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|  | NOVEMBER 19, 2003
Why Gold's Gleam Isn't Likely to Dim The USAA Precious Metals & Minerals Fund's Mark Johnson on why the weak dollar and low interest rates bode well The S&P Gold index has surged 52% this year through Nov. 14, vs. a 19% rise in the broader S&P 500-stock index. And in the last few days, the price of gold has rallied -- hitting roughly $398 on Nov. 18 -- as the U.S. dollar fell amid a spate of news, including potential trade wars with China, falling foreign investment in U.S. Treasuries, and lingering worries about the mutual-fund scandals. As long as the dollar stays weak, and the Federal Reserve holds interest rates at low levels, gold should keep its luster, says Mark Johnson, portfolio manager of the USAA Precious Metals & Minerals Fund (USAGF ). He figures its price could reach $435 next year. Even with the recent gains, Johnson thinks investors should own gold assets to lessen overall risk (see BW Online, 10/29/03, "Beyond Some Bumps for Gold"). BusinessWeek Online's Karyn McCormack recently spoke to Johnson about the sector's status today and what he sees tomorrow. Edited excerpts of their conversation follow: Q: What's your outlook for gold? A: Fairly positive, based largely on our expectations that we'll probably see continued weakness in the U.S. dollar related to the twin deficits -- namely the current-account deficit and the large federal budget deficit, which in aggregate are going to be pretty close to 10% of gross domestic product. Q: What else is pushing the price of gold higher? Is it a supply-and-demand situation as well? A: No, I think it's mostly the currency. And the recent action of the bond market, over the summer especially, kind of indicates that there might be higher inflation expectations going forward. And, of course, the Federal Reserve is committed to keeping interest rates low for the foreseeable future. So that basically means that the real interest rate -- which is already negative -- went even more negative. So that's positive for gold as well. Q: What about the recent strong economic data, which has some people talking about the Fed raising rates sooner rather than later? A: I think gold did surprisingly well in the face of the employment data. You would expect that, given that data and the productivity and GDP data, that the economy would be getting quite a bit better, which would argue for stronger stock prices for the general market, which would be negative for gold. And it should also argue for a stronger U.S. currency, which would also be negative for gold. But gold did quite well this past summer, despite higher long-term interest rates, perhaps reflecting increased inflation assumptions by the bond market. Q: And this is because of the currency, the current-account deficit, and the budget deficit? A: Well, I think at this point, the gold market is looking past the recent data and saying, "Wow! The Fed really has committed to keeping rates low." And, in fact, Greenspan reiterated that commitment. And so, as long as they're keeping the rates low, I think it's still on a bull market for gold. Q: Tell us why your fund is outperforming its peers and the broader market. A: Through Oct. 31, the fund was up 55.1% year-to-date. The Lipper Gold Fund Index was up 40.6%. The fund's three-year annualized performance is 58.2%. And the Lipper Gold Fund Index is 46.2%. We would have been No. 3 out of 34 funds for that period. I think we're outperforming because of stock selection, plus the fact that we have it fully invested throughout this whole period. And we stuck pretty much to our precious-metals charter. So we're running about 80% gold and the balance in other precious metals, such as platinum and diamonds. Q: Have platinum and silver and the other metals run up with gold? A: Silver has definitely lagged. We don't have any significant silver exposure. For platinum, it depends on what time period you want to use for whether it has lagged or outperformed. Platinum is close to its all-time high of $763.50 on Oct. 30. It's at $762.50 right now [on Nov. 10]. [It traded at $771.50 as of Nov. 18.] And in diamonds, Aber Diamonds (T.ABZ ) has done quite well. That's [traded in] Toronto. It's basically at its all-time high as well. Q: What are some of your largest holdings, or your favorite stocks? A: Our largest holding, in terms of U.S.-listed securities, is Glamis Gold (GLG ). And that's also one of our favorite stocks at this time. It's a very high-quality company with a debt-free balance sheet, no zero hedging, low cost of production. It also has excellent management, a diverse mine base, and a very good growth profile because of two new mines that they're going to be building, plus expansion of a third mine. So it's not a particularly cheap stock at these levels. But I think those other characteristics, especially the growth profile, will drive it higher over the next few years.
BW MALL
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