Heavy Metals Could Sink Your Portfolio

Back in 1980, David S. Robinson was convinced the U.S. economy was heading

for disaster. So the Chicago newspaperman bought a 100-ounce silver bar for $5,350. As inflation soared, Robinson's prognosis seemed right on the mark. But by the time Robinson sold his treasure in a booming economy six years later, he recovered only $480 of his investment. "I apparently had more money than good sense," he moans.

Robinson caught a bug that's spreading again after a decade of dormancy. With a depressed dollar and a stock market that seems too good to be true, investor interest in owning gold, silver, platinum, and palladium is on the rise. Some investors see little downside risk in coins and bars--especially those made of gold. Analysts expect production to edge up only slightly, while demand, driven by Asian markets, rises about 4% a year. Yet as Robinson and others have sadly discovered, prices are influenced less by fundamentals than they are by war, hyperinflation, or other calamitous events. As a result, most financial experts warn investors to steer clear of precious metals. "Stay away!" advises John Markese of the American Association of Individual Investors, a nonprofit educational group.

GOLD BUST. For starters, precious metals pay no interest or dividends, and their value has failed to keep pace with stocks, money-market accounts, and other popular investments. Gold is down from a 1980 peak of $859 per ounce to about $389 and silver from $50 per ounce to $5.28. It is true that metal prices can be volatile, and investors who time their purchases and sales perfectly can make a fortune. But opportunities are rare, and those who wait for a once-in-a-lifetime gold rush can incur storage and insurance costs of nearly 1% a year. "It's got to be approached as a speculative play, by people with money to lose," says analyst Philip Klapwijk of Gold Fields Mineral Services in London.

Commissions and premiums also help to wipe away the shine. The few banks in the U.S. that offer the metals, including Wilmington Trust Co. of Delaware and Republic National Bank of New York, charge fees as high as 5% when you buy and 1% to 2% when you sell. Big private dealers and brokers offer similar deals. Markups are higher at local coin dealers, pawnshops, and other mom and pop outfits. Investors will "get ripped off, unless they know the dealer," says analyst Vahid Fathi of Kemper Securities Inc. in Chicago.

Indeed, although precious-metals profits may be scarce, there is certainly no shortage of swindlers in the marketplace. Every few years, it seems, a boiler-room operator springs up to collect money from unsuspecting individuals for gold and silver that never gets purchased or shipped. In one recent scheme, a Beverly Hills firm shut down after delivering just 27 of the 30,000 ounces of gold it owed unwitting investors who had been promised bargain-priced gold.

In another common scam, companies attempt to peddle "rare" coins that carry prices that are far above their value. Government watchdogs recently accused a New Jersey telemarketer of buying Russian gold coins for less than $100 each and selling them to unwary investors for nearly $2,000 apiece. A number of modern get-rich-quick schemes would make a medieval alchemist blush. Last year, a California high school teacher pleaded guilty to fraud charges after convincing investors he could buy "used" gold at low prices and resell it as "new."

SAFEST BETS. Those who retain an appetite for gold and silver in spite of such cautionary tales should consider money-saving alternatives to accepting physical delivery of the metal: certificate or statement accounts, say. Wilmington Trust pools investors' cash to purchase 100-ounce gold bars, which are cheaper than the one-ounce coins most popular with individuals. The bars are stored at the bank, and investors can buy or sell their stakes over the phone.

For those with a short-term view of the market, derivatives such as gold futures at New York's Commodity Exchange can provide a cheap, albeit risky, bet. And for those investors who are seeking to diversify their portfolios, mining stocks could provide the answer. The safest bets are large-capitalization producers such as Placer Dome Inc. and American Barrick Resources Corp., which can appreciate in value through cost-cutting and production growth even when gold prices are going nowhere. The big mining-stock mutual funds, such as Van Eck Associates' $600 million International Investors Gold Fund, provide a wide array of issues. Some funds even offer a proxy for holding metals outright: The $125 million Scudder Gold Fund keeps as much as one-fourth of its assets in bullion.

But Robinson, for one, isn't interested. Would he invest in metals again? "Not on your life," he declares. Just one little case of gold fever can provide a lifetime of immunity.

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