Equity precious metals funds are riding higher on Brexit wave

Some funds up more that 100% so far this year

Jun 27, 2016 @ 12:46 pm

By Jeff Benjamin

The pullback of global financial markets following last week's historic vote by the United Kingdom to leave the European Union proved to be more good news for investors in equity precious metals funds.

The category, which is up an average of 88% since the start of the year, gained 4.6% on Friday when the S&P 500 Index lost 3.6%.

Even though the category has been strong all year, with some mutual funds up more than 100% since December, the Brexit vote added fresh fuel to the run because it made gold even more attractive.

Equity precious metals mutual funds invest primarily in mining companies that tend to work as leveraged bets on the price of gold, which is up 24% so far this year, including a 4.9% spike on Friday.

Some financial advisers have described the rally for the fund category as another reason to steer clear of what can be a volatile space.

“That's just not a sandbox I play in, because it's too short-term oriented for me,” said Tim Holsworth, president of AHP Financial Services.

“In the old days, we'd allocate 5% to precious metals for diversification, but it hasn't worked out for so long it became hard to justify,” he added. “I'm just not smart enough to know when to get in and when to get out.”

Even with the strong rally this year, you can't really blame advisers for being gun-shy of the category, which declined by 23.5% last year and hasn't finished a year in positive territory since 2010.

For Kashif Ahmed, president of American Private Wealth, the reluctance to move assets into equity precious metals funds boils down to the simple aversion to chasing performance.

“Anything that's up 100% in six months I wouldn't touch,” he said.

Of course, some advisers and financial experts were making similar comments three months ago, when the category was up 36% through March.

Mr. Ahmed described the gold rally as a “fear trade,” and acknowledged that the equity precious metals funds would be a better way to play precious metals than to just invest in gold.

Josh Crumb, founder and chief strategy officer at Gold Money, said the rally for precious metals makes perfect sense, and he believes it still has room to run.

“This trend was emerging even without the Brexit vote, which is why you saw so many big-name investors move into gold,” he said.

According to Mr. Crumb, the precious-metal's rally has been fueled by the bet that the Federal Reserve would not be moving toward normalizing, or raising, interest rates.

And last week's Brexit vote was seen as a seal of approval that the Fed will not be raising rates anytime soon.

“This was kind of the last straw, because now after Brexit it looks almost impossible for the Fed to hike,” Mr. Crumb said. “It took away the remaining uncertainty whether fed could raise or not.”

Joe Foster, who manages the $817 million VanEck International Investors Gold Fund (INIVX) , said, considering how difficult it has been for the category over the past several years, this rebound should be viewed as legitimate.

“This category has tremendous leverage to the price of gold, and it was oversold the past few years,” he said. “I don't think the rally is over or overdone. They represented very deep value coming into the year, and based on historical valuations we're still below long-term averages and nowhere near peak valuations we've seen historically.”

For those investors that have been enjoying the ride so far this year in equity precious metals funds, the Brexit vote has certainly been a welcomed bonus.

“When there's uncertainty people flock toward gold,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.

“The Brexit vote has caused investors to remain concerned about the global economic prospects,” he added.

Equity Precious Metals funds outshine the markets

Fund name Ticker YTD 1-year 3-year 5-year
Source: Morningstar

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