Investing in Gold and Silver Is Not for Average Investor

TO abuse William Shakespeare: "All that glitters is not gold - and all that gold may not shine as an investment." The same is true for silver or other precious metals.

While gold and silver prices have inched up somewhat in recent weeks, both metals are essentially stuck in trading ranges that suggest little momentum for major appreciation, experts caution.

Investing in commodities such as gold and silver "is not for most average investors," says Thomas O'Hara, chairman of the National Association of Investors Corporation in Madison Heights, Mich. "Gold is very risky; it provides no regular income, such as occurs from investing in common stocks," he says. And metal prices are "volatile and subject to manipulation from speculators." Investing in gold or silver is "primarily for very wealthy individuals."

Most investors should "stay away" from gold, agrees John Markese, executive director of the American Association of Individual Investors in Chicago. If a person "just has to buy some gold," then owning shares in a broadly based natural-resources mutual fund is probably the safest route. But the gold component should not be more than 10 percent of the value of the investor's mutual-fund portfolio, he says.

Investing in commodities - particularly gold, silver, and platinum - became fashionable in the late 1970s, as investors sought monetary hedges against high inflation. With demand for gold and silver intense, bullion prices soared into the economic stratosphere.

But "boom" quickly turned to "bust." Gold bullion, for example, plummeted from an average of $612 an ounce (and well over $800 in some cases) in 1980 to about $460 in 1981. Silver prices tumbled from $21 an ounce in 1980 to about $10 in 1981. Gold is now trading at just under $400 a troy ounce (a system of weight for gold and silver); silver, meanwhile, is trading at around $5.50 an ounce.

There are three basic ways to own precious metals such as gold and silver:

*Buy bullion, which comes in bars made by fabricators and is usually kept in a bank vault. This requires expensive storage and insurance charges.

*Acquire mining stocks - through equities of mining companies themselves or diversified mutual funds specializing in mining companies. Mining stocks haven't been stellar performers of late; last year, mutual funds specializing in precious metals declined about 12 percent.

* Buy government-minted coins, such as the American Eagle coins produced by the United States Treasury. (Rare coins are another matter; they are usually considered very speculative.) The US Mint's coin program is popular, in part because the coins are relatively affordable, easy to store, and can be resold. One-ounce gold coins cost $570; half-ounce coins cost $235; quarter-ounce coins cost $150; and one-tenth-ounce coins cost $70. Silver-proof coins cost $23. They can be bought by calling 1-800-766-5601 or 202-283-2646.

In terms of financial return, the US stock market has outperformed commodities such as gold and silver in recent years, according to Ibbotson Associates, a Chicago-based investing, consulting, and data-products firm. Ibbotson finds that the compounded average annual price return on gold from 1975 to 1994 was 3.67 percent. For silver, it ran an average of 0.54 percent. By contrast, the return for common stocks on the Standard & Poor's 500 was 9.98 percent, not including reinvestment of dividends.

Gold mavens argue that precious metals represent protection against soaring global inflation or international political or economic turmoil. But in the US, inflation remains under control.

Still, Vahid Fathi and Todd Hinrichs, who follow commodities for Kemper Securities Inc. of Chicago, see gold prices heading up this summer, to around $411 an ounce from today's level of slightly under $400 an ounce.

Rising demand for jewelry products and industrial use are propelling the market, says John Lutley, president of the Gold Institute, a trade group. Yet world gold-mine production fell last year for the first time since the early 1980s. Nor is there evidence that supply will grow much soon. The bottom line, he says, is that tight supplies should put upward pressure on prices.