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Gold investments an inflation hedge

Gold investments an inflation hedge
By GAIL LIBERMAN, Special to the Daily News
Sunday, April 10, 2005

I was going to devote this week's full column to investing in gold — a very volatile investment that many consider a great hedge for bad times.

That was until I heard financial humorist Ben Stein deliver an upbeat speech at a Fidelity Executive Forum conference at The Breakers last Monday.

Stein believes the economy is in good shape and that journalists covering the war in Iraq are making the mistake of insinuating that the terrorists can't be stopped. "This isn't true," he said. After all, World War II stopped. "We're on a learning curve and making progress."

Stein said his hedge-fund buddies are finding it harder to make a living because it's tough to predict what the market will do in an hour or in a month. This creates good bargains for us in the stock market.

Since 1930, "you've never had a losing 10-year period in the S&P 500," he notes. However, over a one-month period, you would have come out ahead only 30 percent of the time."

Bottom line: Invest for the long term and all should be fine. Also, he advised, the best heroes are not the Sean Penns, Barbra Streisands or other anti-war celebrities. The heroes are those who are dying for us in Iraq.

It's up to each of us to analyze whether what we are doing is worth dying for.

Back to gold . . .

Most suggest that you own a little bit of gold as a long-term hedge against inflation. But don't bet the ranch on it over short-term. Gold prices are volatile.

If inflation increases because of a strong economy, weak dollar and huge government deficit, prices are sure to rise. Rising inflation typically results in higher gold prices.

Those with a vested interest in selling gold bullion or mining stocks typically talk about all the good reasons to invest in gold. Often, they cite demand for gold in China, as well as in Asian and Arab countries.

These advisers may be right half the time. Gold prices and mining stocks shoot up during economic and political crises and during fears of higher inflation.

Nevertheless, gold prices often fall just as rapidly they go up.

For example, an index of gold mining stocks has grown at about 3 percent annually since 1988. In 2001, '02 and '03, gold stocks gained 159 percent. But from 1996 through 2000, gold mining stocks lost 85 percent.

What about the current outlook for gold?

James Turk, editor of the Free Market Gold & Money Report, North Conway, N.H., is bullish. He said the dollar should decline in value. That will push up inflation.

"Gold has risen three years in a row," he said. "It is well-poised for year No. 4. The flight out of the dollar for three years in a row is expected to accelerate. China, Japan, Korea and India are talking about diversifying their reserves out of the dollar. This trend toward a declining demand for dollars by central banks, as well as other dollar holders, will continue."

Sounds good, but this is no sure thing. Over the past year, gold mining stocks, for example, have lost 8 percent, according to a report by American Century Investments, a Kansas City-based investment company. By contrast, gold bullion prices rose more than 5 percent.

Gold mining stocks, the report said, do not always move with the price of gold bullion. The reasons: Gold is priced in dollars. A weaker dollar makes gold more affordable to foreign investors and boosts its appeal as a hedge for dollar-denominated investments.

What about platinum and palladium? Many precious-metals mutual funds invest in companies that mine these scarce metals. Investors often purchase platinum and palladium bullion along with gold bullion.

A recent report by Johnson Matthey North America, New York, said the platinum market is moving toward a surplus, and prices are expected to soften. Palladium prices also are soft because of over supply.

So what should you do? It's always a good idea to have an inflation hedge along with stocks and bonds. If your stocks and bonds, for example, decline due to inflation or an economic crisis, your gold should increase in value and help cushion the losses. Most experts recommend keeping about five percent to 10 percent of assets in gold or precious-metals mutual funds that invest worldwide.

The best-rated precious-metals mutual funds, according to Morningstar Inc., Chicago, include: First Eagle Gold Fund and the Vanguard Precious Metals & Mining Fund. Both are conservatively managed and invest in large producers.

***

Gail Liberman is co-author of several books with her husband, Alan Lavine. Their latest, just published by Alpha Books, is 'Rags to Retirement.' You may e-mail her at [e-mail].


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