Precious metal is toying with investors' emotions

October 05, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Gold. Love it or leave it.

The precious metal, which has broken many investors' hearts with its volatility over the years, is again toying with our emotions. There is growing confidence in the investment community that the price of gold will boldly vault beyond the difficult $400-an-ounce barrier and continue to advance.

Big-time investors in hedge funds that include futures, options and gold-mining stocks have lately been moving heavily into gold investments. In addition, many market-timing services are giving subscribers the go-ahead to invest in the glittery metal.

The price of gold has a history of peaks and valleys. It was in a downward spiral in 1991 and 1992, yet since early 1993 the price has risen from a five-year low of $330 an ounce to trade at between $380 and $390 most of the year before a recent assault on the $400 barrier.

Some pundits contend gold's recent rise in price indicates inflation will be headed upward over the next year, even though the correlation between gold and inflation hasn't been as strong in the 1990s as it was in past decades.

It's not just gold bullion that ignites enthusiasm and disdain. The value of mutual funds investing in gold-mining stocks tends to foreshadow increases in the actual price of gold. Consider their volatility. Such funds are down 4.84 percent as a group this year, following a dramatic gain of 84.97 percent last year. They declined 15 percent in 1992, 3.9 percent in 1991 and 23.7 percent in 1990. Yet they posted a 25.6 percent increase in 1989.

Investors understandably come and go, often prompted by the advice of market-timing newsletters. Fidelity Select Precious Metals & Minerals had assets of $115 million in 1992, which ballooned to $550 million by the end of 1993 as gold prices increased and investors became interested. Yet, it has slipped to $425 million this year, largely because of redemptions as investors sought hotter prospects elsewhere.

Complicating matters, there are rising interest rates to contend with. An increase in interest rates initially hurts gold prices because it makes the improved yields of some basic fixed-rate investments more attractive. However, as the stock and bond markets are damaged by the rate increases, gold once again looks good. In fact, gold's biggest boom period in the early 1980s was a time of incredibly high interest rates as well.

"Now's a good time to buy gold, both to make money and as an alternative to a decline in stocks and bonds," counseled Bette Raptopoulos, precious metals analyst with Prudential Securities, who acknowledges that gold faces an extended battle around $400 an ounce. "Once it goes beyond that point, its next resistance will be $408, then $420, and it should reach $500 an ounce."

Increases in gold production have slowed and selling by the Russians and central banks has been absorbed, she said. Supplies are stabilizing and demand is rising.

"The gold cycle is overdue, but too many people have gold that they bought at more than $400 an ounce and aren't likely to buy more until the price revives," explained Alan Posnick, senior vice president with MTB Bank in New York. "While we won't see gold at $800 an ounce in a year, now is a time to buy it gradually, for downside risk is small."

There's been no increase thus far in sales of gold coins, such as the American Eagle and Canadian Maple Leaf, he noted.

"Every individual's portfolio should have some gold stocks, along with Treasury bills and silver stocks," advised James Dines, editor of The Dines Letter, Box 22, Belvedere, Calif. 94920, which costs $195 annually for 20 issues. "I believe Alan Greenspan is raising interest rates due to a currency crisis, and an exit from paper currencies will make gold a primary beneficiary."

In fact, Mr. Dines, a famous "gold bug," firmly believes that when gold awakens, it could go beyond $850, setting an all-time high. But, of course, few people currently share such enthusiasm.

"While gold has traditionally been an inflation hedge, that hasn't been borne out recently and isn't as sound a reason to own it anymore," said Jeff Kelley, associate editor with the Morningstar Mutual Funds investment advisory. "I look at it as more of an aggressive kicker to a portfolio that will have some big years once in a while, sort of a specialized sector play, much like biotech stocks."

This year, only eight of the 35 gold-mining mutual funds have made money.

Top funds this year, according to Morningstar, have been:

* Lexington Strategic Investments, Saddle Brook, N.J.; $89 million in assets; 5.75 percent load (initial sales charge); investing solely in South African stocks; up 12 percent.

* SoGen Gold Fund, New York; $25 million in assets; 3.75 percent load; diversified portfolio, including North American and South African stocks; up 3.2 percent.

* Fidelity Select Precious Metals & Minerals, Boston; $425 million in assets; 3 percent load; diversified portfolio; up 3.1 percent.

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