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Thailand plans major shift of reserves from dollar to euro and Asian bonds

Section: Daily Dispatches

By Jennifer Hughes
Financial Times
Monday, January 10, 2005

"You should always, always, keep 10 percent of your portfolio in
gold," says Frank Holmes, chief investment officer of US Global
Investors, a Texas-based group of funds.

It sounds like an advertisement for one of the group's many natural
resource-based funds but there is sound reasoning, too.

"It's a natural hedge, uncorrelated with other asset classes. At the
moment, you will have a profit that can then be reinvested
elsewhere. If you had stuck to it during the dotcom boom [when gold
was falling] and kept re-topping it to 10 per cent each year, you
would have had fewer, and lost less on, tech stocks," he explains.

Gold prices troughed during the late 1990s when the focus was firmly
on spectacular equity market growth. The subsequent slide in stocks
shifted attention to alternative assets while, more recently, the
dollar's fall has helped boost gold, which tends to move in the
opposite direction. Spot prices for the metal have risen 57 per cent
since January 2002 and now stand at more than $414 a troy ounce from
$278.7 three years ago.

Commodity prices more generally have risen sharply as a result of
increased demand, particularly from China, as part of the global
recovery. Stocks linked to natural resources, in which Mr Holmes
specialises, have also outperformed. Last year the materials sector
of the S&P Global 1200 rose 16.2 per cent compared with 12.5 per
cent for the whole index.

The group's flagship funds, Global Resources and World Precious
Minerals, are well placed to capitalise on this. Global Resources
has returned 30.4 per cent last year and almost 24 per cent
annualised over the past five years. In 2003 it was ranked first in
its category by Morningstar but slipped to 35th last year as others
enjoyed the commodities boom.

World Precious Minerals has returned 18.9 per cent each year over
five years. Over three years it is ranked the best performing fund
in its sector by Morningstar. The group's Gold Shares fund was the
first precious metals fund in the US, evolving out of a fund that
was the company's first offering in 1968. The fund is down 6.4 per
cent in 2004 but has returned 17.2 per cent on an annualised basis
since 1999.

"This is a different fund. It only invests in gold producers and not
in developing mines. It has to beat the XAU index which it did
comfortably," Mr Holmes says. The Philadelphia Gold and Silver Index
fell about14 per cent in 2004.

The global nature of many of the funds' investments means returns
have been flattered by the weakness of the dollar as well as the
strong gains in raw material prices. Copper prices rose34 per cent
last year, aluminium rose 21 per cent and there were double-digit
gains for lead, zinc and tin. To date this year, a rebound in the
dollar has weighed on commodity markets.

"We will see a correction in prices this year but the lows will be
higher than in previous corrections. I do not see prices
collapsing," Mr Holmes says. "Technology means inventory management
is much better than it used to be, so you won't see those huge build-
ups and overhangs, and when demand picks up again prices will rise
from a higher base."

Another area where US Global is making a lot of money is eastern
Europe. Last year its Eastern European fund returned 52.4 percent
and was ranked first in its category by Morningstar.

San Antonio, Texas, is perhaps not the most natural place to run
funds heavy in mining and natural resource stocks.

"It is warm, and inexpensive to work and live in," explains Mr
Holmes, who reckons he spends at least six weeks of every quarter on
the road visiting companies, mines and analysts around the world.

Mr Holmes and the group's other analysts follow a very disciplined
approach to investing, based on a wide range of models.

"Monday, we look at macroeconomic models for the countries we are
involved in. Then we spend the rest of the week assessing all sorts
of factors cyclical, market, currencies, commodities, political to
find the best stocks to own," Mr Holmes explains.

His best investment?

"I really enjoy building a company from the bottom, like Wheaton
River. I saw that one from a $20 million start," he says. Wheaton
recently announced an all-share tie-up with fellow Canadian group
Goldcorp for $2.3 billion. Wheaton is the top holding of the group's
World Precious Minerals Fund which also has a stake in Goldcorp.

His worst investment?

"I was 28. It was in Canada with a guy who found it hard to accept
and pass on bad news I personally lost a quarter of a million on
this one," he says. "I was so angry, then I realised anger wasn't
going to help, that this person had a flaw that was quite common and
that I would see again."

"I now ask people what their best and worst bets are if they can't
disclose the bad stuff, then it reminds me of the guy that lost me
that money."

As chief investment officer he oversees all the funds in the group
after taking a controlling interest in the company in 1989. Before
that, he worked in investment management and the mining industry in
Canada, including time as a portfolio manager specialising in
emerging growth companies.

"I always felt I had good intuition and I am a hard worker," he
says. Then he grins. "I also didn't realise just how much work it
was." Mr Holmes's personal energy extends to running marathons,
mostly recently completing the New York one, and basketball. He also
sees links between sports and fund management.

"You need resilience like an athlete to have confidence in your
abilities and to get back in the game after taking a tumble," he


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