The Gold Digger

Fund Manager William Martin on the outlook for gold investing, and why he's so bullish on Barrick.

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In times of uncertainty, people search for the safe and familiar. When it comes to economic uncertainty, investors often hedge their bets by flocking to one of the oldest symbols of value—gold. William Martin has managed the $1.2 billion American Century Global Gold fund since 1992. The fund is up 16 percent so far this year, and its average annual return, taking into account the past three years, is 24.9 percent. Martin says that if you want to understand the future of gold, you have to understand what's going on with the dollar.

What is unique about the situation for gold in the current market environment?

I've never seen the table set for gold so fully. Usually there's a more even distribution of potential outcomes [for the price of gold]—it's going to rally if this happens, it's going to get spanked if this happens. As long as I've been doing this, for 18 years, this is as one-sided as I've seen it. Why is that?

In the next six to 12 months, the odds that we will see higher prices, rather than lower, are good.... With the financial crisis we're looking at, you've got China coming out and saying, we may need to diversify our foreign exchange reserves away from the dollar. Gold could certainly be a recipient. Saudi Arabia was able to hold the other Middle Eastern countries from doing the same and looking to diversify their petrodollars into other currencies, which would weaken the dollar and help gold. I saw a story that [the Russian energy company] Gazprom was considering, more likely sooner rather than later, to diversify its oil and gas sales out of dollars and into euros and rubles. When you see those kinds of stories, there isn't anything in there that would be negative for gold. Is the state of the dollar the most important factor in the price of gold down the road?

The Fed has painted itself into a corner. They need to manage this situation perfectly. If they're too restrictive, we're going to end up going to lower [interest] rates and having to prime the pump again. If they're too easy, you're going to see the dollar reflect that, and there's potential for importing inflation. Gold loves this kind of environment. What gold-mining company are you high on?

I like Barrick. [The company has been Martin's top holding for about 10 years, he says.] There's people out there who travel a lot—I call them wildcatters—who are out there looking for gold. Sometimes they hit; nine times out of 10, they don't. Barrick has the cash to wait. Because of strong financial stability, they have access to certain types of financial arrangements that I think gives them an advantage. They have these spot-deferred forward sales arrangements with the banks. What that means is that [for many gold-mining companies], they'll enter an agreement to sell their gold forward and they'll lock in. If gold goes up, that becomes a liability, but if gold goes down, that's great. But with Barrick, because of their strong production profile and their stability, they have the option to defer those sales. So if gold does [go] up, they're not going to sell it below price. They'll just roll it, and they're going to take the chance that at some point gold is going to trade down, and they're going to be able to capture that spread. From what I've seen, they're the only ones in the industry who have access to that. Who are some other big players in gold mining?

Newmont is a very large weight in the overall global gold benchmark that we use. We're currently underweight because of their cost creep. They've let their cost of production go up a little bit, and that's cut into their profits. I would have expected them to be a little tighter. But because they're such a big player, we definitely have exposure. What kind of investors should consider gold?

When you talk about people who are young, and starting 401(k)'s, they're trying to time the market and get in and out. But when you look at people who have accumulated their wealth and they're trying to protect those savings, they view gold as an insurance policy. That's where it has a role. And the role would be offsetting those unforeseen risks, probably to the tune of 5 to 10 percent of someone's portfolio.