Gold's fall from grace leaves advisers split over its value as an investment

April 18, 1993|By Steve Goldberg | Steve Goldberg,Media General News Service

Ten years ago, investment advisers often counseled peopl to put 5 percent of their assets into gold as protection against rapid inflation or other disaster.

The theory was that gold provides insurance against drops in stock prices because gold generally moves in the opposite direction of stocks. The theory worked fairly well, but as stocks soared, gold plummeted.

After peaking at $850 an ounce in 1980, gold fell by 50 percent over the next two years and has mostly traded around $400 or less since then.

Today financial advisers are sharply divided on the value of gold as an investment.

"I'm not saying it's worthless," said James B. Cloonan, chairman of the American Association of Individual Investors. "I'm saying it's not a good investment."

Mr. Cloonan says new methods of mining gold could reduce the production price to near $100 an ounce. That, he says, will force gold's price down further, as more and more investors give up on the yellow metal.

But James Stack of InvesTech Research in Whitefish, Mont., thinks the decline in gold's price over the past dozen years is merely a response to low inflation. "One has to recognize that the past decade has been one of slowing inflation and falling interest rates."

As inflation comes back, gold prices will climb, Mr. Stack said. He thinks inflation may rise again soon.

Gold has always come back in value before, he said. There's no reason to think it won't again.

Mr. Stack suggests either buying gold coins from a reputable local dealer or buying a mutual fund that specializes in gold-mining shares. He likes Financial Strategic Gold ([800] 525-8085), which invests primarily in North American gold.

Though gold mutual funds and stocks are even more volatile than coins, they can presumably make money even if the price of gold doesn't skyrocket. Even if gold is just another commodity, a company that produces it still can add value by increasing or improving production.

Gold prices are a roller coaster ride. Gold funds often are the top performers among mutual funds one quarter (as they were in the first quarter of 1993) only to be the worst performers the following quarter.

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