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  We're watching gold but sitting on cash for the time being

BENJ GALLANDER and BEN STADELMANN

Saturday, September 22, 2001

It is unseemly to calculate how to make money on crises and human misery, and all the more so when so many have lost all that they hold dear.

However, investors who are responsible for the financial security of their families must assess the potential consequences of current events. Historically, war is the greatest destroyer of wealth. For the past half-century this scourge has largely spared affluent Western countries, but it has percolated unabated through less fortunate parts of the world. Now our luck has run out.

Trying to figure out what is going to happen next is a mug's game — the geopolitical combinations and perturbations are far too complex for anyone to predict how things will turn out. The only thing that is certain is uncertainty itself.

For our Contra stock portfolio, we are adopting a wait-and-see approach — nothing has been bought or sold. As frequent readers know, our posture has been defensive for some time, and we have been sitting on cash from a flurry of previous sales. At this point, events have not changed the downward economic trend; instead, it appears to be accelerating.

Gold is the traditional refuge in times of war, but so far its increase in value has been muted. Shares in mining companies have been a bit stronger, which is unsurprising given current conditions, and we continue to rate our holding in this category, Richmont Mines Inc. (RIC-TSE), as a buy. The difficulty, and promise, of investing in gold producers is that a large component of the risk/reward equation is dependent on factors other than precious metal prices. Reserves, operating costs, quality of management, debt and financing, hedging programs, are all significant factors in deciding a firm's prospects.

What if you want to stick to the metal itself as an insurance policy against a world that has gone haywire? You can buy bullion for safe keeping, or gold certificates, but either can be inconvenient and incur various charges.

As an alternative, one of us personally bought some Central Fund of Canada (CEF.A-TSE) last week at $5.05. CEF is a closed-end fund based in Alberta with 97 percent of its assets in precious metals — 55 percent in gold and 42 percent in silver. Buying shares is simple, one only incurs the normal brokerage commissions costs and, like many closed-end funds, it trades at a discount to its net asset value. That means you actually can buy gold for less than what it's worth.

This discount normally runs 8 to 10 percent, but it has narrowed recently and will likely narrow further in the near future as interest in gold rebounds, especially if the United States gets embroiled in a major conflict. Another way to mitigate the risk of making a poor selection of a gold mining company is to purchase an exchange-traded fund. Like index funds, ETFs have low management-expense ratios, and as the basket of companies represented is stable, there are few taxable distributions to worry about.

Barclays Global Investors has an ETF called the iGold Fund (XGD-TSE). This product tracks the Standard & Poor's TSE Canadian Gold Index, a group of seven producers: Agnico-Eagle, Barrick, Franco-Nevada, Goldcorp, Kinross, Meridian, and Placer Dome. That's an excellent mix; many mutual funds suffer from over-diversification.

Just keep in mind that like most indexes, the group is weighted to market capitalization, which means that giant Barrick shoulders a hefty chunk of the performance load. We don't use ETFs ourselves, but this makes an intriguing play for those who like this kind of investment.

Although the war against terrorism is apt to be protracted, in a few months the economic storm may have abated, allowing clarity of vision to be restored. By then, many stocks will have been beaten below reasonable valuations, and they will take a further hit with tax-loss selling. This would represent a far better buying opportunity than has been available for a very long time.

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