Markets

Fed's Go-Slow Stance Boosts Gold Prices: 4 Funds to Buy - Mutual Fund Commentary

The Fed's latest views on the rate hike, the reduced view on the economic growth and inflation have helped the gold traders. Coming off from a 3-month low, Gold is set for its first weekly gain since February. The "go slow" approach now for hiking rates has been helping a gold rally. Gold futures for April deliveries increased by 1.5% to $1,169 per ounce on the Comex division of the New York Mercantile Exchange. This was the best one-day percentage gain since Jan 30, driving gold to highest close in two weeks.

Gold started off 2015 with a bang as safe haven buying mainly due to increase in currency volatility, uncertainly over Greece's future in the euro zone and expected quantitative easing in Europe, propped up prices. However, the gains fizzled out as gold prices again dropped on strong U.S jobs market. Following which, gold prices fell to new six-week lows as equities recovered on hopes that Greece would work out a deal with its creditors.

Gold had plunged 3% since start of 2015 on expectations of rate hikes. Remember, the yellow metal generally offers returns mostly through price appreciation. In recent times, the stronger US dollar had been affecting gold prices. There is an inverse relationship between the trade-weighted U.S. dollar and the price of gold . The dollar is gaining strength against major currencies mainly due to the adoption of loose monetary policies by the European Central Bank and the Bank of Japan. Such policies have weakened these two currencies in comparison with the dollar.

However the recent rally is great news for traders, and expected to last for some time with expectations of no immediate rate hikes. Gold prices generally trend higher during low rate scenarios. The safe haven thus can be a lucrative option and what better than investing in gold mutual funds.

FOMC's Policy Statement

The FOMC meeting that concluded on Wednesday indicates a gradual pace of rate hikes. The Fed's "dot plot" that tracks what Fed officials think rates should be at the end of the year, saw the median "dot" declining from 1.125% in December to 0.625% at this meeting. The median dot for next year also decreased from 2.5% in December to 1.875% in March.

Meanwhile, in a unanimous vote Fed officials dropped the word "patient" from the policy statement. However, the Fed emphasized that change in its policy statement doesn't mean it has decided on the timing of a rate hike. The central bank noted that a rate hike was "unlikely" in April and cautioned that it will only hike rates if it has "seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term."

Growth, Inflation Concerns

The Fed said economic growth "moderated somewhat" following its December's view of economic activity increasing at a solid pace. The central bank trimmed its growth forecast for 2015 to 2.3-2.7% from an earlier forecast of 3%.

At the same time the apex bank raised concerns that inflation measures were short of expectations, due to a slump in energy prices as well as low import prices. Speaking at the news conference, Yellen said inflation would remain below 1% over the year. The price index for personal consumption expenditures which is the Fed's preferred measure of inflation rose only 0.2% in January. This was the lowest level experienced since Oct 2009, when the gauge increased 0.1%.

Interest Rates & Gold Relationship

The traditional relationship is that higher interest rate has an adverse effect on gold. Gold is viewed often as capital preservation asset and currency that has no yield. So if there are higher yields elsewhere, the cost of holding gold goes up.

However, the World Gold Council now believes the relationship of gold to US rates has weakened over time. As a consumer product it can keep seeing higher demand amidst economic growth. Rate hikes also needs to be measured against rates cycles in other countries and particularly in emerging markets. In fact, inflation rates in emerging markets amid increasing demand for gold are deemed to be more relevant that the inflation rate in the US.

Separately, the study by World Gold Council notes that more normal US interest rate environment may not have as much negative impact as many generally believe. The report notes the following points:

• In a moderate rate environment (with real rates ranging between 0% and 4%), returns for gold are in line with the long-term average of an annualized 6 - 7%.

• Rising rates are worse for gold than falling rates, but still provide annualized returns well in excess of a conservative 0% long-term inflation-adjusted return estimate often used to show gold as a core portfolio asset.

• Gold's volatility is significantly lower in a moderate real rate environment. While rising real rates are associated with increased volatility, it is only marginally higher than the long-run average.

• The correlation between gold and global equities in a moderate real rate environment is close to zero, which forms part of the basis for gold's diversification properties.

• High rate environments (with real rates exceeding 4%) are least favorable towards gold in terms of returns, but volatility and correlations remain moderate relative to other assets.

However, a rate hike and gold gains are only a possibility. Volatility in asset prices and in equities must be a dominating mood to drive investors to safe haven.

Gold Funds to Buy

Gold has always been viewed as a store of value and a safe-haven asset. Investors generally buy gold as it is a hedge against inflation, macroeconomic, geopolitical, systemic and monetary risk. Gold traders embraced the Fed's dovish policy stance. This is to be expected as the precious metal has an easier time competing with interest-bearing investments if rates remain at historic lows.

Here we will list 4 mutual funds focused on operations related to gold and gold bullion. Each of them has earned a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) .

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Gabelli Gold AAA (GOLDX) seeks growth of capital over the long term. The fund invests a lion's share of its assets in companies involved in operations related to gold and gold bullion. It invests in value stocks of companies having impressive growth potential. It may invest a major share of its assets in foreign companies which also include developed and emerging economies.

GOLDX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . The fund has gained 2% over the last one week. The fund has an expense ratio of 1.58% as compared to category average of 1.41%. However, the fund carries no front or deferred sales load as compared to category averages of 5.27% and 2.12%, respectively.

Invesco Gold & Precious Metals Investor (FGLDX) seeks capital growth on a long-term basis. The fund purchases securities of companies whose primary operations include mining, dealing and investing in gold and other precious.

FGLDX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . The fund has gained 2.2% over the last one week. The fund has an expense ratio of 1.45% as compared to category average of 1.41%. The fund carries no front or deferred sales load as compared to category averages of 5.27% and 2.12%, respectively.

First Eagle Gold A (SGGDX) provides investors with the opportunity to participate in the investment characteristics of gold. It invests a large share of its assets in gold or in companies involved in basic operations of gold. Investments are also made in gold mining finance companies and operating companies having mines with long, medium or short life.

SGGDX currently carries a Zacks Mutual Fund Rank #2 (Buy) . The fund has gained 2.4% over the last one week. The fund has an expense ratio of 1.27% as compared to category average of 1.41%. However, the fund carries front end sales load of 5% as compared to category average of 5.27%. It carries no deferred sales load.

Tocqueville Gold (TGLDX) seeks long-term capital growth. It invests a large share of its assets in companies related to gold and other precious metals located worldwide. Investments are also made in developed and emerging markets. While most of the assets are invested in Gold related securities, a maximum of 20% of the assets can be invested directly in gold bullion and other precious metals.

TGLDX currently carries a Zacks Mutual Fund Rank #2 (Buy) . The fund has gained 3% over the last one week. The fund has an expense ratio of 1.36% as compared to category average of 1.41%. The fund carries no front or deferred sales load as compared to category averages of 5.27% and 2.12%, respectively.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at www.zacks.com/funds/mutual-funds .

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Get Your Free (GOLDX): Fund Analysis Report

Get Your Free (FGLDX): Fund Analysis Report

Get Your Free (SGGDX): Fund Analysis Report

Get Your Free (TGLDX): Fund Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

FGLDX TGLDX GOLDX SGGDX

Other Topics

Mutual Funds

Latest Markets Videos