Sunday, September 28, 2003

Gold gets back some of its luster

Mysterious allure

By Rachel Beck
The Associated Press

NEW YORK - Gold investors think they've found a fail-safe bet. No matter what happens to the economy, stock market or anything else - good or bad - they count on seeing positive returns.

That's why investors have been pouring big money into gold and gold stocks, a big switch from the not-so-distant past when they shunned gold in favor of higher-flying investments.

In today's investing world, after three years of steep stock-market declines, they are looking for better insurance to make money. It's still unclear, though, if gold is really so safe.

Gold began its climb in 2001, just as the global economy and stock market began to slump. Its strength intensified in the months before the war in Iraq, surpassing $380 an ounce - its highest level in seven years.

After an initial post-war retreat, gold bounced back and is forecast by many analysts to climb above $400.

Surprising strength

Market watchers acknowledge that they've been surprised by its current strength.

For one thing, gold has largely been following the path of the euro, the currency representing 12 European nations that has been gaining against the U.S. dollar over the last year. But the euro weakened this summer, the dollar strengthened, and gold prices surged higher.

And then last week, the dollar tumbled, but gold continued to climb.

There has also been a positive turn in both the U.S. stock market and economy. Since gold is considered a safe-haven asset, investors historically have pulled out when those areas improve.

But so far this year, gold stocks are up sharply, and precious-metals mutual funds, which include gold, have soared 25 percent, solidly outperforming the 17 percent gain in the Standard & Poor's 500 stock index.

And those gains add to last year's 63 percent rise in precious-metals funds, the best-performing fund category in the market and a sharp contrast to the 23 percent decline in the S&P 500, according to fund-tracker Morningstar.

So what's behind all this? Analysts say there is just enough uncertainty in the marketplace to tap investors' interest. They see some kind of protection in gold, thinking they can win no matter which side of the coin they get.

"Are we in for deflation or inflation? We don't know. Are interest rates on their way up? We don't know. Is the economy really back on track? We don't know," Lynn Russell, a fund analyst at Morningstar in Chicago, said. "Those unknowns make gold attractive."

Remember $800?

But gold isn't without risks.

Future gains might be limited because there already has been such a big run-up in price - it has climbed from $260 an ounce since early 2001.

And price gains have largely been fueled by speculation, not because of any significant shift in physical demand.

A final reminder to gold investors: Two decades ago, gold was trading at more than $800, and it was supposed to keep rising. Today, it's less than half that.

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