these figures in perspective, the average diversified U.S. equity fund holds 3.94% cash, according to Morningstar.

Fund flows aren't the only determinant of how much money Holmes keeps in cash. Gold, as he sees it, is a currency, and just as there are times when the dollar or the euro are overvalued or undervalued, the same is true for gold.

The fund manager uses proprietary algorithms to determine when the different instruments have diverged meaningfully from a trend. "We are not Koala bears hugging an index," he says, referring to penchant of some fund managers to try to replicate the performance of a benchmark.