Gold Looks Promising

by Alan Lavine and Gail Liberman

The gold bugs are beating the tom-toms now that the metal hit $500 per ounce. Should you invest? Financial advisors typically recommend that you keep some five to 10 percent of your assets in gold. But gold and precious metals mining stock mutual funds are volatile. Your investment can fluctuate more than 50 percent. So it’s best to invest a little at a time.

Over 10-year and five-year periods ending in 2001, the average precious metals mutual fund respectively lost -3.2 percent and -11.7 annually. Today it’s a different ball game. Over the past three years, the average precious metals mutual fund has grown at a 29 percent annual rate.

Some analysts believe the price of gold could hit $800 an ounce like it did in the 1980s. The reasons: Gold consumption in China and India are growing rapidly, while the supply of gold is struggling to meet demand.

“We believe in the next few years the price of gold could approach prices reached back in the 1980s of nearly $850 per ounce,” says Rob Lutts, chief investment officer at Cabot Money Management, Salem, Mass.

In fact, Lutts believes that commodities in general will be a top market performer for the next five to seven years.

There are a number of ways to invest in gold.

 You can purchase gold bullion or legal tender gold coins like American Eagles. But expect to pay storage costs if you purchase substantial amounts.

Your bullion investment should track the gold bullion market. When your sell it, you may have to have the metal “assayed” or analyzed.

Legal tender gold coins, on the other hand, are more liquid. They are a medium of exchange that represents the current price of gold.

You can purchase gold mining stocks. However, they may not always move in tandem with gold bullion prices. The reason: Mining stocks are influenced by the performance of the overall stock market as well as the financial condition of the mining company.

A professionally managed precious metals mutual fund, which typically invests in stocks, provides a way to own several companies. This gives you more protection in case the market or the performance of one particular company heads South. Many mutual funds also invest in sliver and other types of precious metals mining companies. They may also invest in bullion.

Some of the best-performing gold funds over the past year include the U.S. Global Gold Shares Fund and Oppenheimer’s Gold and Special Minerals Fund, according to Morningstar Inc., Chicago.    

Today, there also are exchange traded funds that track the performance of gold bullion. With exchange traded funds, you own a security that invests directly in gold rather than gold companies. Exchange traded funds trade daily on the stock exchange. Exchange traded funds that invest in gold bullion include iShares Comex Gold Trust and streetTRACKS Gold shares.

Beware. With certain direct investments in gold, you may owe Uncle Sam the higher capital gains tax on collectibles.

Interested in investing in a fund that owns gold and other commodities? Consider the Oppenheimer Real Asset Fund, which tracks the Goldman Sachs Commodity Index, and the PIMCO CommodityRealReturn Strategy Fund, which tracks the Dow Jones-AIG Commodity Index. Both have racked up double-digit returns over the past couple of years.

Several years ago, however, they were deeply in the red.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.