Sector Plays

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Fool's gold?

Stocks and mutual funds featuring the precious metal are up sharply since 2001, but the investment is not without risk


By Rachel Beck
ASSOCIATED PRESS

September 28, 2003


Gold investors think they've found a fail-safe bet. No matter what happens to the economy, stock market or anything else – good or bad – they count on seeing positive returns.

That's why investors have been pouring big money into gold and gold stocks, a big switch from the not-so-distant past when they shunned gold in favor of higher-flying investments.

It's still unclear, though, if gold is really so safe.

Gold began its climb in 2001, just as the global economy and stock market began to slump. Its strength intensified in the months before the war in Iraq, surpassing $380 an ounce – its highest level in seven years. And after an initial post-war retreat, gold bounced back.

Now, as some analysts forecast a climb above $400, market-watchers acknowledge that they've been surprised by its current strength.

For one thing, gold has largely been following the path of the euro, the currency representing 12 European nations that has been gaining against the U.S. dollar over the last year. But the euro weakened this summer, while the dollar strengthened, and gold prices surged higher.

And then, just this past week, the dollar tumbled, but gold continued to climb.

There has also been a positive turn in both the U.S. stock market and economy. Since gold is considered a safe-haven asset, investors historically have pulled out when those areas improve.

But so far this year, gold stocks are up sharply, and precious metals mutual funds, which include gold, have soared 25 percent, solidly outperforming the 17 percent gain in the Standard & Poor's 500 stock index.

And those gains add on to last year's 63 percent rise in precious metals funds, the best performing fund category in the market and a sharp contrast to the 23 percent decline in the S&P 500, according to fund-tracker Morningstar.

"Gold prices should be down, and gold stocks should be down, but they keep going up," said John H. Hill, a former geologist turned vice president of equity research at Citigroup's Smith Barney investment division.

Still, gold isn't without risks.

Future gains might be limited because there already has been such a big run-up in price – it has climbed from $260 an ounce since early 2001.

And price gains have largely been fueled by speculation, not because of any significant shift in physical demand.

Gold stocks also can be very volatile. While they can benefit greatly should the price of gold continue to rise, they can tumble if there is any turmoil in areas of the world where gold companies mine.

A final reminder to gold investors: Two decades ago, gold was trading at more than $800, and it was supposed to keep rising. Today, it's less than half of that.

http://www.signonsandiego.com/news/uniontrib/sun/business/news_mz1b28gold.html