What are gold mutual funds?




Investors in gold have, essentially, three basic alternatives: (1) bullion; (2) individual equities; or (3) funds that invest in gold and gold-related equities (gold mutual funds, Exchange Traded Funds - ETFs, etc.).

Bullion or Coins

Bullion or coins are a relatively conservative way to invest in gold. While investing in the physical metal may sound simple, it requires special considerations, such as having safe-keeping (custodial) arrangements to store the metal and determining the creditworthiness of the custodian. These considerations make bullion investing unrealistic for many investors.

Equities of Gold Mining Companies

Equities of gold mining companies offer greater leverage than direct ownership of the metal itself. The sensitivity of share prices to a hypothetical rise in metal price is related to the cash flow from current production and the valuation impact on proven and probable reserves. Excessive reliance on trading strategies to generate returns, however, can be expensive and tax-inefficient, as well as time consuming. Many who have tried to outsmart this market by hyperactive trading have under-performed. And, it requires substantial research, analysis, and continual monitoring.

Gold Mutual Funds

Benefits of Gold as an Investment

  • Diversification -- Gold belongs to a distinct asset class and may be an effective means of portfolio diversification.
  • Low Correlation -- Gold typically has a low correlation with the overall U.S. equity markets (as measured by the S&P 500). Gold not only diversifies your portfolio but, when included with a portfolio of U.S. equities, may help dampen the volatility of the overall portfolio.
  • Hedge -- Gold has traditionally acted as a hedge against financial assets. So, in uncertain times and in periods of high inflation, gold may act as an effective store of wealth.
  • Demand -- Demand for gold is on the increase, fueled by the jewelry industry as well as by industrial demand.

Investments such as gold mutual funds are managed by professionals who can assess the relative merits of investing in bullion and equities, do the necessary research, and continue to monitor the portfolio regularly.

Morningstar, Inc., a mutual fund rating service, defines gold mutual funds – those having a precious metals objective set out in the offering prospectus – as those “Funds that pursue capital appreciation by investing primarily in equity securities of companies engaged in the mining, distribution, or processing of precious metals.”

Likewise, Morningstar assigns gold mutual funds to its “Specialty--Precious Metals Category” if the fund's portfolio focuses on “mining stocks, though some do own small amounts of gold bullion. Most portfolios concentrate on gold-mining stocks, but some have significant exposure to silver, platinum, and base metal mining stocks as well. Precious metals companies are typically based in North America, Australia, or South Africa.”

Midas Fund, included in Morningstar’s group of gold mutual funds, pursues gold investing by having at least 65% of its total assets in

(i) securities of companies primarily involved, directly or indirectly, in the business of mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources (“Natural Resources Companies”) and

(ii) gold, silver and platinum bullion.

Up to 35% of the Fund’s assets may be invested in securities of companies that derive a portion of their gross revenues, directly or indirectly, from the business of mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources, in securities of selected growth companies and fixed income securities of any issuers, including U.S. government securities.

Like many gold mutual funds, Midas Fund may invest in domestic or foreign companies that have small, medium or large capitalizations and concentrates its investments by investing at least 25% of its total assets in Natural Resources Companies. Because gold mutual funds typically concentrate investments in smaller companies and foreign securities, with mining and exploration risks of precious metals, gold mutual funds are riskier and more speculative than general, diversified funds. Unlike some other gold mutual funds, in seeking to enhance returns, Midas Fund may use futures, options and short sales, and may use leverage.

Midas Fund may engage in short selling up to 100%, although the Fund has no current intention of more than 40%, of its net assets, and it may engage in options and futures transactions subject to cover requirements (see “Cover for Options, Futures, and Forward Currency Contract Strategies” in the Statement of Additional Information (“SAI”) for more information). There is a risk that these transactions may reduce returns or increase volatility. In addition, derivatives, such as options and futures, can be illiquid and highly sensitive to changes in their underlying security, interest rate or index, and as a result can be highly volatile. A small investment in certain derivatives could have a potentially large impact on a Fund’s performance.

We believe that a reasonable allocation to a gold mutual fund in a conservative, diversified portfolio would be limited to 3% and up to 10% for aggressive investors.

Midas Perpetual Portfolio, although not defined as a gold mutual fund by Morningstar, invests a fixed target percentage of its assets in gold. The Fund's investments in gold may include bullion, bullion type coins, and exchange traded grantor trusts that invest gold ("ETFs"). From time to time, mining company shares may be used to achieve target allocations in gold if deemed attractive for tax planning or other purposes. Midas Perpetual Portfolio seeks to preserve and increase the purchasing power value of shares over the long term. The investment strategy of the Fund acknowledges a broad range of economic possibilities and seeks to incorporate investments appropriate for each of them.

To learn more about gold investing, Midas Fund, and Midas Perpetual Portfolio, we invite you to explore our web site or call 1-800-400-MIDAS (6432) to speak to a shareholder services representative. Thank you for investing with Midas!

 

 
   
 

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