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For the five trading days ending Thursday, Oct. 16, the average precious metals fund we track shed 17.0% of its value on an 11.9% drop in the price of gold to $804.60 an ounce.
CEO Joe Conway may be predicting $1,000 gold before year-end due to "massive financial market turmoil" and "significant monetary inflation," but the yellow metal is not cooperating.
The problem with the monetary inflation argument is that, even though banks may have money to lend, as we head into a recession there are fewer good credit risk companies and individuals trusted by these institutions to which they can make loans. Also, the
/Jefferies CRB Commodity Price Index is off about 40% since the end of June, which shows a decline in raw material costs.
The "lack of jewelry demand" was cited by John Reade, the head of Metals Strategies for
, as a reason for the downward pressure on the price of gold. In the largest drop on record, Friday's University of Michigan Survey of Consumer Confidence fell to 57.5 from 70.3 in September. In a recession, struggling consumers, shell-shocked from stock market losses, may be shunning gold jewelry in advance of the prewinter holiday shopping season.
The worst-performing precious metals fund this week is the
ProFunds Precious Metals UltraSector ProFund
, which dove 32.60% on 150% leverage to the Dow Jones Precious Metals Index. This index follows U.S. stocks of companies that explore for and extract gold, silver and platinum ore.
Losing more than one-quarter of its net asset value, the
Market Vectors Gold Miners ETF
scored the second worst at -26.61% for the period. This exchange-traded fund tracks the Amex Gold Miners Index. While 54.9% of the companies in this index are Canadian, 16.8% South African and just 14.2% U.S.-based, all the holdings are U.S.-traded securities including
Harmony Gold Mining
. The worst-performing holding of this fund,
, tanked 51% over the short time period.
On the other hand, the portfolio of
, off 25.94%, holds shares of many of the same gold, silver, platinum and other natural resource companies as traded on their home stock exchanges like Toronto, London, New York and Johannesburg.
The president of Midas Funds, Tom Winmill, described the smaller mining shares that rely of credit due to their lack of cash flow as "road kill." The sentiment is shared by
chief financial officer, David Garofalo, who expects the credit freeze to cause bankruptcies among the smaller mining and exploration companies. With a credit line of $600 million and another $110 million in cash as of September, Agnico plans to look for acquisitions in order to target a fivefold increase in precious metals output.
The best-performing Precious Metals table has been omitted as none of the funds in this category generated a positive return this week.
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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.