The White Knuckle Ride Is Over

'If you don't like roller coasters, gold is not a good investment for you," says Bruce L. Kaplan, the president of Kaplan & Co., a precious-metals consulting firm. Good counsel at any time, but rarely more true than in 1993. After bottoming out at an seven-year low of $326 an ounce in March, gold prices rallied during the spring and summer, reaching a summit of $409 in early August. Then prices rapidly sank to $343 in September before rebounding into a more recent range between $360 and $388. According to Morningstar Inc., precious-metals mutual funds, which are dominated by gold stocks, have posted total returns of 63% so far this year, compared with a 16% decline last year and a 5% drop in 1991.

Beyond these gyrations, however, bruised goldbugs see the makings of a slow but steady increase in prices over the next year or so, even without an upsurge in inflation. "I think you're seeing the early days of a long-term recovery," says Ian MacDonald, a precious metals analyst at Cr dit Suisse. Adds Richard Scott-Ram, the chief economist at the World Gold Council's U.S. offices: "It's coming time when the underperformance of gold in recent years has to catch up to normality while the overperformance of stocks and bonds is vulnerable to having setbacks."

Bullish "bullionaires" point to improving supply-and-demand fundamentals. Unlike recent years, 1993 had no dramatic negative shocks on the supply side. Mine production has been leveling off, and, aside from Canada, which will sell about 120 metric tons by yearend, sales by major central banks around the world have eased up. Last year, Belgium and the Netherlands dumped more than 600 metric tons of gold on the market to bolster their currencies, but the two countries have since been quiet. "I don't believe central-bank selling is a major threat for the coming year or two," says George Milling-Stanley, a precious-metals analyst at Lehman Bros.

Nor does Russia seem capable of damaging the market, having exhausted most of its gold reserves in a futile attempt to prop up the old regime. Its mining equipment, further, is old and badly in need of repair. And the former Soviet Union is likely to use portions of its current supply to satisfy the hunger for gold jewelry of its own denizens.

SUMMER SQUALL. While global supply is holding fairly steady, demand is apparently on the rise again. In the U.S., jewelry and gold coins are increasingly on people's wish lists. Through the first nine months of 1993, the World Gold Council reported overall global demand of 1,817 metric tons, up 6% over last year. Developing markets in the Mideast and Asia remain hot, though demand has softened lately, with China trying to cool down an overheating economy and reduce domestic supply.

These trends are showing up in the markets. "It used to take a price as low as $350 to trigger more incremental demand," says Lucille Palermo, manager of the Van Eck Gold/Resources Fund. "Now, it seems to be happening at $370." Analysts question, though, whether demand can be sustained if prices squirt back above $400 an ounce--especially if they spike too swiftly, as they did during the summer. Most prefer a scenario that would feature a slow and steady rise, culminating in above-$400 gold prices again toward the middle of next year.

As the economic picture in the U.S. and elsewhere is brightening, so is the outlook for other precious metals--especially platinum and silver, which, more than gold, depend on the fortunes of industry. Silver prices tend to bootstrap gold and haven't been hurt yet by a long-term dark cloud: the possibility that digital photography will partially or even largely supplant conventional methods that use silver. The metal recently sold for $5.13 an ounce, down from an August high of $5.44.

Platinum, a main component in catalytic converters, is being helped by a global boost in auto sales. The metal, which typically trades at a premium to gold, peaked at $428 in early August. Recently, prices were around $387. One bearish factor: the sticky recession in Japan. Japanese consumers are the main buyers of platinum jewelry.

While some experts are bullish, few feel the sky's the limit. Even as the U.S. economy picks up steam, the kind of nasty double-digit inflation rates that propelled gold prices to $875 an ounce 13 years ago seems highly unlikely. If there's anything gold fans have learned in recent years, it's not to be too greedy.

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