Security Fears Only Spur the New Gold Rush - TheStreet

Heading into the homestretch, major averages were struggling to reach break-even. Meanwhile, the markets newest old-standbys, gold and related shares, were rallying again.

As of 2:20 p.m. EDT, gold futures were up 0.6%% to $317.10, while the Philadelphia Stock Exchange Gold & Silver Index was up 0.8% to a 52-week high of 85.69.

Gold's latest gains were being aided by ongoing concerns about potential terrorist attacks here, as well as India's Prime Minister Atal Bahari Vajpayee call for troops to prepare for a "decisive battle" over Kashmir.

The yellow metal was also getting a lift after the Bank of Japan's decision to sell an estimated $3 billion of yen failed to materially halt the dollar's slide vs. the yen. Prior to the intervention, the dollar fell as low as 123.53 yen, its lowest level since Dec. 3. After the sale, the dollar rallied to as high as 125.06 yen before reversing again and lately was trading at around 124.25 yen.

As discussed

last night, the Japanese intervention was expected by currency traders after a series of comments by Japanese officials.

Darko Pavlovic, a currency analyst at MG Financial Group, suggested "today's intervention looks like the first of several to come," and noted the Bank of Japan acted alone. If the euro continues to slide vs. the yen, the European Central Bank could get involved, he predicated. So, too, could the

Federal Reserve

, if officials here decide the so-called strong dollar policy really remains U.S. policy.

"In the past, joint interventions proved more effective on the currency markets, due to their concentrative power and psychological effect," Pavlovic noted.

Because gold moves inversely to the dollar, the potential for joint central bank intervention to strengthen the greenback is likely to encourage gold's detractors, of which there are many, despite robust gains for gold and related shares in the past 18 months or so. Heck, even gold-timing newsletter writers are bearish, with an average cash position of more than 70% as of May 20, according to

Hulbert Financial Digest

(which was recently acquired by

CBS MarketWatch

).

The rise of bearish newsletter writers is probably a good contrarian sign. But those who've only recently awakened to gold's re-emergence are understandably asking the question: Is it too late to get in?

Not Too Late

Frank Holmes understands your concerns. Holmes is the lead portfolio manager for U.S. Global Investors' $50 million

(UNWPX) - Get Report

Precious Minerals and $30 million

(USERX) - Get Report

Gold Shares funds, which are each up more than 100% year to date and more than 65% in the past 12 months, according to Morningstar.

The potential for short-term volatility in gold's price is why Holmes recommends investors use dollar-cost averaging, so as to avoid buying the top. Less predictably, Holmes advised that individuals have no more than 5% of their overall portfolio in gold and related shares.

Still, he remains quite bullish on the yellow metal: "You should have that diversification

into gold because this is a secular move," the fund manager said, suggesting the $360 to $400 per ounce range is a "fair and reasonable level" for gold.

The fundamental reasons behind that optimism which Holmes cited here

March 26 remain intact, including:

The aforementioned weakness in the dollar, and accompanying concerns about renewed inflationary pressures thanks (in large part) to monetary and fiscal stimuli, as recently discussed here;

Demand for gold outstripping supply while gold-mining firms, most notably Barrick Gold and AngloGold , are reducing their hedging -- the selling of future production for fixed prices. "For years, hedgers were putting a lid on gold; today they're putting the support," Holmes said. "It's a key catalyst" and a counterbalance to central bank selling;

Interest from money managers previously underweight the sector, and from nontraditional buyers;

Gold buying in Japan.

"Dynamic factors are converging and say gold is undervalued and will trade higher," Holmes said. "Gold has the wind at its back."

U.S. Global Investors remains long the names Holmes mentioned here in late March, including

Freeport McMoran Copper & Gold

(FCX) - Get Report

,

Northgate Exploration

(NGEX)

and

Harmony Gold Mines

(HGMCY)

.

In addition to Harmony's common shares, the fund also owns warrants, which give an investor the right to buy securities in the future for a fixed price, usually higher than the current price. Similarly, U.S. Global has acquired warrants on

Newmont Mining

(NEM) - Get Report

, in addition to the common shares.

Since Holmes is bullish on gold, and his work suggests gold stocks move 3% to every 1% move in bullion, the fund group employs warrants to "get bigger leverage to the upside move." Additionally, the fund reduced its exposure to hedgers such as Barrick and AngloGold, although it has recently been rebuilding positions after the miners' announced plans to reduce such activities.

Using warrants and avoiding hedgers are among the reasons that both U.S. Global's gold funds are in the top 10 among precious metals funds for the past three- and 12-month periods and have outperformed the Philadelphia Stock Exchange Gold & Silver Index. The XAU was up 56% year to date and 30% in the past 12 months, heading into today.

Given renewed interest in gold shares, Holmes said his current focus is finding names undervalued relative to their peer group. His current favorite is

Wheaton River Minerals

(WRM:Toronto).

Wheaton River recently sold private placement warrants totaling C$94.3 million to help fund its previously announced acquisition of Minas Luismin, one of Mexico's largest gold and silver producers.

Holmes forecast Wheaton River could double from its current price of about C$1.50 a share and believes a planned listing on the American Stock Exchange, should it occur, would result in even more explosive upside.

Yes, more and more, the terms "explosive" and "gold" are being used in the same sentence, and it's no joking matter.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.