Precious Metals and Gold Mutual Funds

The Precious Metals and Gold mutual funds are dominated by those that invest in gold exclusively. Precious Metals mutual funds invest in the stocks of companies that mine, process or distribute precious metals or provide products and services to those who do.

Some of these funds restrict their investments to companies whose sole business is gold-related. These funds may be labeled as Gold funds or they may call themselves Precious Metals funds, so this is another case where you need to read the prospectus to be sure you know what you're investing in.

Precious Metals, especially gold, offer inflation protection and excellent diversification. The sector as a whole has approximately zero correlation with the S&P 500. This sector outperformed the general market over the past 10 years by a wide margin but with more than twice the volatility. But some of these funds served up fairly constant returns commensurate with their volatility.

Precious metals prices tend to be very erratic and can stay depressed for long periods of time. However, a good fund manager can reap good and consistent returns by investing in solid businesses that have a steady flow of revenue, especially from industrial users of precious metals. Precious Metals and Gold funds that employ this strategy aren't as glamorous as the more speculative funds in this sector and they're less apt to yield occasionally high short-term returns, but their strategy is sound and can serve you well as a long-term investor.

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