Alluring now, gold lacks luster for long term

Gold is once again - golden.

Of the mutual-fund categories posting gains so far this year - a short list that includes bond, real estate, and small-cap value funds - gold funds are well out front, according to information firm Lipper Inc.

Gold now sells for about $283 an ounce. But growing consumer demand and other economic factors should help propel the per-ounce price into the $300 to $350 range in the months ahead, says Charles de Vaulx, co-manager of the First Eagle SoGen Gold Fund.

The Manhattan-based fund is the current leader among the 35 gold funds tracked by information firm Morningstar Inc., in Chicago.

Mr. de Vaulx sees three underlying factors that should help keep gold on top for the rest of the year:

• The likely inflationary impact of the government economic-stimulus package now emerging. The plan could range between $75 billion and $100 billion.

• Eventual downward pressure on the US dollar, which de Vaulx sees as overvalued. A weaker dollar is inflationary, which would boost the value of gold, he says.

• The political, economic, and global uncertainty connected with America's war on terrorism. Traditionally, gold has been one of the first hedges that investors turn to during turbulent times.

"Gold prices rose right after the Sept. 11 attacks" on the World Trade Center, says Paul Bateman, president of the Gold Institute, a Washington-based trade group representing gold producers.

"We are seeing a lot more interest in gold these days than in the past year or so," he adds. "Gold is getting another look from money managers and institutional investors."

Other experts note that gold investors should also benefit from the recent demise of the Washington Agreement, an accord between major industrial nations that had required central banks to sell a part of their gold reserves through the year 2004. Since central banks will hold on to more of their gold, that will hold down supplies, boosting prices.

Still, not everyone agrees that now is the time to buy gold, whether it comes in the form of gold-based mutual funds, coins, bullion, or bars.

"It used to be that gold was always the preferred way" of sheltering assets in times of economic and political uncertainty or high inflation, notes Chris Davis, who tracks precious-metal funds - including gold, silver, platinum, and palladium - for Morningstar.

But precious-metal funds today tend to be inherently volatile, he says. Most of the hefty gains in these funds came early in the year, and they have zigzagged downward since then. While their average return is still 11 percent for the year, according to Morningstar, that hides the fact that the category actually slid 4 percent for the 30-day period ending Oct. 19.

In fact, precious-metal funds have hardly been winners over the long term. Case-in-point: For the five-year period through Oct. 19, the funds have lost an average of 14.3 percent a year. Over 10 years, the average annualized return was -3.6 percent.

Still, fund experts note that the best metals funds this year were mainly invested in gold, with little in other commodities, such as platinum and palladium. That holds true for de Vaulx's fund. "We are a pure-play gold fund," he says.

But Davis doesn't find precious-metal funds "terribly appropriate for any investor. A person can get by fine without one," he says.

Today, he says, there are several alternatives to gold as a hedge against economic downturns. The list includes US Treasury I Bonds, which seek to offset inflationary gains; and real estate funds. Unlike gold funds, both of these instruments provide steady income streams.

But if one wants to have a small part of his or her assets in precious-metal funds for purposes of diversification, he should limit the amount to "about 5 percent or less," Davis says. To find a solid gold fund, he recommends using Morningstar's website (www.morningstar.com) for analysis on competing funds.