Report: "Gold: A Hedge That's Worth Its Weight in History"
August 23, 1998
By ERIC HUBLER
A bit over four years ago, an aging German Jew who
has seen a lot of trouble gave his niece a wedding
gift of
three gold coins, along with this admonition: "May you
never have to use them."
Let's hope not. Those coins, slumbering in a bank
vault, have declined 26 percent in dollar terms.
Blue-chip stocks, meanwhile, and, some real estate have
more than doubled.
What kind of hedge is that -- a hedge against getting
rich? Is gold, the traditional talisman against
everything from tyrants to inflation to stock market
plunges, losing out?
No, says Douglas M. Cohen, an analyst for Morgan
Stanley Dean Witter -- but you could be forgiven for
thinking so. "History is full of episodes where people
have said gold is dead, and sure enough, it's tended to
rally back very strongly," he said. "Gold has thousands
of years of history on its side."
What's scary now is that, at about $289 an ounce, gold
is not far from its production cost of $250 to $260 an
ounce, though it is up from January's 18-year low of
$278.
Indeed, gold has quite a roll call of negatives. Start
with currencies: Because gold is denominated in
American dollars, which are currently strong, it is
less affordable than it once was in traditionally
gold-hungry markets like India.
But even with demand down, production has been rising
in Australia, Canada and South Africa, and there are
fears of more gold coming to market, perhaps from the
Russian central bank or the International Monetary Fund
seeking to raise cash during Russia's fiscal crisis.
What is bad for gold has been even worse for gold
shares. Gold has fallen less than 2 percent in 1998,
but Morningstar Inc., the Chicago mutual fund
publisher, says the average precious-metals fund fell
21.8 percent this year through last Monday and 43.5
percent in the last year.
But Harry Bingham, who manages two gold funds for Van
Eck, says gold is as important as ever. "Gold is the
only money," he said. "You might say silver is money,
but that's only pocket change. And everything else we
call money is really a credit instrument."
After the 1929 market crash, when stocks declined 90
percent, gold rose 70 percent, and the shares of gold
producers like Homestake Mining catapulted 700 to 800
percent. Talk about a diversifier: "Ten percent in that
would have salvaged the whole portfolio," Bingham said.
"We're seeing some paper money just evaporate" today,
he said, citing the Indonesian rupiah and the South
Korean won. "So I think we're probably fairly close to
a turning point in the perception of the value of gold
versus paper money."
Daniel B. Leonard, manager of the Invesco Strategic
Gold Portfolio fund, said: "If you were in the yen and
bought gold a couple of years ago, you're looking
pretty good now." The same goes, he says, for people
who have to put food on the table with rubles or yuan
or Canadian dollars.
In the United States, gold investors typically buy
shares in either gold mutual funds or mining companies,
rather than the metal itself.
Bill Martin, manager of the American Century Global
Gold fund, favors Barrick Resources, which has reduced
costs to $150 an ounce at a new mine in Peru and has
sold its production forward for $400 an ounce for three
years.
Leo Larkin, a metals analyst at Standard & Poor's,
mentions Newmont Mining, Placer Dome and Barrick as
low-cost producers.
The woman with the wise uncle, meanwhile, reports that
those three nuptial coins are staying right where they
are.
Copyright 1998 The New York Times Company |
