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Detroit Free Press Susan Tompor Column: Pot O' Gold is Tempting, but Don't Rush to Invest

Posted on: Friday, 17 March 2006, 06:00 CST

By Susan Tompor, Detroit Free Press

Mar. 17--Can the goldbugs fly even higher?

No doubt about it, gold investors have had an incredible bit of luck, thanks to amazing run-ups in gold prices and the stock prices of gold-related companies.

Gold-oriented mutual funds, on average, were up 30.5% in 2005, according to Lipper. The price of gold itself hit a 25-year high and rose to $575.60 an ounce on Feb. 2 in London.

After such glittering gains, you've got to wonder if it's too late to buy gold. Can gold really go any higher?

Last week, gold took a tumble and suffered its biggest weekly drop since 2004. Even so, plenty of experts say that, yes, the pot of gold can get even chunkier.

Old highs could be tested

How about gold hitting $600 this year?

Leo Larkin, equity metal analyst for Standard & Poor's in New York, told me Tuesday that he thinks gold will hit $600 an ounce before the end of the year.

Ultimately, Larkin said, gold could even test old highs and nudge near the eye-popping $820 an ounce hit in 1980.

James DiGeorgia, who has an online newsletter called the Gold and Energy Advisor, is forecasting that gold will be priced at $1,000 an ounce within the next two or three years -- and then climb even further and hit $2,000 an ounce by 2011 or 2012.

Any doubt that we're hearing some hot talk for one hot sector?

But before investors get burned, they need to remember that it's always a bad idea to dump buckets of money into last year's sure thing.

Sure, it's tempting.

The annualized average 5-year return for mutual funds that invest in precious metals was 32.95% through Wednesday, according to Morningstar Inc.

By contrast, the average annualized 5-year return for the Standard & Poor's 500 stock index was 3.85%.

Yet, you've got to have common sense. Gold is a highly volatile investment.

Go back to far less popular times -- say in 1997 -- and gold-oriented funds lost as much as 39% to 59% in one year, too.

Don Cassidy, senior research analyst for Lipper, said most investors would want to put 5% or less of their money into gold.

"You don't want to go overboard, particularly when there's been a big run," Cassidy said.

Cassidy says he's not a goldbug by any means but he believes that gold funds will do a bit better than the overall stock market in 2006. He sees stocks going up in the mid-single digits.

Past performance drives investors

So why is everyone rushing to gold?

Unfortunately, some money is flooding into some mutual funds simply because of the sensational past returns.

"I get a lot of calls from clients asking about gold," said Larry Moss, senior vice president for Raymond James in Birmingham.

Moss said investors see the cost of gold going up. They hear talk about the possibility of inflation getting out of control. So they're looking at gold.

But he's cautious, especially given the run-up so far, and hasn't been encouraging clients to invest in gold.

"These are more emotional plays than long-term investment plays," Moss said

Yet there are other reasons for the current gold fever, too.

Gold is an inflation hedge. It's also seen as a safe haven as investors have grown more concerned about global unrest, war in the Middle East and terrorism.

Gold had fallen as low as $254.10 an ounce on Aug. 2, 1999.

Gold closed at $271.50 an ounce on Sept. 10, 2001 -- before the terrorist attacks on Sept. 11, 2001. And by Feb. 4, 2003, the price of gold had shot up to $378.50.

In the past year, gold has also gotten a bigger push upward as oil prices have shot up. And Cassidy notes that investors in the Middle East often store their wealth in gold, driving up gold prices.

Gold experts appear to have some sound reasons for their forecasts. But they admit that other unexpected forces -- including recessions in the United States and elsewhere or an unexpected surge in interest rates -- could cut into those golden dreams.

So everyday investors would be smart to play it cool, even though gold is one hot commodity.

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Source: Detroit Free Press

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