DeborahAdamson

SAN ANTONIO, Tex. (CBS.MW) — It took a dedicated gold bug to hang tough with the two mutual fund portfolios recently taken over by U.S. Global Investors’ chief investment officer, Frank Holmes.

The $50 million U.S. Global Gold Shares fund USERX, +0.39% and the $71 million U.S. Global World Precious Minerals fund UNWPX, -0.23% have certainly reflected the volatile fortunes of this precious metal. See related story .

Assailed by fund tracker Morningstar Inc. as one of the mutual fund world’s worst, Gold Shares fund averaged a dismal loss of about 12 percent annually for the last 10 years, disastrously underperforming Standard & Poor’s 500 Index by almost 25 percent, according to Morningstar.

Precious Minerals dogged the S&P by 11 percent, delivering a scant 2 percent a year over the period.

But loyal U.S. Global shareholders have been getting the last laugh as both funds have skyrocketed in the wake of the new gold boom.

As of Wednesday, U.S. Global Gold Shares is the best performing of any mutual fund year to date, delivering a blistering 106 percent since the beginning of the year, according to Lipper. Precious Minerals is right behind it with a glistening 104 percent gain.

The money management firm also has started to reduce expense ratios in the two portfolios, which stood at 5.79 percent for Gold Shares and 2.86 percent for World Precious Minerals. It cut costs entailed by serving small accounts by raising the minimums to $5,000, among other measures.

Holmes, who took over management of the two funds last year along with co-manager Ralph Aldis, spoke to CBS.MarketWatch.com about the prospects for gold stocks and what he’s doing differently as the funds’ newest captain.

CBSMW: It’s been a wild ride for your gold funds. Right now gold’s in favor. Do you think this uptrend can be sustained?

Holmes: I believe it’s sustainable for several reasons. One, for the past 20 years global money supply has been growing at close to 15 percent and world mine supply has been growing at 2 percent and is now falling. So you have, with gold under $300, a massive amount of contraction taking place and new mine supply coming out. Two, on a big macro theme, central banks are at a holding level of where they were in 1950. Throughout 1960s and 1970s we saw central bank increasing their gold holdings and then throughout the 1990s decreasing them.

Third, you have a lot of currency unrest and concerns by investors from Enronitis to the Japanese not having enough insurance. So you’ve seen a big increase in Japanese consumption in January of bullion. The Japanese are the largest holders of U.S. government debt and worry about their U.S. bonds being devalued, the perfect hedge is good. You’re also seeing demand for jewelry in the past 5 years has exceeded mine supply.

The only thing that has kept gold down has been central bank selling. Without central bank selling, gold will be at a more natural level of $400 an ounce. That’s where we think gold can trade up to. You’re also seeing a lot of big mining companies realize that they can’t find deposits that are commercial at these price levels. Their hedging has been hurting the price levels so they have been unwinding their hedges and that’s creating a natural demand.

When you add the consolidation of the mining industry. they almost creating an oligopoly. Also the barriers to entry to provide gold deposits are extremely high with environmental rules in the past 20 years. You can’t just walk in and look for gold.

Everyone just believes this is a blip. That means it trades higher.

CBSMW: Can gold go higher without a dollar collapse or further attacks on the U.S.?

Holmes: There’s a fundamental thing going with gold alone but these other things also accelerate it. What has been the catalyst in the last four months. was 9/11. What 9/11 did was forced the U.S. government to go to deficit spending and drop interest rates at a negative rate of return.