Gold bug puts money where his mouth is

On the heels of a 20% drop in gold and a 40% drop in gold-mining stocks, the most passionate defender of the precious metal has launched his first gold mutual fund. The EuroPac Gold Fund (EPGFX) will invest primarily in gold-mining companies, where Mr. Schiff sees a big opportunity. “We've been moving clients from physical gold into gold-mining companies,” said Mr. Schiff, chief executive of Euro Pacific Capital Inc. “The stocks have just been crushed,” he said. “I've never seen sentiment this bad, and you have to love a market everyone hates.” Gold-mining stocks have struggled mightily this year, though they have bounced back in the past month. The Market Vectors Gold Miners ETF (GDX), for example, is up 20% in the last month but still down 40% for the year. Physical gold, by comparison, looks better. The SPDR Gold Shares ETF (GLD) is down 20% year-to-date. Mining stocks long have been viewed as a leveraged play on gold, but due to their poor management, they have been nearly left for dead by the market.

'Misused' money

“The No. 1 reason gold miners have done terribly is, they've done a terrible job of managing their capital. They were very profitable during the gold bull run, but they've misused all that money,” said Sam Lee, an analyst at Morningstar Inc. “They've historically overpaid for gold mines and understated costs,” he said. “The marketplace has gotten fed up with that.” The market's tough love could be just what the gold miners need, Mr. Lee said. “They almost had to go through something like this to hammer home the fact you can't waste your money,” he said. “Today, they're definitely a better buy than three years ago.” Mr. Schiff launched his first mutual fund just over three years ago, but despite his fevered belief in gold, he has held off on launching a gold- mining mutual fund until now. “They had just had such a big run. I didn't want to launch one after that,” Mr. Schiff said. “I didn't want to get caught in a big correction. You don't want to be the guy that started an Internet fund in 2000.” This year's correction hasn't done anything to soften his long-term outlook for gold. Market watchers attribute gold's fall to rising real interest rates, which makes the precious metal less attractive as an inflation hedge. But Mr. Schiff thinks that real inflation is inevitable, if not already here.

Inflation

“Inflation is not low,” he said. “A lot of people on Wall Street think inflation is low because they believe the government and not their own eyes.” Inflation, thanks to the central bank's easy-money policy, is going to send gold to $5,000 an ounce or higher in the next few years, Mr. Schiff said. “Is it going to happen this year? Not likely,” Mr. Schiff said. “But it's not going to take a decade. The problems are too big for gold not to react.”