Some Say Gold Still Glitters in Dark Times

Last week's debt crunch and the resulting stock market rout have fanned fears of a systemic breakdown in global financial markets.

While we're not there yet, it's precisely this kind of scenario that inspires Simon Fenwick, co-manager of the $1.1 billion SGGDXFirst Eagle Gold Fund(SGGDX), to stick to a narrow investment mandate of gold bullion and gold stocks.

For a long time that strategy was a winner: Prices of both the metal and mining stocks more than doubled in the four years to January 2007, allowing the fund to log annualized returns of nearly 20% over the period. But it has really penalized him this year, as the price of gold rose 1% in the first half, while gold stocks, as represented by the Amex Gold Bugs Index, were essentially flat. Fenwick actually lost money, giving up 2.7% through June 30.

Meanwhile, some his peers who hold a more diverse group of metals stocks, including producers of platinum, lead, zinc, iron ore and copper, shot to the sky in the first half on robust demand for industrial materials.

Fenwick has no regrets, however. He says gold has a unique quality that compensates for its recent weakness. "The reason we own gold, and believe investors should own gold, is as an insurance policy against a major financial accident," the manager says. "Although base metals miners do well during an inflationary period, they tend to fare poorly in deflation" when prices are falling.

Straying from his investment strategy would be a major disservice to investors who should own the yellow metal, he says, not for the "price quoted on a Bloomberg" terminal, but rather what it can buy when the values of other assets are falling. He notes the metal has tended to hold up well in widely diverse scenarios.

Such tectonic crises would certainly include the huge consumer price inflation of the 1970s, when gold shot up from $35 an ounce to a peak of over $800, and the Great Depression of the early 1930s, when consumer prices fell like a stone while gold held steady at $22 an ounce.