Investors seek out gold when they are fearful. There's nothing like being able to hold a piece of shiny metal and knowing that if the sky is really falling, you've got something that can at least be traded for life's essentials.

The past couple of years have given investors that panicky feeling. Over the last extremely bumpy decade, the S&P 500 has gained an average of only 2.9% a year annualized. And that means gold and other precious metals are again playing an important role in many investors' portfolios. New York-based Tocqueville Asset Management sees the appeal of this logic. The fund company has been a fan of gold far longer than recent gold bugs have even known where to find the spot price of gold.

In 1998, the firm launched its gold offering, the $2.4 billion Tocqueville Gold fund. It was the height of the dot-com frenzy. At the time, gold was trading at a multiyear low, selling at less than $300 an ounce. The smart money was chasing high-flying tech issues, and there was talk that gold would never again be relevant, given the fabulous returns in equities and housing.

"For a contrarian investor, it was the perfect time to start a gold fund," says John Hathaway, the fund's manager. At the beginning of this year, gold was trading at about $1,600 an ounce.

For the first five years, the fund limped along in an obscure category. But in the early 2000s, investors experienced a vicious turn in the markets, and Tocqueville Gold came into its own.

As the Internet bubble popped and commodities soared, gold didn't seem like a quaint investment of a bygone era. Investors began to see the need to protect themselves from explosions in other parts of their portfolios. Even at today's much higher prices, Hathaway insists investors haven't missed out completely - he believes gold can rise as high as $2,000 an ounce.



There are several bull arguments for gold, even though there are periods of volatility like December's 10% price drop. The biggest is currency weakness. "Gold is a hedge against currency debasement," Hathaway says. But gold offers a respite from that gloomy worldview. Furthermore, Hathaway notes, three large emerging economies - China, India and Russia - have increased the percentage of gold in their reserves, providing further support for gold prices long term.

These trends have led Tocqueville Gold to impressive gains. Over the last three years, Tocqueville Gold gained an average of 37.6% a year annualized, besting 99% of the funds in Morningstar's equity precious metals category. For the five-year period, Tocqueville Gold is up 14.6% a year annualized, in the category's top 4%. By comparison, the S&P 500 is up 13.4% and 0.1% during those periods, respectively.

Tocqueville Gold is not a pure play on gold. Unlike more common exchange-traded gold funds, this offering doesn't invest just in physical gold, but looks largely to small-cap stocks in mining and exploration. In fact, Hathaway has not bought the real stuff since 2004, and gold makes up just 6% of assets.

The reason Hathaway prefers stocks is that they offer something that gold itself doesn't: the potential to participate in a company's growth and collect a dividend. "As prices rise, they will be forced to bump their dividends," Hathaway says. "With a direct gold investment, you don't get the dividend."

There's also the possibility of stock appreciation, in addition to the increase in gold prices. But such a reliance on gold-related stocks is a double-edged sword: In addition to being influenced by the price of gold, there are times when these stocks act like, well, stocks. Many times, Tocqueville Gold moves more in concert with small-cap stocks rather than gold. In 2011, small-caps as measured by the Russell 2000 fell 4.2%. Tocqueville Gold was down 15.9%. Gold prices, by comparison, rose 10% in 2011.



Investing in gold stocks means traveling the globe in search of promising mines and operations. The names that populate the fund's top 10 tend to be based in North America - Canada and Mexico mostly. But further down are more exotic locales. Therefore, analysis of the stocks also requires analysis of the geopolitical situations and the rules of law in the nations where miners operate. For that reason, the fund has shied away from Russia, even though the country is rich in gold mining. "They're crooks," Hathaway insists.

On the opposite end of the spectrum are stocks domiciled in Canada, prized for its stability. "It's the single best jurisdiction with a pro-mining political regime," he says. "But the valuations tend to reflect that."

South Africa, once a gold mining powerhouse, has a collection of mines whose production is in decline. However, the country is home to companies with vast experience in the market. And some South African companies, like Gold Fields, are also looking to expand into younger mining markets like Peru. That country is where Hathaway sees the greatest potential upside for mining.

The fund holds Buenaventura, Peru's largest publicly traded precious metals company and a major holder of mining rights. "It's a place you have be," he says. "The geology is fantastic." Hathaway likes that Buenaventura has conservative management, which has not issued new shares since the fund made its investment seven years ago, preserving existing shareholder value. Also, the stock pays 20% of its profits as dividends.

While Tocqueville Gold has always been heavy on mining stocks, today's gold prices make them even more compelling, because even high-cost production and low-grade ore can be profitable. Take, for example, Osisko Mining, a Quebec City-based gold company. "The established mining community thought that you have to go deep to find the good stuff," Hathaway says. That would entail greater expense, plus a bigger time lag before the company could generate profits. But Osisko can make money mining low-grade gold closer to the surface, Hathaway says, a process that's less labor intensive and time intensive.

Nonetheless, Osisko didn't perform in 2011. It was down 32.2%. Likewise, Ivanhoe Mines is a mineral exploration and development company in British Columbia whose main project is the world's largest copper and gold mine, Oyu Tolgoi in Mongolia. Tocqueville bought shares of Ivanhoe when the company was still in exploration mode.

As the mine ramps up production, Hathaway believes the company could be an acquisition candidate. Over the last 10 years, the stock returned 30.3% a year annualized. In 2011, however, it plunged 22.7%. Exploration companies don't always work out. "They need a lot of cash to finance their operations," Hathaway says. By making small investments early in a company's life cycle, however, Tocqueville is able to keep losses under control.

Newmont Mining, the world's second largest gold mining stock, also has a coveted place in the Tocqueville portfolio. It has been an investment since shortly after the fund's launch. Hathaway likes the stock because of the firm's valuable assets - its mines - on four continents. Among the four is an operation in Peru.

Unlike Ivanhoe, Newmont has established mines that are already producing. It also had profits ($493 million) in the third quarter. The core earnings of the company fell 8.2%, however, because of a recent rash of acquisitions. Revenues, however, were helped by rising gold prices. The acquisitions should help Newmont increase its mining operation to 7 million ounces of gold a year from 5 million, which should help the stock. Newmont was down 0.7% in 2011.


John Hathaway, Tocqueville Gold
Age: 70
Credentials: B.A., government, Harvard University; M.B.A., University of Virginia
Experience: Portfolio manager, Tocqueville Gold (1998-present); senior managing director, Tocqueville Asset Mgmt. (1997-present); chief investment officer, Oak Hall Advisors (1990-97); founder, Hudson Capital Advisors (1986-90); president, American Securities (1985-86); partner, David J. Greene & Co. (1976-85); analyst, Spencer Trask & Co. (1970-75)
Ticker: TGLDX
Fund inception: June 1998
Style: Precious metals equities
AUM: $2.6 billion
Three-year performance as of Jan. 5, 2012: 37.66%
Five-year performance as of Jan. 5, 2012: 14.6%
Expense ratio: 1.34%
Front load: None
Min. investment: $1,000
Alpha: 16.89 vs. BofA/ML U.S. dollar LIBOR

Ilana Polyak, a New York writer who contributes regularly to Financial Planning, has written for The New York Times, Money and Kiplinger's.

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