In the past few years, gold and gold-mining stocks have been among the weakest performers in our First Eagle Global, Overseas and U.S. Value Funds. Given the dramatic decline in some of these holdings, clients have questioned their presence in our portfolios.
We believe that gold and gold-mining stocks continue to have a fundamen-tal place in our funds. We’ve organized this paper around the three major reasons for this conviction.
| In an equity portfolio, gold can be a potential hedge against the frailties of the | ||
| 1 | ||
| monetary architecture. | ||
| While gold-mining stocks can present many risks in comparison with gold | ||
| 2 | ||
| bullion, they can also present opportunities. | ||
| Investors who understand industry dynamics in depth and analyze gold | ||
| 3 | ||
| miners with careful discipline are best positioned to potentially capitalize on the opportunities in gold-mining stocks. |
| First Eagle Investment (Trades, Portfolio) Management has long believed that exposure to gold and gold-related investments may be an | ||
| 1 | ||
| effective way to potentially hedge long-only equity portfolios against the frailties of the worldwide monetary architecture. |
The power of gold to play this role has been demonstrated repeatedly in equity market crises going back to the Great Depression. At times of extreme pessimism, gold has tended to be buoyant and equities depressed; at times of extreme confidence, gold has tended to be depressed and equities buoyant. This cycle is well documented. Over the last 45 years, gold and the MSCI All Country World Index (MSCI ACWI) have moved in opposite directions relative to world incomes (Exhibit 1). A hypothetical portfolio that blends 50% equities (MSCI ACWI) and 50% gold bullion may be more stable relative to World GDP per capita than either a portfolio that is 100% gold bul-lion or a portfolio that is 100% equities. While the hypothetical 50/50 equity and gold portfolio may have the most stability relative to world incomes, we favor a portfolio structure that has a majority in equities and a minority in gold, given the potential in-cremental return one may generate from equities through both dividends and judicious stock selection. Nonetheless, we believe the potential hedging role gold can play is clear for long-term holders of equities.
