Bright Outlook For Gold

by Alan Lavine and Gail Liberman

Should you invest in gold or precious metals mutual funds that own mining stocks?

The answer: Own a little bit of each asset as a long-term hedge against inflation. But don’t be the ranch on the price of gold over the short-term. Gold prices are volatile. You could lose your shirt.   If inflation increases due to a strong economy, weak dollar and big government deficit, the cost of goods are services are sure to rise. Rising inflation results in higher gold prices.

People that have a vested interest in selling gold bullion or mining stocks typically talk about all the good reasons to invest in gold. In addition the reason mentioned about, they often talk about China, Asian and Arab demand for gold.

These investment advisors may be right half the time. Gold prices and mining stocks shoot up during economic and political crisis as well as fears of higher inflation.

Nevertheless, gold prices often fall just as much as the go up.     For example, an index of gold mining stocks has grown at about 3 percent annual since 1988. In 2001, 2002 and 2003 gold stock gained a total of 159 percent. But from 1996 through 2000 gold mining stocks lost a total of 85 percent.

What about the current outlook for gold?

James Turk, editor of the Free Market Gold& Money Report, North Conway, NH, is bullish. The reason: He says the dollar will decline in value. That will push up inflation.

“Gold has risen three years in a row,” he said.” It is well poised for year number four. The flight out of the dollar for three year in a row is expected to accelerate. China, Japan, Korea and India are talking about diversifying their reserves out of the dollar. This trend toward a declining demand for dollars by central banks, as well as other dollar holders will continue.”

Sounds good, but this is no sure thing. Over the past 12 months gold mining stocks, for example, have lost -8 percent, according to a report by American Century Investments, a Kansas City based investment company. By contrast gold bullion price rose over 5 percent.

Gold mining stocks, the report said, do not always move in tandem with the price of gold bullion. The reasons: Gold is priced in dollars. A weaker dollar makes gold more affordable to foreign investors and boosts its appeal as hedge for dollar denominated investments.

What about platinum and palladium? Many precious metals mutual funds invest in companies that mine these scarce metals? Investors often purchase platinum and palladium bullion along with gold bullion.

A recent report by Johnson Matthey North America, NY said the platinum market is moving toward surplus and prices are expected to soften. Palladium prices are also soft due to over supply.

So what should you do? It is always a good idea to have an inflation hedge in a portfolio of stocks and bonds. If your stock and bond funds, for example, decline due to inflation or an economic crisis, you gold will increase in value and cushion the losses. Most experts recommend keep about 5 percent to 10 percent of assets in gold or precious metals mutual funds that invest worldwide.

The best rated precious metals mutual funds according to Morningstar include: First Eagle Gold Fund and the Vanguard Precious Metals Mining Fund. Both are conservatively managed and invest in large producers.

There are other inflation hedges that include: Real estate, real estate stock funds, inflationed index U.S. Treasury and corporate bonds, inflation indexed U.S. Savings bonds and inflation index bank certificates of deposit.

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.