Of late, gold and other precious metals are trouncing equities as weaker economic growth both in the U.S. and globally continue to dent investors' sentiment. In times of economic upheaval, investors dump equities to look for safe haven assets, and precious metals are well suited to serve this purpose.
Lower interest rate environment across the globe is also luring investors to bet on precious metals. After seeing three back-to-back years of losses, these metals have rallied about 20% this year. Hence, investment in mutual funds having exposure to precious metals will surely be a prudent choice.
Domestic Economic Growth Weak
U.S. economic growth stalled in the first three months of the year since businesses and consumers turned cautious with their spending. The economy expanded at an annualized rate of 0.5% in the first quarter, its weakest quarterly growth in two years, according to the Commerce Department. Into the second quarter, things aren't looking bright either.
The battered U.S. manufacturing sector did stabilize a bit in April, but is yet to regain full health, while consumer spending may have further experienced a slowdown in April. The ISM manufacturing index dropped to 50.8 in April from 51.8 in March. The Reuters/University of Michigan consumer sentiment index, on the other hand, declined to 89.0 in April from 91.0 in March.
When a country's growth prospects are headed south, investors mostly get out of risky investments like stocks. By the end of April, investors pulled money out of equities at the fastest pace since last summer's market rout and poured money into precious metals, which boast of a safe haven appeal. Precious metals tend to retain their value and even increase their value during times of market downturn. Let's also not forget that we are in May, which is predominantly a bad month for investment. Investors as it is tend to offload their stock holdings this month and reenter the markets in fall.
Global Growth Uncertainties
And it's just not a domestic malice. Global growth worries also continue to linger on. Soft Chinese and British factory data rekindled fears of slowing global growth. In China, manufacturing activity slipped last month. China's official manufacturing PMI fell to 50.1 in April from 50.2 in March. The production index, new orders index and the new export orders index all ticked down in April.
British factory output for the month of March was abysmal. Factory output declined 1.9% than a year earlier, its steepest fall since May 2013, according to the Office for National Statistics. Shut down in the steel industry led to such broad-based declines. Meanwhile, the European Commission cautioned about slow economic growth among many large countries. All these factors boosted the appeal for precious metals.
Fed Rate Hike Not in the Cards
Coming back to domestic shores, expectations that the Federal Reserve won't raise rates at the June meeting lifted precious metals. The latest report on weak job creations in April made the Fed cautious about raising rates sooner. The U.S. economy created a total of 160,000 jobs in April. This increase in hiring was the slowest since September. Moreover, the labor force participation rate declined to 62.8%, which could mean that people found it a bit more difficult to get jobs. The Fed is already cautious about raising rates in the near term as the U.S. inflation rate in the first quarter came in way below its desired level.
Lower interest rates generally tend to boost precious metals, as it makes yield-bearing assets such as U.S. Treasuries less attractive. Lower rates also adversely affect the dollar, which in turn raises the appeal for precious metals. Add to this, central banks across the world including Japan, Sweden, Switzerland, Denmark and Europe are adopting negative interest rates. This is why investors are snapping up gold this year.
Top 5 Precious Metals Mutual Funds to Invest In
As mentioned above, concerns about domestic and global economic growth along with near-zero and even negative interest rates around the world are playing a major role in helping precious metals gain at the expense of equities. In fact, when it comes to the yellow metal, banking behemoths such as The Goldman Sachs Group, Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) have turned bullish.
Goldman Sachs increased its three, six and twelve-month forecasts to $1,200, $1,180 and $1,150 an ounce from an earlier prediction of $1,100, $1,050 and $1,000 per ounce, respectively. JPMorgan Private Bank's Solita Marcelli has said that "We're recommending our clients to position for a new and very long bull market for gold."
Banking on these bullish sentiments, it will be judicious to invest in mutual funds that have considerable exposure to precious metals. We have selected five such precious metals mutual funds that have given impressive year-to-date returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio.
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear.
The American Century Global Gold A (MUTF:ACGGX) invests the majority of its assets in companies that are engaged in mining, processing, distributing and exploring in gold. ACGGX's year-to-date return is 75.4%. Annual expense ratio of 0.92% is lower than the category average of 1.44%. ACGGX has a Zacks Mutual Fund Rank #1.
The Fidelity Advisor Gold A (MUTF:FGDAX) invests a large portion of its assets in securities of companies engaged in gold-related activities, and in gold bullion or coins. FGDAX's year-to-date return is 65.9%. Annual expense ratio of 1.2% is lower than the category average of 1.44%. FGDAX has a Zacks Mutual Fund Rank #1.
The Franklin Gold and Precious Metals Advisor (MUTF:FGADX) invests the majority of its assets in securities of gold and precious metals operation companies. FGADX's year-to-date return is 70.7%. Annual expense ratio of 0.84% is lower than the category average of 1.44%. FGADX has a Zacks Mutual Fund Rank #2.
The Deutsche Gold & Precious Metals A (MUTF:SGDAX) invests a major portion of its assets in companies engaged in activities related to gold, silver, platinum or other precious metals. SGDAX's year-to-date return is 69.4%. Annual expense ratio of 1.25% is lower than the category average of 1.44%. SGDAX has a Zacks Mutual Fund Rank #1.
The Wells Fargo Precious Metals A (MUTF:EKWAX) invests a large portion of the fund's net assets in investments related to precious metals. EKWAX's year-to-date return is 69.8%. Annual expense ratio of 1.1% is lower than the category average of 1.44%. EKWAX has a Zacks Mutual Fund Rank #2.
Link to the original post on Zacks.com