Gold bugs look beyond war, betting on a declining dollar
Sunday, April 13, 2003
BY SAM ALI
Star-Ledger Staff
Want to start a fight with a diehard gold fan? Just say the bullion rush that drove the price of the precious metal to almost $390 an ounce during February from a low of $252 during 1999, is, in a word, over.
Gold bugs are a rabidly loyal -- if not hopelessly optimistic -- crew. But to the average investor, gold seems to have lost a bit of its luster.
Since hitting its February high, the price of gold has swooned nearly 20 percent. And the typical precious-metals fund -- up nearly 63 percent last year -- is down 12 percent year-to-date, according to Morningstar, a Chicago research firm that tracks the mutual-fund industry.
So what gives? Is it time to go for the gold or has it lost its shine?
"Anybody who thinks the game is over is watching too much CNBC," said John Hathaway, fund manager for the Tocqueville Gold Fund in New York, which was up 83 percent last year.
Despite a number of false starts during gold's torturous 20-year slump from a high of $850 during January 1980, many fans are convinced this rally is the real deal _ the early stages of a bull market that could last for the next 10 to 12 years and push prices to $400, $500, $600 or even higher.
"I think there was a war premium built into in the gold price when it got to a high of $390," said Brien Lundin, publisher of the Gold Newsletter, based in Jefferson, La. "But that war premium has largely been washed away, and I don't think we have much more to go on the downside."
Investors frequently turn to the safety of gold when the world begins to seem like dangerous place -- one reason gold prices have historically risen during periods of war, recession and depression, right when stocks have been at their worst.
But tempting as it may be to attribute climbing gold prices to the conflict in Iraq, many gold bugs think this isn't the most significant factor in gold's latest climb.
The investment landscape is threatened by a number of storm clouds: the slipping stock market, deficit spending, and most of all, the declining dollar.
"Any long-standing bull market in gold is founded on a corresponding lack of confidence in the fiat currency of the day," Lundin said.
For any or all of these reasons, gold fans think the rally could continue. But bear this in mind: Gold investors have had their hearts broken time and again.
"People have been predicting the end of the bear market, on and off now, for the last 20 years," Morningstar analyst Lynn Russell said.
Truth of the matter is, gold doesn't have a great track record.
Yes, gold is trading at more than $300 an ounce today. But that's down from $400 during January 1996 and $850 during 1980.
A telling portrait of gold's performance emerges when viewed during a 200-year period, according to Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School and author of the best-selling "Stocks for the Long Run."
According to his calculations, a dollar invested in the stock market from 1802 to 2001 would have grown to $599,605. A dollar invested in gold during that period would be worth -- 98 cents.
Still tempted? Even the most bullish gold pros say the average investor should put no more than 5 percent of a total portfolio into gold-related holdings.
"If you are optimistic on a quick end to the Iraqi conflict and a relaxation of global tensions, and foresee an economic rebound, it is hard to make a case for gold today," said David Dietze, president of Summit-based PointView Financial. "However, if you are pessimistic about the geopolitical and economic outlook, some small exposure as doomsday insurance may be justified."
HOW TO PLAY GOLD
Average investors who are risk averse should stick to gold mutual funds, as mining stocks are unpredictable and highly volatile, experts said. One standout, Russell said, is Oppenheimer Gold & Special Minerals fund, which was up 42 percent during 2002 and has a good long-term track record.
To raise the stakes, consider making a more concentrated bet: the Tocqueville Gold Fund, a favorite pick among many metal heads.
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