With this week's 50-basis-point federal funds rate cut, the dollar plummeted and gold reached its highest level in 27 years. Thursday's close at $733 for the spot price of gold was second only to the Mount St. Helens-like price eruption to $873 an ounce back in the stagflation days of September 1980, coinciding with the start of the Iran-Iraq War.
Over the last 12 months, gold has followed the inverse path of the U.S. dollar, climbing more than 27% as the currency lost another 8% of its value against a basket of six major currencies.
Not only did the
rate cut confirm the heightened risk of recession, it also made the U.S. dollar comparatively less attractive as a reserve currency.
Federal Reserve Chairman Alan Greenspan brought this home on his recent book tour to promote
The Age of Turbulence
, which explains the economic imprudence of following through on trillions of dollars in tax cuts from a projected surplus that didn't materialize.
Gold Gallops; Dollar Dives
In an interview this week, Greenspan declined to say exactly what investments he owns, but did admit to having diversified away from the U.S. dollar.
The precious-metals fund benefiting the most from the dollar's slide,
ProFunds Precious Metals UltraSector (PMPIX), skyrocketed 15.02% in the five trading days ending Sept. 20. This fund is leveraged 150% to the Dow Jones Precious Metals Index.
In second place, the
Fidelity Select Gold Portfolio (FSAGX) jumped 11.11% with significant holdings of the largest gold miners including
, Newcrest Mining,
The two holdings that moved up the most, Newcrest Mining, up 16.13%, and
, up 14.50%, are stopping their forward-sale hedging programs, which are inappropriate in a rising gold-price environment. Newcrest is buying its way out of contracts to sell 4 million ounces of gold at well below the market price.
here for an explanation of our ratings.
All of the underperforming precious-metals funds made money this week. Four of the laggards are tied directly to price moves of bullion metals. Mining shares tend to be more volatile than bullion, because their profit margins expand much faster than their mining costs when spot prices rise and shrink much faster when prices fall.
The smallest gain this week came from the
PowerShares DB Gold Fund
, up 3.44%. It tracks the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold Excess Return Index of gold's market value. The next two on the list,
Streettracks Gold Trust
, up 3.77%, and
iShares COMEX Gold Trust
, up 3.81%, both hold gold bullion in large bank vaults.
The 4.18% one-week performance by the
Vanguard Precious Metals and Mining Fund(VGPMX) would normally be considered a good return for a mutual fund. Not this week. With a sector allocation of 62.9% mining, 16.6% chemicals, 9.2% coal, 5.1% building materials, 3.4% metal fabrication and 2.6% iron and steel, the fund diversified itself away from a pure mining play and outsized gains.
One of the fund's holdings, the London-based
, lost 3.30% over the period because of a strike at its South African platinum mine.
If the Bush administration has its way, the U.S. may kick off a second Iran-Iraq war from America's permanent bases in Iraq. The ensuing world turmoil should be enough to break the record high price of gold sparked by the first Iran-Iraq war.
There are plenty of indications that this is where we're headed. Senator John McCain updated a Beach Boys' tune by singing "Bomb, bomb, bomb, bomb, bomb Iran" at a campaign rally earlier this year. And this week, Iran's President Mahmoud Ahmadinejad was refused permission to lay a wreath at ground zero to honor the victims of the Sept. 11 terrorist attacks, as the publicity stunt might garner antiwar sympathy. Look for $1,000-per-ounce gold if the bombs start falling.
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Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.