Don''t miss these two essays at Gold-Eagle

Section:

Royal Precious Metals
glitters, thanks to gold

By Michael Ryval
The Globe and Mail, Toronto
Wednesday, November 20, 2002

http://www.globeandmail.com/servlet/GIS.Servlets.HTMLTemplate?
current_row=1&tf=tgam/search/tgam/SearchFullStory.html&cf=tgam/search/
tgam/SearchFullStory.cfg&configFileLoc=tgam/config&encoded_keywords=em
bry&option=&start_row=1&start_row_offset1=&num_rows=1&search_results_s
tart=1&query=embry

With investors seeking safety from battered
stock markets, and growing anxiety about a
possible war between Iraq and the United
States, gold bullion has gained about 14
percent since the start of the year.

The combination of a rising gold price and
market jitters has pushed up the value of
gold stocks, making precious metals funds one
of the few shining areas.

And within the category, the $218.5-million
Royal Precious Metals Fund has been a
standout. It returned 80.8 percent for the
year ended Oct. 31, versus 46.2 percent for
the group average. That made it the top
performer in the category and among all funds
available in Canada.

"I attribute the performance to the fact I am
very much committed to a higher gold price,"
says manager John Embry, vice-president of
Canadian equities at Toronto-based RBC Global
Investment Management Inc.

"I'm seeking companies that will benefit the
most from that type of environment," adds the
39-year investment industry veteran who has
managed this fund since April 1994.

As a result, he's avoided major blue-chip
producers such as Barrick Gold Corp. and
Placer Dome Inc. These firms have extensive
hedging programs that ostensibly protect them
from a falling gold price but also prevent
them from benefiting from a rising price.

"In the event of a higher gold price, they
will either have problems with their hedge
book or won't perform as well as unhedged
companies," he says. It was a good bet: These
players have barely moved in the last 12
months.

But Mr. Embry's investment in mid-cap,
unhedged producers such as Meridian Gold
Corp. have paid off big-time. Bought at an
average C$7 a share in late 2000, it is now
trading around C$27.

The second aspect of his investment stance
was a decision to buy a number of little
followed small-cap producers. These account
for about one-third of the 60-name fund, on a
weighted basis.

For example, he bought Eldorado Gold Corp.
for about 50 cents a share a year ago. The
junior firm, which has interests in Brazil
and Turkey, has risen to about $1.70.

Thistle Mining Inc., which has acquired the
President Steyn mine in South Africa, cost
about 20 cents when he bought it last year.
It trades at about 65 cents.

"These kinds of stocks, when added to my core
holdings, make a big difference. They add
ballast to the fund," Mr. Embry says.

Core positions, which make up about three-
quarters of the fund, include such firms as
Repadre Capital Inc. and Iamgold Corp., as
well as River Gold Mines Ltd. and FNX Mining
Co. Inc.

Going forward, Mr. Embry remains very upbeat
on the sector, but has reduced holdings such
as Meridian Gold, which he believes have
become too expensive.

Instead, he has focused on low-margin
producers that will stand to benefit more
from a higher gold price. This accounts for
his acquisition of names such as Kinross Gold
Corp. and TVX Gold Inc.

Mr. Embry argues that gold stocks, having
risen from their lows in late 2000, finished
the first leg of a bull market last May. They
went through a corrective phase over the
summer and fall, and are poised to start the
second leg. But, he admits, it all depends on
a much higher gold price.

How much higher? He sees gold rising to
US$400 an ounce by mid-2003 from about $319
now, and then hitting $500 "should conditions
deteriorate sufficiently."

A long-time gold bug, Mr. Embry encountered
some unwanted publicity last June when the
media picked up a report he wrote for
internal consumption. In it, he pointed to
growing evidence of gold price manipulation
since 1995. He argued that central banks and
so-called "bullion banks" that have been
short-sellers have a common, vested interest
in keeping the gold price low.

The report proved fodder for conspiracy
theorists. Today, Mr. Embry is reluctant to
discuss the report, hinting that it caused
some embarrassment to the Royal Bank. But his
conviction remains unwavering. "The
fundamentals behind gold are getting better
and better," he says.

His argument is posited on a weakening U.S.
dollar and the U.S. current-account deficit,
which is 5 percent of gross domestic product.
"When a country runs that kind of deficit,
the currency usually buckles."

Mr. Embry notes a correlation between gold
and the greenback. "If the dollar is seen as
a less attractive currency, not all the money
will move into the euro or yen. At the
margin, some of it will move into hard
assets, such as gold."

The second leg of the bull market will be
apparent as investors move into gold stocks
in a bigger way. "This leg could last a
couple of years," he says.

Acknowledging the sector is notoriously
volatile, he adds that the third leg could
end up in a speculative blow-off, much like
tech stocks. "But it all hinges on a higher
gold price," he says, arguing that a
combination of a weakening U.S. fiscal
condition, record-low interest rates, and
dismal equity returns will prompt people to
buy bullion directly.

"The competition for gold is materially less
than it has been for the last 20 years," he
says. "As these problems manifest themselves,
people will view gold more favourably."

While Mr. Embry paints an attractive picture,
analysts recommend caution.

"These funds have a history of big ups and
big downs," says Gordon Pape, Toronto-based
co-author of the "2003 Mutual Fund Buyer's
Guide," who considers the fund "one of the
best precious metals funds around."

Yet he reminds investors that the fund also
had four consecutive negative years, from
1997 to 2000.

Mr. Pape warns that gold stocks are
vulnerable to factors such as rising interest
rates, making for hazardous going. But he
maintains that "if you're going to walk into
that particular mine field, this is one of
the better ways to do it."

James Gauthier, fund analyst at Toronto-based
Dundee Securities Corp., does not recommend
holding more than 5 percent in any precious
metals fund.

Though impressed with Royal Precious Metals,
it is not his first choice. He prefers the
$123.8-million Mackenzie Universal Precious
Metals, which came second in the category on
a one-year basis and first over three years.
"Its performance is a bit more consistent,"
he says.