Not All That Glitters
A declining dollar and the threat of war have made gold funds hot. But playing this market can be risky.
By David Rynecki, FORTUNE
Feb. 4, 2003
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There's no question that gold has been white-hot lately. Investors who see the yellow metal as a safe haven from economic and geopolitical instability have driven the base price per ounce up from $270 at the beginning of 2001 to a recent six-year high of $366. Riding that wave, the average precious-metals fund rose 53 percent in 2002. But could this gold rush be tapped out?
Gold fund managers, not surprisingly, don't think so. They argue that a declining dollar, an enduring downmarket for stocks, and a Federal Reserve hell-bent on reinflating the economy secure the shiny stuff's value. Throw in the standoff in Iraq, and they see a gold investor's perfect storm. "The weight of these risks favors gold as a safe haven over the next few months," says Salomon Smith Barney analyst John Hill. Indeed, John Doody, editor of the Gold Stock Analyst, is among many predicting that gold could rise another 25 percent, to $450 an ounce. Declares Jean-Marie Eveillard, the veteran investor whose First Eagle Gold fund was up 107 percent last year: "We may be in the early stages of a bull market for gold."
But bear this in mind: Gold investors are notoriously bad forecasters. From 1985 to 1987, for example, a collapse in the dollar boosted gold 76 percent and had many metalheads predicting an extended rally. Instead the price fell 15 percent the very next year.
Still tempted? Even bullish gold pros caution the average investor to put no more than 5 percent of a total portfolio into gold-related holdings and say it's safest to invest through funds. One standout, says Morningstar analyst Lynn Russell, is Vanguard Precious Metals (VGPMX), up 33 percent in 2002. The no-load, low-cost fund has been less volatile than its peers because it diversifies its holdings across gold, silver, platinum, and other metals. To raise the stakes, try making a more concentrated bet: Tocqueville Gold (TGLDX), a no-load fund that ran up 83 percent last year. For this fund's investors, another stormy year would indeed resemble perfection.
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