The portfolio manager of Van Eck Global's International Investors Gold Fund lays out the case for investing in the yellow metal.
Gold looks, well, golden, to Joe Foster, precious metals expert and portfolio manager for Van Eck Global. Foster joined Van Eck in 1996, and currently serves as lead team investment manager for the company's flagship mutual fund, the International Investors Gold Fund. He is also a team investment manager for the company's Global Hard Assets Fund and VIP Global Hard Assets Fund, and acts as a consultant for the Market Vectors Gold Miners ETF (NYSE Arca: GDX).
Recently, HAI Associate Editor Lara Crigger chatted with Foster about his thoughts on gold, including the role it plays in a portfolio, how much investors should hold, and where the yellow metal is headed next.
Crigger: What role should gold play in an investor's portfolio? Is it a source of profit, insurance or both?
Foster: I think No. 1, it should be thought of as a form of insurance in times of financial stress. Gold's a great portfolio diversifier, because it has a very, very low correlation with other asset classes. So when you add a little bit of gold to the portfolio, it gives the portfolio better risk-adjusted returns in the long term.
Then on top of that, it is a hedge against financial stress, whether it's inflation or deflation or some sort of credit crisis or currency turmoil. Gold reacts to all of that stuff, and can enhance performance during those times of volatility.
Crigger: So in that case, how much gold should investors hold in their portfolios?
Foster: Gold should never be the centerpiece of a portfolio; it's more of an add-on. Personally, I would recommend 5-10 percent in gold or gold shares. I give a range because when investors have a feeling that the financial risk is going to be elevated in the future, which I believe it is now, then they'd want to be at the higher end of the range. Then when you see the economy and the credit market start to perform properly, then you might want to peel back to the lower end of the range.
Crigger: Should investors only hold gold in bullion form, or are other vehicles, such as ETFs or futures, OK too?
Foster: My favorite allocation would be a combination of gold and gold shares. So for gold itself, either physical gold or in gold ETFs is fine. For gold shares, gold mining companies can be a risky investment, so I think you're better off with an experienced portfolio manager and buying into a gold equity fund.
I have preferences for gold shares in a gold bull market. If you're carrying the right gold shares in your portfolio, you should be able to outperform the gold price. So as long we have an outlook for higher gold prices going forward, I thing gold shares are the best way to play it.
Of course, I'm being sort of cautious. We have seen throughout this bull market periods of time when gold has outperformed gold shares, so I'm a big believer of diversification within the gold universe. You get better diversification when you have a mix of gold and gold shares.
Crigger: Where do you see the price of gold going in the next few years?
Foster: In the near term, as we move into 2011, I think we'll see gold make new highs above the $1265/oz high that we saw back in June. In the longer term, there's no easy way out of the mess that we have with the credit markets and the debt that the government is taking on and so on. So in certain scenarios, I could see gold trending toward $2000/oz in the next three to five years.