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Gold Funds Continue to Lose Luster

Investors redeemed a net $114 million in May, more than in the previous two months combined.

Gold funds continued to lose their luster in May as investors bailed on the sector for the third consecutive month.

Shareholders pulled a net $179 million out of specialty precious metals mutual funds during May, according to the latest data from Financial Research Corp. That was more than the approximately $114 million combined outflows for March and April.

For the first five months of the year, investors have redeemed nearly a quarter of a billion dollars out of the fund.

At least part of the problem seems to have been lackluster returns for gold funds, which averaged a paltry 2.9% for the year through the end of May, according to Morningstar. This poor performance, which comes on the heels of an average return of 31% last year, may have prompted some investors to look for better prospects elsewhere.

"Usually there is more performance chasing than rebalancing," says Russel Kinnel, director of mutual fund research at Morningstar in Chicago. He repeatedly sees "hot money" attracted to funds by stellar performance that then tends to get pulled out quickly when the sector inevitably cools off.

"I think any kind of momentum strategy can sometimes work, but generally it is pretty bad idea," Kinnel adds.

FRC says

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Fidelity Select Gold (FSAGX) saw the biggest outflows in absolute terms, with $60 million walking out the door. That represented over 4% of the funds assets at the beginning of the month.

Several funds had even bigger outflows, when measured as a percentage of total assets.

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U.S. Global Investors Gold Shares (USERX) lost almost 8%, and two of Rydex's funds,

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Precious Metals Adv (RYMPX) and

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Precious Metals Inv RYPMX shedding 9% and 11% of assets respectively.

A spokesman for San Antonio-based U.S. Global Investors declined to comment citing company policy banning the discussion of the firm's fund flows.

Rydex and Fidelity had not returned calls with comments either.

Morningstar estimates investors continued to pull money out of the funds in June to the tune of another $40 million, as average fund gains for the first six months of the year fell to a meager 2%.

The mutual fund cash-out came in tandem with a major liquidation in holdings by

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in April and May. GLD is the largest gold exchange-traded fund and the only U.S.-listed ETF that holds physical bullion. The volume of the metal it keeps in London vaults fell to 463 tons in late June from a peak of 501 tons in mid-April.

However, recent figures show much of the loss has been reversed with the trust holding about 497 tons of the gold as of Thursday evening.