Investor's Business Daily, August 2nd, 2007
It looked simple. Stocks and stock funds were down. So gold funds rose in July.
They gained 3.73% on average, according to Lipper. It was the group's first month in the top spot since November.
In a bruising month for the overall market, it was the only sector to gain ground.
Natural resources funds gave back 0.40%. Tech funds slid 0.84%.
But gold's gain wasn't conventional. "It wasn't simply a story of stocks down, gold up," said Thomas Winmill, manager of $220 million Midas Fund MIDSX. Bullion buoyed the sector. Silver glittered even brighter. But gold stocks were largely leaden, he said.
"Petro dollars in Russia and the Middle East chased precious metals," he said. "And central banks weren't selling."
Limiting Sales
Central banks of 18 major nations have agreed to sell no more than 500 tons of gold annually. Their fiscal year ends Sept. 30. So far this year, the group has sold 350 tons. Last year banks sold less than their quota. "I expect the same this year," Winmill added. That dampens supply in the face of strong demand.
Also, the dollar kept falling vs. key currencies. That also boosted gold for global investors.
Gold stocks got hurt by rising commodity prices, Winmill said. "Mining companies use a lot of diesel, rubber tires and steel," he said. "Mining costs increased a lot. That compresses margins."
Further, many big miners have little growth or declining production. "The longer that older mines dig, the more expensive their yield becomes," Winmill said. "They literally are digging themselves into a hole."
Winmill added: "We focus on miners with growth in their portfolios. Generally, that means smaller-cap miners, with newer operations, who may be more entrepreneurial."
Platinum Prospects
In balance, Winmill prefers silver to gold. It will get more of a boost from year-end holidays and the Indian wedding season.
Silver Wheaton SLW gained 17% in July. It was powered by silver's sheen. It started from a low base, having been oversold in June.
Going forward, Winmill prefers base metals vs. precious. "Global growth will fuel commodities in general and industrial metals in particular," he said. Global demand for cars will drive use of platinum.
Winmill would be more bullish on gold if the Federal Reserve cuts interest rates. "That would hurt the dollar, helping gold," he said.
Fallout from subprime lending woes tainted much of the market in July. Investors sold off risky stocks and debt.
Financial services funds lost 7.00%. Not knowing which stocks would be stung next by problem loans and the credit crunch, investors fled the sector overall.
Real estate funds lost 7.26%. Many real estate investment trusts are heavily leveraged. Increasingly averse to credit risk, investors exited REITs.
Tech stocks were hurt less than most sectors in the market sell-off. That's because tech companies tend not to be heavily leveraged, said Kevin Landis, who runs the $700 million in five Firsthand tech funds.
Tech's strongest July theme was alternative energy. "Anything associated with that has done well all year," Landis said.
Two tech industry segments benefited. Firms involved with solar cells are getting more business.
Sunpower SPWR gained 12%. "They make the highest efficiency solar panels shipping today," Landis said. His funds own Sunpower via stakes in Cypress Semiconductor CY.
The second hot solar segment is efficiency companies. "Their technologies let you be smarter in running a building, factory or street lights," Landis said. "Reducing wasted energy results in free energy."
Echelon ELON, which makes hardware and software that lets devices communicate via control networks, gained 26%.
Landis sees no sustained let-up at least this year for either alternative energy or efficiency firms.
July was the sixth month in a row resources funds finished among the top three sectors.
The commodities category had several drivers. Oil crossed $70 per barrel. Global GDP growth stayed strong. The dollar stayed weak. That persuaded many investors they could put their money to better use by investing in commodities, said Brian Hicks, co-manager of $1.5 billion U.S. Global Investors Global Resources Fund PSPFX.
Still, emerging markets were a soft spot for commodities funds. "They sold off as investors demanded higher rates from businesses and governments that wanted debt financing," Hicks said.
DryShips DRYS reflected demand for commodities. The dry-bulk shipper was up 218% this year through July 31. It gained 32% in July alone.
