LONG BEACH, CALIF., March 21Gold has been a highly coveted asset for millennia, but its appeal lately has been intermittent at best. The price of gold has climbed about 11 percent in 2014 through March 19, but is still 29 percent below the all-time high of $1,895, set in 2011, after a dismal run last year.
Investors could have done worse - by investing in mining stocks, which lost about two-thirds of their value during the decline in the price of gold.
Running a fund that concentrates on mining stocks is difficult amid such a backdrop, but John Hathaway, lead manager of Tocqueville Gold, and Joseph Foster, manager of Van Eck International Investors Gold, have done it better than most. Hathaway's fund was recognized at the 2014 U.S. Lipper Fund Awards in New York on March 20 as the best precious-metals fund for the second straight year and for its five-year performance. The Van Eck fund was honored for its 10-year results.
The managers highlight several reasons for the decline in gold, including reduced inflation expectations and a heightened appetite for risk that made hedging against disaster an afterthought.
"People weren't worried about risk anymore," Foster observes. "They saw the economy getting back on track - no signs of inflation, no adverse consequences of (Federal Reserve) policies. If people aren't worried about risk, there's no need for gold."
There has been a renewed concern about risk lately. Russia's military intervention in Ukraine in early March led to a nearly 2 percent spike in gold the next trading day, one of those events that reminds investors why they own gold in the first place - to prepare for some problem, economic or political, that they have no idea they need to prepare for.
Hathaway considers mining stocks the best way to be prepared because they're highly leveraged to the price of the metal. Any move above or below a company's production costs can produce significant changes in profitability and move its stock accordingly.
Hathaway is not exactly a cheerleader for the mining business. In his opinion, the people in charge are not the cream of the managerial crop. But that makes it easier to spot the well-run companies.
"It's very easy to (outperform) because it's such a poorly managed business," he says. "The differences lie in the ability to get returns on capital and generate good cash flow. There are huge amounts of differentiation there."
One example: Osisko Mining Corp., whose appeal is its low risk profile, financially and politically, Hathaway says. Osisko has a new, profitable mine in Quebec, one of the safer places that gold mines are found, and the company recently received a takeover bid - "a validation of everything we thought about Osisko," he calls it - from Goldcorp Inc., which he also owns.
Other holdings that Hathaway highlights, in part because they help limit risk, are so-called royalty companies, notably Silver Wheaton Corp, Royal Gold Inc and Franco-Nevada Corp. Royalty companies gain exposure to an assortment of other companies' mining projects by providing capital in exchange for the right to buy a portion of whatever the mines produce.
Foster is less harsh than Hathaway in his judgment of mining bosses.
"There are risks in mining that you don't find in other industries," he says. "They do business in remote parts of the world, in different cultures and hostile climates. Things are bound to go wrong." He also notes that costs in the industry have risen substantially over the years.
Foster, a geologist by training, looks for companies with promising deposits and management that he expects to be able to exploit them. He also owns Osisko and its suitor, Goldcorp. Other holdings include Randgold Resources Ltd, which he says has done "a phenomenal job of discovering and developing new deposits" in West Africa; Tahoe Resources Inc., which should reach full production this year on "a world-class silver mine" in Guatemala; and Continental Gold Ltd., which is developing a mine in Colombia.
Foster sees investors focusing more on risk.
"There's risk in the financial system that will drive gold much higher," he predicts.
Hathaway likewise sees enough potential banana peels in the world to warrant a positive outlook on gold. He stresses, though, that even if the world avoids slipping on them, exposure to the metal is still prudent because some other perils will come along soon enough.
"The reason you own gold is for things that are inherently unpredictable," he says. "It's not something you trade; you have it there as a diversifier." (Follow us @ReutersMoney or here Editing by Lauren Young and Leslie Adler)