Is the party over for gold funds?

INFLATION worries will drive up gold prices. A declining dollar will drive up gold prices, too. So what happens when there are new inflation worries and a declining dollar?

You get more than a 10 percent increase in the price of gold since the first of the year, that's what. You also get one of the hottest plays in mutual funds in several years. In the last three months, several top-performing gold funds have advanced more than 50 percent and over the past year, it wasn't difficult to more than double your money in a gold fund.

A high-riding year

Clearly, gold funds have been the place to be. For the year ended May 1, the ten top-performing mutual funds were all either gold or precious metals funds, as were 20 of the top 25 funds, according to the Mutual Fund Forecaster, a Fort Lauderdale, Fla. newsletter.

As a result, investors have been racing to send in their checks or make telephone switches to gold funds, to the point where some funds can't invest the money fast enough, and have to keep it in cash equivalents for a few days or weeks. This has been a bit of a problem for some of the gold funds, because when money is parked in cash equivalents, it's not riding the upward trek of gold prices.

``The money has been pouring in,'' says Charles Broska, assistant vice-president for marketing at United Services Funds. The San Antonio company's United Services New Prospector Fund posted a 160 percent gain for the 52 weeks ended May 1.

Like most gold funds, the bulk of New Prospector's assets - 80 percent in this case - are invested in gold mining stocks. The mines are in North America and Australia, Mr. Broska says, with no investments in South Africa. The company has another fund, United Services Gold Shares, that does invest in South African mines. It was up more than 97 percent for the year ended April 27, he says.

Some stay in South Africa

On the other hand, about 32 percent of the Financial Programs Gold Fund is invested in South African mines, says Don W. Clark, fund spokesman. ``We make no effort to shade our portfolio politically,'' he says. The Denver-based fund had a 124 percent total return for the year ended May 1.

The reality of South African politics is just one of the factors that has helped boost the prices of gold bullion and gold mining shares.

The decline of the United States dollar, for one thing, has followed tradition and helped boost the price of gold. Historically, the dollar and gold move in opposite directions and they seem to be following the script this time.

Hirohito coin boosts demand

In addition, Japan bought 625 tons of gold last year, partly to mint a new coin honoring Emperor Hirohito. Also, gold coins from the US, Australia, Canada, and Mexico have been very popular and have consumed much of the newly-mined gold from those countries.

Concerns about renewed inflation - whether or not those concerns have any foundation - have also helped push up gold prices. As gold-watchers have known for a long time, however, it doesn't take well-founded information to move the metal's price. Rumors, even worries about new rumors, can be just as effective as any real news.

Now, the most important question for investors in gold funds, or for people thinking of becoming investors, is: Have all the gains already been made? Is it too late to join the party?

``I don't think it's too late,'' says Dennis Suskind, partner in charge of metals at J. Aron & Co., metals brokers. ``The question is, is it an equity fund or a bullion fund?'' When gold is selling for more than $400 an ounce, gold mines have no trouble making profits, he says. ``I find gold mining shares very attractive.''

Funds that emphasize mining stocks over bullion find that prices of the stocks tend to be less volatile than the metal itself. Finding out the percentage of bullion or mining shares in a fund at any given time, however, may not always be easy.

Get portfolio updates often

Some funds only break down their holdings when they prepare their quarterly reports. But a lot can change in the precious metals markets in three months, so investors might want to look for a fund that will give frequent updates, possibly over the telephone, of the current portfolio makeup.

The spectacular gains on gold funds probably won't be repeated in the next 12 months, the experts caution, but that doesn't mean it's too late to get some very respectable returns.

``I would not expect the same kinds of returns'' as the funds had over the last year, Mr. Suskind says.

``The key is to diversify at all times,'' and use precious metals as only one of four or five different kinds of investments in a mutual fund portfolio, United Service's Broska says.