Tocqueville Gold: 5-Star Buy

by Art Epstein, S&P Capital IQ, The Outlook

The historic rally in gold prices that began in 2001 surprised even the most ardent fans of the yellow metal.

Despite a pullback during 2012, portfolio managers at Tocqueville Gold Fund (TGLDX) think gold prices will hit new all-time highs by the end of the year.

"The situation is ripe after a big correction for money to come back to gold," says John Hathaway, portfolio co-manager, with Douglas Groh, of the $2 billion fund. "The stage has been set for a resumption of gold's multi- year advance."

Catalysts for a further jump in gold prices, Hathaway says, include the eurozone's recessionary economic conditions and sovereign debt crisis, and persistent budget deficits in the U.S. and elsewhere.

He also thinks more "quantitative easing" by the Federal Reserve or the U.S. economy slipping into another recession would "put a lot of money back into gold."

For the global economy, Hathaway sees "stagnation, at best." He also thinks low and even sometimes negative real interest rates make gold attractive. "The overhang of bad baggage from 10 years of predominantly negative real interest rates is, in our opinion, weightier than anything in history."

He believes the recent 10 month decline in the price of gold has been the major headwind for gold mining stocks. The fund's managers seek expo- sure to "overlooked and undervalued" gold stocks around the world.

Hathaway uses a bottom-up selec-tion process to identify companies that have growth potential. "We talk to management, kick the rocks and tires, and meet local managers
of mines and local politicians to access risk in gold mining. We spend a lot of time visiting mines around the world."

He sees value mostly in small and mid-cap gold companies because new discoveries can increase the valuations of these companies more than that of larger gold companies.

The fund's three-year average trailing total return of 15.96% vs. its peer average total return of
6.28%, as of July 30, 2012, contributed to its positive performance analytics ranking.

GLDX also received high marks for John Hathaway's relatively lengthy tenure as manager (14 years). The absence of a sales load, and a low portfolio turnover of 3% compared with almost 43% for peers, as of March 31, 2012, helped the fund obtain a favorable ranking for cost factors.

The fund's top-five company holdings (as of June 30, 2012) — Goldcor, Eldorado Gold, Gold Resource, Royal Gold  and Newmont Mining. Hathaway says they are "dirt cheap and we think highly of them."