A well-known gold bug has a surprising message for investors: Although he remains bullish on the metal, he says it might be time to lighten up on gold stocks.
The man in question is Frank Holmes, chief investment officer at U.S. Global Funds and the portfolio manager of
U.S. Global Investors World Precious Mineral Fund and the
Gold Shares Fund, which invest in stocks of gold and precious metals companies. The two funds are up 85% and 92%, respectively, over the past 12 months.
Gold currently is hovering at $580 an ounce, off 20% from its recent high of $730, but still up 35% from about $430 last June. Mining stocks, however, have gained more, because upward movements in the gold price add disproportionately to company earnings.
According to Holmes, the past month's selloff in gold is just a stopping point on a possible journey to $1,000 an ounce, as the Russian government looks set to start hoarding bullion reserves. That bullish view is no different than the one he had before the general metals run-up this spring.
So why does he advise investors to ditch such a strong-performing asset class?
"What I share with people is that there's a lot of historical math that shows
having exposure to gold helps with generating a stable return with least volatility," says Holmes.
Holmes reckons that a 10% weighting in gold or gold stocks is optimal in terms of reducing the overall swings in a portfolio's value. That's because variations in the value of gold don't correlate with price movements in the overall stock market, for instance, in the
Thus, a fall in the stock market isn't necessarily matched by a change in the price of gold or gold stocks. Experts say a small investment in gold can help reduce overall swings in a portfolio's value.
But now, as gold prices have almost doubled over the last 12 months, an investor who had 10% of his assets invested in gold or gold stocks this time last year would now be looking at closer to 20% of total assets tied to the metal. And that may encourage some inappropriate investment decisions.
"What finance theory tells you is that you need to be diversified across all asset classes," says Ken Eades, head of finance at Darden's Graduate School of Business Administration, who explains that allocation decisions often are much more important than trying to chase performance of particular funds or sectors.
But that's what people frequently do, according to data from Financial Research Corp. Through April of this year, $2.1 billion flowed into precious metals mutual funds, and another $2 billion into exchange-traded funds tracking the gold bullion, such as the
"Sell some of the winners and put some more into some of the losers," advises Eades, who says that investment strategies focused on the allocation of assets rather than chasing performance tend to do better in reducing overall fluctuations in value.
you minimize the risk for any given expected return level," he says, meaning that the portfolio would be expected to grow consistently with fewer swings in value. He advises periodically changing the portions of different asset classes of stocks, bonds, real estate and commodities back to their original target percentages. For gold, that wouldn't be a large portion.
"The magic that people forget is the need to rebalance each year," says Holmes, who recommends investors rebalance their portfolios on their birthday, or, failing that, in the week between Christmas and New Year.