Gold Still Isn't Much Of A Prospect

To investors who have bought gold in the past five years, the precious metal has brought nothing but grief. Now, as gold plunges through the $350-per-ounce floor to a six-year low, analysts say that at today's prices gold is a real bargain.

If you feel as if you've heard that before, it's because you have. Last December, with gold at $360 an ounce, analysts were talking about bargain-hunting and pointing to the metal's limited downside. Now, with gold hovering around $337, down 6% from the year's start, it might look tempting to jump in. But gold prices could fall further. With the end of the cold war, much of the geopolitical tension that used to fuel its price has been defused. And since gold throws off no interest and has carrying costs to boot, it's expensive to invest in the metal even if the price doesn't go down.

One of gold's biggest draws has been that, unlike paper assets, its value rises as inflation heats up. Unfortunately for goldbugs, price and wage increases are trending down around the world. And inflation is projected to stay low for years. With interest rates running high--after adjustment for inflation--investors end up paying a steep price for holding gold. "When you get a real rate on long-term bonds of 5%, from a long-term point of view gold has a negative carrying cost of 5%," says August F. Arace, co-portfolio manager of the $57 million Freedom Gold & Government Fund. Arace has 90% of his fund's assets in government bonds and just 10% in gold stocks.

`MUTED EFFECTS.' Even if one wishes to hedge against inflation, there are now better ways to do it. Ten years ago, if investors were concerned about the dollar or the price of oil, they would turn to gold. Today, financial futures let investors fine-tune bets on oil or the dollar. "Gold doesn't react to world events like it used to," says Edmund Serfaty, portfolio manager of the $200 million United Services Gold Shares Fund. "It used to be that, with something like the gulf war, gold would've been much higher. But these things seem to have muted effects now, mainly because of currency trading and derivatives."

Investors who were playing gold by buying into Serfaty's mutual fund have been hit even harder than they would have been had they bought the metal itself. Over the past year, gold has fallen some 6%. But the United Services Gold Shares Fund is down 17%. And those shares will continue to fall if the price of gold doesn't stabilize.

How low can gold go? In 1982 and 1985, it dipped below $300. "I don't rule out that gold could go beneath $300, on a very temporary basis," says Frederick Demler, PaineWebber Inc.'s minerals economist, who nonetheless is recommending buying the metal for the long run. But analysts note that the upside is limited, too. When analysts speak of trading ranges, they usually go no higher than $400 to $425.

NO BARGAIN. Some diehard goldbugs venture higher estimates. Harry J. Bingham, president of the $120 million Van Eck Gold/Resources Fund, forecasts that the price will eventually head back to its early 1980s level, when it climbed to a high of $875 an ounce. "There are fewer goldbugs, but the ones that are there are as steadfast as they used to be," notes Jeffrey M. Christian of CPM Group, a precious-metals consultant in New York.

It's true that contrarian investing has proved lucrative in the past. But with the fundamentals so stacked against gold, it's hard to see how a play on the metal, even at these low prices, can really pay off.

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