Should You Be Dazzled By The Gold Rally?Joan Warner
Suddenly, gold bugs are crawling out of the woodwork. In the first quarter, investors came pouring into gold mutual funds, which rewarded them with double-digit returns. Gold-mining stocks were up an average 23% for the period, compared with just 4.37% for the Standard & Poor's 500-stock index. And bullion prices, flirting with $340 an ounce, may have broken away for good from their 12-month low of around $326 in mid-March.
Gold bulls believe the comeback is practically inevitable. They cite inflation fears, a stock market many think is overvalued, interest-bearing investments with laughable yields, and a recalcitrant federal deficit. "When you put all those factors together, they don't spell mother, they spell gold," says Bruce Kap-lan, who runs a metals consulting firm in Santa Monica, Calif. Kaplan thinks gold could top $400 by yearend.
But small gold rallies have happened before during the metal's 10-year decline--and fizzled. A look at fundamentals suggests that the gold bugs' excitement may be premature. While gold demand for jewelry-making is strong and growing, especially in the Far East, efficient production and central-bank selling seem likely to provide an ample supply.
VOLATILE. For individual investors, owning physical gold isn't much of a deal unless its price really takes off. It pays no dividends, and you carry insurance and storage costs. While gold stocks and mutual funds have done well, they are far more volatile than gold itself. If prices don't meet investors' expectations, gold shares will whipsaw back down. "You already have speculation built in that could be disappointed in the absence of good news," says Richard Hoey, chief economist at Dreyfus.
One strategy may be to seek out gold stocks and funds that have risen for independent reasons. The best fund performers last quarter invested mainly in South African mining companies, as the world looked more kindly on Pretoria's politics. The trend will probably continue in 1993. If you do share the gold bugs' inflation angst, consider alternative investments. Technical analyst Bernadette Murphy at M. Kimelman recommends oil stocks, which also pay relatively high dividends and present less risk. And Lincoln Anderson, Fidelity Investments' chief economist, thinks that international equity or currency funds are a much better hedge.
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