This Metal Has Precious Little Shine

Gold bugs are calling it the $400 question: What will it take to push gold prices beyond $400 per ounce? For more than five years, whenever gold has flirted with that level, heavy selling has slapped it down again. It appears that's not about to change.

Barring some huge surprise--such as war, financial panic, or surging inflation--gold will probably stay within a narrow range just below $400, analysts say. Any rallies will serve as an excuse for producers to sell, driving prices back down. And without a runup in gold prices, most mining stocks will probably trail the broad market. Meantime, mutual funds that specialize in precious metals still haven't recovered from last year's 11.6% decline. Courageous investors seeking to diversify their portfolios might sense a buying opportunity, but these funds may not be worth the risk. "Staying away from them is probably the wisest course for most investors. They're too volatile," advises analyst Eileen S. Makoff, who tracks precious-metals funds at Morningstar Inc.

NO SIGN OF FEVER. With the Federal Reserve steadfast in controlling inflation, the U.S. economy slowing, and Japan facing deflation as the yen soars, economists doubt gold will get a lift anytime soon. Even currency-market turmoil has failed to buoy gold's price. This year's Mexican peso crisis hasn't driven worried investors into gold. Nor has the collapse of the dollar. In terms of yen and German marks, gold prices have plunged.

The only bright spot in the gold market: fundamentals. World gold-mine production dropped 0.6% in 1994, the first decline since 1975, and analysts expect mine supplies to edge up only slightly over the next few years. Even with the addition of scrap gold and sales from central bank stockpiles, the supplies won't keep up with an expected 4% annual rise in demand through 1997. Appetites are growing in China, India, and elsewhere in the developing world, where gold jewelry remains a standard for investment and adornment. Traders report strong buying from the Pacific Rim every time the gold price dips below $375. That demand will continue to limit bullion's downside risk, says Philip Klapwijk, senior analyst at Gold Fields Mineral Services Ltd. But since the demand erodes whenever the prices soar, even strong fundamentals are unlikely to support a speculative surge for very long.

So how can investors participate even with no sign of gold fever? A handful of mutual-fund managers have crafted defensive strategies. At the $125 million Scudder Gold Fund, manager Douglas D. Donald swears by bullion as a less volatile holding than mining stocks. "It has been a savior," he notes. Donald held 24% of the fund's assets in bullion at the end of last year's third quarter. When gold stocks tanked in the fourth, he sold thousands of ounces to meet redemptions. Now, Donald is slowly rebuilding his metal cache.

At the SoGen Gold Fund, manager Jean-Marie Eveillard is thinking defensively, too. His largest holding is the Swiss-based Bank for International Settlements. A blue-chip outfit controlled by the world's central banks, BIS has 50% of its assets in bullion--and thus provides an indirect gold play without any mining risk. Eveillard, who has "no idea" when bullion prices may increase, also likes preferred shares of Freeport-McMoRan Copper & Gold Inc., which offer a coupon and redemption value indexed to gold prices.

"IT'S INSURANCE." Such defensive strategies offer too meager an upside, contends Henry J. Bingham, who manages Van Eck Associates' $600 million International Investors Gold Fund, a heavy investor in South African stocks. Since gold funds tend to rise when stocks and bonds fall, investors seeking maximum diversification should buy aggressive funds, Bingham contends. "It's insurance," he adds.

Other metals mavens favor mining stocks for similar reasons. But even they recommend caution when panning for bargains among the dozens of small mining issues from Africa, Asia, South America, and Canada. Instead, they advise investors to stick with well-capitalized, efficient producers.

Of the 46 gold funds that Morningstar follows, all but four own Placer Dome Inc., and all but nine hold American Barrick Resources Corp. They may not have much pizzazz, but with gold stuck in neutral, the tried-and-true path may be the best to follow.

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