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Gold Mutual Funds - Are They as Good As Gold?

In a previous post, we talked some about the options mutual fund investors had for investing in gold mutual funds. It turns out there are several options we have, and they are a powerful vehicle for adding diversification to your overall mutual fund portfolio. We covered the diversification effects of gold mutual funds previously, but this study focused on funds using gold stocks, primarily gold mining stocks. But we often get questions related to the performance of gold funds, and how correlated they are to the actual price of gold.

Below we take a look at the price action of the GLD ETF, which attempts to exactly track the spot market price of gold. We have plotted the price of GLD against that of FSAGX, or Fidelity Select Gold, and also plotted it against the S&P 500. The plot only goes back few years since GLD only started trading a few years ago, but it’s enough to tell the story.

GLD vs FSAGX
Click to enlarge

As you can see, neither of these gold related funds is very well correlated to the S&P 500. Since the beginning of 2005, the broad market is up less than 20%, while the price of GLD has doubled. The overall performance of the Fidelity Select Gold fund, while very impressive as it’s up about 50%, is still not as good as the price of gold itself. And overall, you can see that FSAGX correlates more to the price of gold than it does the overall market, nonetheless it does it does track the overall market to some degree,

That’s to be expected. After all the fund is invested in the stocks of companies, and while their profit outlook will improve as the price of their product (gold) increases, there will also be a decrease in demand, especially with a decrease in overall economic activity, and profits will also be affected by things like energy prices and labor costs, etc.

The bottom line is that while gold funds do have some benefit as diversifying tools for your portfolio, they are not going to be an exact proxy for gold in your portfolio. If that is what you are after, you are better off buying some of the gold funds.

Filed under Asset Allocation, ETF News

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