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Mutual Fund News

Manager hedges bets with heavy metals

Predicting market crash, Barisheff stocks silver, platinum, gold

MUTUAL FUNDS REPORTER

TORONTO -- If Nick Barisheff's economic forecast is right, the dark clouds looming on the horizon are lined with silver. And gold. And platinum, too.

In an unusual strategy, the Millennium BullionFund, a two-year old mutual fund managed by Mr. Barisheff, has taken a pass on mining stocks and invests solely in the precious metals, themselves.

"It's a totally different risk-reward relationship. A mining stock can go to zero. Bullion can't go to zero," said Mr. Barisheff, who, with a mass of wispy white hair, moustache, glasses and natty suit, looks like a Bay Street version of Albert Einstein.

Like the physicist, Mr. Barisheff is prone to deep thinking, too.

Tearing a page from pundit Robert Prechter Jr. and a handful of market doomsayers, Mr. Barisheff predicts a combination of high interests rates, mountains of debt and a sagging U.S. dollar will create an economic meltdown. A mix of deflation and inflation will roil markets with discretionary items -- stocks, luxury goods and real estate -- plunging in value while essentials -- oil, gas and food -- will climb in price, he said.

"When the market crashes what is going to be the next best thing?" he asked, adding that precious metals should make up about 20 per cent of an investor's portfolio. "Demand [for precious metals] will ultimately be much higher."

The mutual fund trust invests one-third in physical gold, one-third in silver bullion and one-third in platinum.

There are no derivatives, futures contracts or options, just the physical precious metals.

The fund began national sales one year ago and has grown quickly despite no marketing or ties to a larger mutual fund firm. By the end of 2003, investments totalled $13-million. Today, the fund holds about $27-million in precious metals. About 16,000 ounces of gold, one million ounces of silver and 8,000 ounces of platinum are kept under lock and key in the fund's name deep in the basement of Bank of Nova Scotia in downtown Toronto.

The fund's performance has been mixed and, like the value of precious metals themselves, very volatile in price. Over the past 12 months, the fund is up about 15 per cent in value. In comparison, 17 precious metals equity funds have risen an average of 34 per cent, while the spot price of gold has climbed about 19 per cent in the same period.

While the Millennium BullionFund's concept is not new -- Central Fund of Canada Ltd., a publicly-traded gold and silver investment firm, was founded in 1961 -- the investing strategy still sparks some controversy.

"There is certainly a bit of a debate on whether you want to take on the risk of [mutual fund] management as opposed to the bullion," said economist Martin Murenbeeld of Victoria-based M. Murenbeeld & Associates Inc. He suggests timing is the key to successfully playing the gold market: Buy leveraged equities when gold is climbing and bullion when prices are in retreat.

"When gold is running hot, you might want to get in to some of the juniors where there is a real bang for the buck. But of course you lose your shirt as soon as gold goes down," he said.

Indeed, small-capitalization juniors and producers have enjoyed the greatest gains in a strong gold market and some funds have made the most of the run.

For example, manager John Embry's Sprott Gold and Precious Minerals Fund posted a stunning 72-per-cent return in 2003. Holdings include small-cap producers Alamos Gold Inc. and Southwestern Resources Corp.

There's much agreement precious metals may have a place in every portfolio, but fund watchers argue diversification is key.

"You are at the whim of the price of bullion," said Mark Chow, a fund analyst at Morningstar Canada. "You are not diversifying as much. You are very concentrated on a certain sector."

Mr. Barisheff's 20-per-cent precious metals mandate is "a bit much for my tastes," said Dan Hallett, president of Dan Hallett & Associates Inc. in Windsor, Ont. He says that hard assets -- a list that includes precious and base metals, paper, forestry and real estate equities and funds -- should comprise about 10 per cent of most investors' holdings.

© 2007 The Globe and Mail. All rights reserved.

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