Gold funds surged an average of 38% this year, about 2-1/2 times the pace of the benchmark S&P 500 Index, as the precious metal reached a record.
Gold is a popular investment in times of economic and political uncertainty.
Since many countries in the developed world are running huge deficits and printing money, and there is a long-running war in the Middle East and the threat of one in Korea, gold has extended a rally that bodes well for the sector in 2011, analysts say.
Investing in mutual funds that buy gold-company stocks is a way to reduce risk in the highly volatile sector. Problem is, only a handful of funds produce relatively consistent returns.
Also, the price of gold itself is up 19% this year, half that of the average precious-metals fund, which mostly hold gold-related stocks instead of the commodity itself.
Gold traded around $1,383 an ounce this week after hitting a record $1,432.50 on Dec. 7. In July 1997, gold sold for $319 an ounce, its lowest price since December 1985. (See: Gold Racks Up Strongest Annual Gain in 3 Years.)
Morningstar analysts are using a long-term gold-price assumption of $1,366 per ounce in their gold-stock analysis models, which corresponds to Comex gold futures contracts, a widely accepted barometer of gold prices.
Four funds with excellent long-term records and their holdings follow, as well asa new mutual fund that's the top performer this year.
One of the best long-term performers in the sector is the $1.7 billion Van Eck International Investors Gold Fund , up 46% this year. It boasts a 10-year annualized return of 31%. In 2009, it rocketed 64%.
The fund's biggest position is Kinross Gold , at 9% of the fund, followed by Agnico-Eagle Mines , at 7.5%, Randgold Resources , at 6.2%, and Goldcorp , at 5.6%.
In noteworthy moves, the fund doubled its stake in Northgate Minerals in the quarter ending Sept. 30 to a 1.2% allocation, and halved its stake in Andean Resources to 1.4% of the fund.
Kinross Gold, a Canadian gold-mining company, has a solid long-term record, with a 10-year annualized return of 27%, versus 17% for gold and 1.3% for the S&P 500. This year, Kinross is little changed.
The company generates over 90% of its revenue from gold and has mining operations in eight countries. Its biggest are in the U.S. and Russia, which assures a degree of political stability to ensure uninterrupted production, something that's an issue for many gold producers.
Kinross gets sterling endorsements from several respected investors, including the $71 billion Fidelity Contrafund (FCNTX), managed by William Danoff. It holds 4.9% of the company's outstanding shares. The world's largest money manager, BlackRock , holds 11%.
Kinross has been able to grow its annual production substantially in recent years through acquisitions, adding to its risk. It also doesn't hedge the price of gold, which also adds to its risk factors.
Morningstar gives Kinross three out of five stars. Three-star stocks should offer investors a return that's roughly comparable to the stock's cost of equity, the firm says.
Another reliable fund is the $2.5 billion Tocqueville Gold Fund (TGLDX), up 49% this year. It has an 8.5% allocation to gold, and then the stocks of Osisko Mining , at 6% of the fund, Randgold Resources, at 5.5%, IAMgold , at 5%, and Newmont Mining , at 4%.
Barrick Gold , at a 3.5% allocation, the fund's fifth-largest holding, is up 31% this year. The company, the world's biggest gold producer, is the anchor investment of many gold funds, although not necessarily the top holding.
It's conservatively run, has a solid balance sheet, and the majority of its operations are in North America and stable countries in Latin America, which assures that production won't be easily uninterrupted by political unrest.
At Sept. 30, Barrick held $4.3 billion in cash and had generated $3.3 billion in operating cash flow, aided by the record price for gold. Through the third quarter, gold production was ahead of projections.
The company reported record net income and cash flow for the third quarter ended Sept. 30. Net income for the nine months ending Sept. 30 was $2.4 billion.
Barrick has an "A" credit rating and a three-star rating from Morningstar.
Capital World Investors, which includes mutual funds offered by Capital Research and Management and American Funds, is the largest institutional investor, holding 5% of Barrick's shares.
The $50 million Dynamic Gold & Precious Metals Fund (DWGOX), launched in April 2009, is the top performer in Morningstar's "equity precious metals" category of funds, with a 66% return this year.
Its top two holdings, Kinross Gold and Osisko Mining, are both at 9.4% of the fund.
Rounding out its top five are: Sand Gold , up 6.4% this year, Perseus Mining , up 88%, and Allied Nevada Gold , up 71% this year.
Fund manager Robert Cohen is loading the fund with small gold-company stocks, and there is not one loser in his top 25 holdings. Some have spectacular returns, including Ampella Mining , now at 4.3% of the fund and up 389% this year, and Papillon Resources , a new holding as of the third quarter. It's up 865% this year.
Osisko Mining, which explores for gold and operates mines primarily in Canada, has seen its shares rise 70% this year, contributing to its three-year return of 148%.
For the nine months ended Sept. 30, the company posted a net loss of $18.3 million.
Franklin Gold and Precious Metals Fund (FKRCX) owns 2.6% of its outstanding shares, the largest of any mutual fund.
Of the analysts that follow Osisko, eight have it rated "buy," one rates it "outperform" and there are five "hold" rankings, according to FactSet.
Also among the large, reliable gold funds is Franklin Gold and Precious Metals Fund, with $4 billion in assets. It has a 45% return this year and a 24% 10-year annualized return. It holds 86 stocks, 41% in its top 10, and it has a relatively low, 18% annual turnover.
The fund features a hefty 3.95% annual yield.
Its largest holding is Australia's Newcrest Mining, at 7.7% of the fund, followed by Randgold, at 5.5%, and AngloGold Shanti .
Franklin Gold raised its stake in South Africa's AngloGold by 880,000 shares in the third quarter, increasing the fund's allocation to 5%.
One of the fund's top returners is the small Nevsun Resources , an African gold-mining firm. Its stock is up 157% this year.
Randgold Resources, after gaining 80% in 2009, saw its 2010 return cut to almost nothing last week after it said its previously projected fourth-quarter production levels at its largest mines, which are in Mali and the Ivory Coast, won't be met due to political unrest.
Until then, it was having a good year. Third-quarter net income more than doubled to $28.2 million, including a 21% increase in mining operations. At that time, the company said it expected 2011 gold production to rise by 50%.
Fidelity, through its mutual funds, owns 13% of the company's outstanding shares, making it Randgold's largest investor by far.
The Vanguard Precious Metals and Mining Fund's (VGPMX) top holding, at 8% of its $5 billion in assets, is Newmont Mining, the world's second-largest gold producer.
Vanguard Precious Metals is up 34% this year and is another long-distance runner with a 22% 10-year annualized return.
Its other top holdings include: Centerra Gold , at 6.5% of the fund and with a return of 85% this year; Hochschild Mining , 6.3%, and up 84%; and Lonmin , 6% of the fund, and down 0.7% this year.
Newmont shares are up 27% this year and have returned 240% over the past decade. Its third-quarter net income rose 38% to $537 million from a year earlier, while sales in the quarter rose 27% to a record $2.6 billion.
Morningstar analyst Elizabeth Collins said in a November research note that "we believe Newmont will face slightly declining overall production for the next few years. As such, it could turn to acquisitions to boost its production and pipeline."
But the company has a record of using its steady cash flow to make acquisitions. In the third quarter, it reported operating cash flow of $854 million and cash on the books of $4 billion.
Canada-based Newmont has a three-star rating from Morningstar.
Analyst ratings are all over the board, with seven rating it "buy," three "outperform," seven "hold" and two "sell," according to FactSet.
Capital World Investors is the largest institutional investor in Newmont, with an 8% stake.
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