Eldorado Gold Corp T.ELD

Gold Story

[doughboy24]

The shine is back: Is there (enough) gold in your portfolio? Michael Kane Vancouver Sun The world's oldest asset class is often under-represented in otherwise well-diversified investment portfolios. Until 20 years ago, popular wisdom said mom-and-pop investors should keep about 10 per cent of their money in gold stocks, both to profit from rising global demand and as a hedge against inflation. Gold generally skyrockets when currencies stumble. Popular wisdom has been knocked sideways, however, with the world's leading central banks coordinating their efforts to keep inflation under control and depressing gold prices by selling off hefty portions of their reserves. Today, most investors have less than three-per-cent exposure to gold through equity mutual funds. Fred Sturm, manager of the Mackenzie Universal Precious Metals Fund, says the pendulum has swung too far. While the price of gold has remained stagnant for more than two decades, he is anticipating a gradual turn in the precious metals sector. "We would say investors should have somewhere between five and 10 per cent of their portfolios in gold," he said in a telephone interview from Toronto. Chief among Sturm's reasons are rising inflation, pressure on the U.S. dollar from its growing trade deficit with the rest of the world, and falling interest rates which historically favour gold and squeeze short-sellers out of the market. He also says it is important to remember that gold is a safe haven in volatile markets. Certainly, the market has taken a shine to gold. The Toronto Stock Exchange Precious Metals Index recently hit a 52-week high -- rising 30 per cent this year -- while the TSE as a whole is down 10 per cent for the same period. Sturm's fund is a top performer, up 33.1 per cent year to date and up 40 per cent in the last year. The numbers are almost unprecedented in the sector. "It is a very large spread," Sturm says. "Not only has the fund outperformed the TSE, but more significant is the value added by professional management relative to the underlying gold index. "What we are anticipating is that this is a major long-term turn in the precious-metals complex. We have a sneaky, clandestine bull market in gold because many of the things that were negative have become less negative and some that were positive are actually becoming more positive." For example, Sturm suggests the dampening effect of central banks selling off gold may soon come to an end, and we could see one or two central banks returning to the market as buyers. Britain, for example, has reduced its reserves below the level it would be required to maintain for entry into the European monetary union. If a central bank started to buy, strong supply and demand fundamentals would come into play. In broad terms, about 3,600 tonnes of gold are demanded every year, primarily for jewelry, and only 2,500 tonnes are mined. "We estimate we would need a price somewhere in the $350-to-$375 range to bring supply and demand closer together," Sturm says. "Today, we are at $273." While some commentators suggest the recent nine-year high in inflation was a one-time event driven by soaring energy prices, Sturm says businesses from car manufacturers to potato farmers are trying to maximize profitability by producing less and charging more. "We have forgotten that investors should protect against inflation," he says. "The bottom line is if the price of gas, the price of gold, the price of what you are paying for materials is going up, and you're not participating in some way, then you aren't being protected from inflation." Sturm, at least, is putting his investors' money where his mouth is. While his $45-million fund has traditionally held as much as one-third of its portfolio in other precious metals such as diamonds, platinum and palladium, he has recently reduced that exposure by half to reflect his growing confidence in gold. [e-mail]