Will Fed's New Ease Revive Gold's Glitter?

WALL Street's scramble into paper assets - essentially, stocks - has taken the spotlight off commodities, including gold and silver, but also interest-rate sensitive base metals such as aluminum, copper, and nickel.

That may not be totally wise, according to a number of commodities experts. While there is no evidence that gold is about to rise rapidly in price, it is still valued as a long-range hedge against economic adversity. And, say the experts, selective base-metal stocks, such as aluminum and copper, look promising over time.

Gold and silver, the darlings of hard-money purists, are momentarily the forgotten children of the investment community. Despite pockets of conflict in the former Soviet Union and Yugoslavia, there is no major war to frighten investors into gold. Most economists expect inflation to remain under control, running in the 3 to 4 percent range during 1992 in the United States. And interest rates still appear to be heading southward.

Given such a scenario, it's hardly surprising that gold, silver, and platinum have all been showing weaknesses. Silver was the worst-performing commodity throughout the 1980s and is expected to remain at depressed levels during 1992. Silver bullion peaked at around $50 an ounce in 1980; today it is trading at under $4 an ounce. Nor is gold showing much muscle. The current support level for gold is around $348 to $350 an ounce - based on February gold futures - according to Bernard Savaiko, senior commodi ty analyst at PaineWebber Inc.

"The [investment] shift is now to paper assets; but once that is over, then attention will once again move back to precious metals and gold," insists Mr. Savaiko. He predicts that gold will hold at about its current price range and then climb upward later in the year.

"We're sitting on a time bomb in the form of enormous debt - at the governmental and individual levels. Every major inflation is historically proceeded by huge debt," Savaiko says. And continuing actions by the Federal Reserve to rev up the economy - akin to "printing paper money could spur inflation later this year, he says, thus putting upward pressure on gold prices.

Savaiko is not alone in his assessment. Many investment newsletter writers continue to advocate gold, either in the form of owning bullion outright, or holding stocks in mining companies. The Dec. 20 issue of the Holt Advisory, for example, urges investors to maintain precious-metal holdings, including gold, since gold bullion and mining stocks will "inevitably rise" as the value of the dollar falls relative to other currencies. The letter expects the Bush administration to pressure the Group of Seven in dustrial democracies to lower interest rates in their countries. Paper currencies will lose value vis-a-vis gold, the letter argues.

While some analysts say having part of a portfolio in gold is a good long-range strategy, the jury is still out on whether gold will appreciate in value much this year, with inflation currently under control.

Whatever the case, several industrial metals that are interest-rate sensitive look increasingly attractive, according to Vahid Fathi, a metals analyst with Kemper Securities Group Inc.

In early December 1991, Kemper was advising clients to be wary of economy-sensitive metal stocks, such as aluminum, copper, and nickel, or, at the least, steer clear of these sectors until the second half of 1992. Many of these metal-sector stocks were trading at high price-earnings ratios. But then the Fed interceded and slashed the discount rate by one percentage point on Dec. 20. That changed the investing climate, says Mr. Fathi, since gains in the economy stemming from lower interest rates should be nefit some base metals, particularly aluminum.

Fathi notes that recent cuts in the output of smelters will help aluminum, as will higher industrial demand in the second half of 1992; ingot prices, he says, have probably hit bottom.

Kemper has now listed Alcoa as a strong buy; it recommends selective accumulations in the nickel sector; it suggests that copper and gold sectors look attractive for the long term.