Transcripts

"Of Mutual Interest"-John Waggoner, Mutual Fund Columnist at "U.S.A. Today."

SUZANNE PRATT: In tonight's "Of Mutual Interest," how much gold should you hold in your investment portfolio? Here with some suggestions is John Waggoner, mutual fund columnist at "U.S.A. Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: If you hear your neighbor shout eureka, he may have discovered gold in the hydrangea bed. It's more likely however, that he owns a gold fund and that has been nearly as good lately. Should you own a gold fund? Quite possibly. But you shouldn't have more than 5 percent of your portfolio in gold. Gold has soared above $700 this year and more than doubled in the past five years.

Gold mutual funds, however, have gained even more. A $1,000 investment in the average gold fund is now worth about $3,500. Gold funds typically invest in the stocks of gold mining companies, which can often rise or fall faster than the price of the metal itself. One reason of course, is that the price of any stock depends on the enthusiasm of the buyer. And gold fever has spread from the metals market into the stock market.

A more rational reason is that a gold mine's earnings can soar much faster than the price of gold. If you own the Wahoo gold mine and produce gold for $500 an ounce, your profit margin is 20 percent if gold sells at $600 an ounce. If gold rises to $700 an ounce, a 14 percent gain, your profit margin doubles. Gold is rising because of inflation fears. It's the longtime antidote of choice for rising prices and a falling dollar. But gold funds have bad years too, and when they're bad, they're awful. If you're worried about inflation, putting 5 percent of your portfolio in gold will help protect against inflation and it's a lot easier than digging up the hydrangeas. I'm John Waggoner.