“You should always, always, keep 10 per cent 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 per cent 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 $20m start,” he says. Wheaton recently announced an all-share tie-up with fellow Canadian group Goldcorp for $2.3bn. 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 explains.

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