Funds Watch: The Real Conundrum of Precious Metals Funds (GLD, SGGDX, USAGX, VPMGX, GDX, GDXJ, SIL)

Since the beginning of this year, the price of gold has gained about 6%. Three large precious metals funds, however, are down between -5% and -10% during the same period. The mutual funds though are doing better than the mining ETFs, which have taken a hit of between -10% and -15%.

The SPDR Gold Trust (NYSE: GLD), like gold itself, is up about 6%. The three funds trading down are First Eagle Gold Fund (SGGDX), USAA Precious Metals and Minerals Fund (USAGX), and Vanguard Precious Metals and Mining Fund (VGPMX). The struggling ETFs are the Market Vectors Gold Miners ETF (NYSE: GDX), the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), and the Global X Silver Miners ETF (NYSE: SIL)

The First Eagle Gold Fund (SGGDX) holds total assets of $3.1 billion, of which about 14% is held in gold bullion. It’s largest mining holding is Newmont, the world’s largest producer of gold, at 6%. Newmont shares are down nearly -13% since January. The fund gets a 5-star rating from Morningstar.

The USAA Precious Metals and Minerals Fund (USAGX) holds total assets of $2.2 billion, none of which is held in bullion. Newmont is the fund’s fifth largest holding, and of the top ten holdings only Goldcorp posts a positive return year-to-date. The fund has a 4-star rating from Morningstar.

The Vanguard Precious Metals and Mining Fund (VGPMX) holds assets totaling $5.5 billion, again none of which is in bullion. The fund’s top holding, Australia’s Iluka Resources, has posted a year-to-date gain of more than 75%, but every one of the remaining top ten has posted a loss. The fund gets a 2-star rating from Morningstar.

The Market Vectors Gold Miners ETF (NYSE: GDX) boasts total assets of $6.8 billion, all of which is invested in equities. The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) holds total assets of $2 billion, all invested in equities. The Global X Silver Miners ETF (NYSE: SIL) holds total assets of $415.7 million, all of which is invested in equities.

What’s hit the equities-heavy funds and ETFs is concern about the rising cost of production and the falling quality of ore grades. Before late April, GDX and GDXJ tracked GLD pretty closely. Since then, however, the ETFs have fallen off a cliff. Even the mutual funds had tracked GLD pretty well until late April.

Now the issue is whether or not gold and GLD will follow the funds. There is substantial precedent for a sell-off in gold following softness in mining shares. There are plenty of reasons to remain bullish on bullion, not the least of which is the continuing problem of sovereign debt in Europe and, soon, in the US.

The real problems facing precious metals miners in the real world can give them and the funds that follow them a bad headache. The SGGDX, with its bullion stake, probably won’t get hit as hard as the others, but it could suffer from being the best house in a bad neighborhood.

Paul Ausick