Gold has gusto and a polished image in 2008.
The precious metal was propelled beyond $900 an ounce by fears about the financial markets, inflation, possible recession and a weaker dollar. Long considered a safe haven in turbulent times, it has tripled in price since 2001 and surged 30 percent in 2007.
Gold investments can increasingly be found in mainstream portfolios as a hedge against all of those worries. Trust companies and diversified mutual funds are a departure from gold's more traditional positioning as a preferred holding of doomsayers.
"We're in a multiyear bull market for gold, which I'm surprised is so strong at this point," said Leo Larkin, gold and precious metals analyst for Standard & Poor's Corp. "I think it may be a little ahead of itself."
His cautious view is not held by all, especially considering the tight world supply of the metal. Only the demand for gold jewelry has declined. Many gold followers expect prices, despite their inevitable fluctuations, to ratchet upward. For example, Citigroup Global Markets Inc. is predicting gold at $1,000 an ounce in 2009 and 2010.
The average gold-oriented mutual fund, investing primarily in gold-mining stocks, has a one-year return of 26 percent and three-year annualized return of 32 percent, according to Lipper Inc.
Among exchange-traded funds, streetTRACKS Gold Shares (GLD), which invests in actual gold bullion, has a one-year return of 35 percent and three-year annualized return of 28 percent. Inflows into gold ETFs have been accelerating.
"A whole string of events has made gold an attractive investment the past few years," said Steve Land, the portfolio manager of Franklin Gold & Precious Metals Fund (FKRCX) in San Mateo, Calif. "These include the weakening U.S. dollar and a desire for protection against inflation or currencies."
His $1.9 billion fund is up 32 percent over the past year and has a three-year annualized return of 36 percent. It requires a 5.75 percent "load" (sales charge) and $1,000 minimum initial investment.
Top holdings among 61 companies in the fund's low-turnover portfolio are Australia's Newcrest Mining Ltd. (NCMGY.PK) and the Canadian firms Barrick Gold Corp. (ABX), Goldcorp Inc. (GG) and Yamana Gold Inc. (AUY).
Land seeks out large, low-cost gold producers with multiple mines in use and then holds their stock for a long time. The investment industry is benefiting from more accurate knowledge of how much gold mining companies have in the ground and how much it will cost them to get it out, he said.
"Declining world production has led to strong demand for gold," said Mike Mapa, editor of InsideMetals.com of Reno, Nev., and a geologist in the mining business for three decades. "I look for gold-mining companies on U.S. exchanges that have reserves and production, since you can't benefit from $900 gold without production."
Mapa recommends shares of gold producers Eldorado Gold Corp. (EGO), Barrick Gold and Yamana Gold. Smaller gold-mining companies aren't benefiting from the rise of gold because they don't have enough to sell and their exploration costs are climbing, he said.
Location of gold mines is a serious consideration. For example, North American mining companies enjoy a stable political environment, while countries such as Venezuela could conceivably take over a firm's property. South Africa, meanwhile, has high production costs because its mines are situated so deep in the ground.
Average investors putting money in gold should do so with eyes wide open. You can't move effectively in and out of such a volatile investment and should therefore consider it a permanent hedge providing boost and balance in troubled times.
"You don't make money on gold as a long-term investment because it doesn't really go up and stay up in value," said Loyd Stegent, certified financial planner with Stegent Equity Advisors in Houston.
Gold is negatively correlated to the stock market, Stegent noted, meaning what's bad for stocks is generally good for gold. Investors buy gold when they're selling stocks because they're worried about future problems, he said.
For his clients, Stegent recommends ETFs such as Market Vectors Gold Miners ETF (GDX), which invests in gold-mining stocks and has a one-year return of 18 percent, as well as streetTRACKS Gold Shares.
"I believe about 10 to 15 percent of your stock portfolio should be in gold, using its volatility as a shock absorber for your portfolio," Stegent said. "I use it in all of my client portfolios because no what knows what the future will be, when fear and panic may strike the market."
Some advisers consider 15 percent in gold to be an aggressive position. Many advisers make it a more minor holding; just be sure not to jump whole-hog into it just because you're feeling jumpy about the world, experts said."If someone believes gold will be part of their long-term asset allocation, I'd recommend no more than 5 percent of one's portfolio be allocated," said Bryan Lee, a certified financial planner in Plano, Texas, who deems gold to be a worthwhile part of a long-term allocation. "It has helped many of our clients' portfolios to remain relatively flat, while many investors have experienced quite a drop in their portfolios over the past few months."
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, Ariz. 85287-4702, or by e-mail at [email protected]