One of the biggest surprises on Wall Street during 2003 was the extraordinary performance of gold-oriented mutual funds — investments that normally fall as the stock market rises.
The deteriorating dollar, concerns about rising interest rates and inflation and global terror fears contributed to solid gains in gold stocks and, in turn, gold funds. And analysts say gold may well continue to be a good choice in the coming months.
But investors should consider putting their money into gold funds, not gold itself.
“Funds make more sense for individual investors than going out to the pawn shop and buying gold coins,” said Amaury de Barros Conti, a gold equity trader with U.S. Global Investors. “And there’s risk involved with owning gold mining stocks as well. Funds have diversified holdings which in itself reduce the risk for investors.”
Gold is most often associated with jewelry, but it is also an industrial material that can be of great importance in an emerging economy like China, and that helped the metal’s price during 2003. Moreover, in addition to gold, most precious metal funds have some exposure to mining stocks and other metals, such as silver, platinum, copper and zinc that are in greater demand in improving economies.
The 49 gold-oriented funds watched by fund-tracker Lipper Inc. had a return of 58.33 percent in 2003, making them some of the year’s best performers.
Investing moderate amounts of money in precious metals funds can help diversify your portfolio and offset inflation risks because their values will remain stable or even increase as currencies weaken and decline.
Most financial planners will recommend you limit such holdings to no more than 5 percent to 10 percent of your total portfolio. That’s because precious metals have just barely kept pace with the rate of inflation over the long term, meaning their returns historically are much lower than stocks and bonds.
But gold has seen a stunning run-up in recent years. It is currently trading at about $423 a troy ounce, a measure that is equal to about one-fourteenth of a pound. That’s a steep rise from $250 in 2000, but still far shy from the $875-per-ounce price tag in 1980 — another time of global unrest, and also a time when inflation was a serious problem for the economy.
It could see further gains, said Rob McEwen, chairman and chief executive of Goldcorp Inc., a Toronto-based consortium that owns the Red Lake mine in Ontario, the world’s richest-grade gold mine.
“It looks like we’re in the first phases of a multiyear bull market,” said Mr. McEwen, who thinks gold will trade in a range between $375 and $450 over the next year. “I’d say you’d want to stage your investments out; there will be pullbacks and consolidation … and we are in an election year, so that will have a bearing on the market and on gold and on the dollar.”
The weakening dollar, which has spiraled to new lows against the euro and other major currencies for months amid growing concerns about the U.S. budget and trade deficits, remains the biggest factor propelling gold’s current rise.
Another driver is that U.S. interest rates have fallen to 45-year lows, and policy-makers with the Federal Reserve have signaled they are not likely to raise them anytime soon.
A third factor is that China is opening up its markets and demand for precious metals like gold is on the rise.
“That’s a new source of demand that hadn’t been there before,” said Mr. Conti. “There’s not that much to go around. The market is very, very tight.”
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