Gold Is Back In Favor

by Alan Lavine and Gail Liberman

Is gold back in favor? Yes, for a while. But how long will in last?

Gold and gold mining stocks have a negative relationship to stocks. For that reason, they can act as a hedge against stock market losses during tense times. But you must have the patience of a saint to invest in gold. Precious metals mutual funds gained 18.8 percent last year. This year, they are up 22 percent. By contrast, the stock market is down -14 percent over the same period, according to Morningstar Inc., Chicago.

Be advised the performance of gold can be fleeting. Over the past 10 years, gold funds have grown at a -3.2 percent annual rate. That tells you that most of the time, gold isn't a great investment. But it is a hedge in times of economic turmoil or high inflation. In 1978, when inflation and interest rates hit double-digits, gold funds gained more than 100 percent.

Experts say that gold or mutual funds that own mining stocks, should be no more than 5 percent of your total portfolio. That way you won't lose your shirt when gold is underperforming. On the upside, it should cushion losses in stocks and bonds when you need it--like today.

So what is the outlook for gold and mining stocks? 

Joe Foster, manager of the Van Eck International Investment Gold Fund, believes that many economic and political changes internationally since the historic collapse of the Nasdaq stock market bubble in 2000 could make gold attractive for years.

On Friday, Feb. 7, 2002, gold bullion had a weekly close of more than $300 per ounce for the first time in two years after rallying sharply since Feb. 1. Bullion has been advancing since April 2001 as the general stock market has declined and interest rates, less inflation, have reached their lowest levels since 1993.

The rise above the psychologically important $300 level could mark a historic, positive change in investor sentiment toward bullion.  "There are a number of reasons behind recent moves in the gold price," says Foster. "Of course, the political, economic and market uncertainty of recent months has been a catalyst. But there are a number of other contributing factors."

Foster also cites less gold hedging, a slowing of central bank sales and a surge in Japanese buying as positive for gold. Japanese gold imports jumped 45 percent in the fourth quarter of 2001. These factors may combine to make gold's recent surge different from other short-lived spikes seen in recent years.

Gold prices are determined by supply, demand and fear. During tense times or high inflation, people want to own gold. In other times, they don't.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," 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.

More articles by Al and Gail can be found here.