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Gold Stocks Glitter So Far This Year, But Analysts Are Cautious

January 27, 1996

NEW YORK (AP) _ The buzz on gold stocks has turned up a notch or two since the price of the metal has improved. But many market professionals claim the stock market offers much better alternatives.

``I hate the stock, I really hate gold. It’s boring. It’s dull,″ groused William LeFevre, editor of Monday Morning Market Memo at Ehrenkrantz King Nussbaum, Inc.

LeFevre said investors ``know not to talk to me″ about gold stocks. But since gold cracked $400 an ounce this past week and appears to have some staying power above that level, many people in LeFevre’s position are fielding calls.

``I don’t own any,″ said Robert Streed, senior investment counselor at Northern Trust Co. in Chicago, ``but I have to admit I’m interested.″

Many stock-market professionals advise passing. But recent numbers make that advice hard to take. Gold-mining stocks are up a flashy 14.4 percent in the first four weeks of this year, compared with 0.65 percent on the Standard & Poor’s 500 and 3 percent on the Dow industrials. At least short-term, gold shares have replaced technology as the market leader.

But like any investment trend, analysts warned it should be carefully scrutinized. Gold stocks have rallied on the back of gold, which busted out of its two-year trading range of $370 to $395 an ounce.

On Friday in New York, February gold futures dropped 90 cents to $4.06 an ounce. But that is not even half of the $875 peak in January 1980.

In 1980, gold soared because of its role as a haven in times of economic and political unrest. With double-digit inflation, Soviet troops in Afghanistan and American hostages in Iran, gold was on a roll.

This time around, experts say it has rallied more fundamental and tamer supply-and-demand issues that may not be long-lived.

Demand for gold currently outstrips supply, which should be good for the price. But this situation has existed for five years, a period when the price of gold went nowhere.

In past years, supply was met by intermittent selling by central banks and, more importantly, by forward selling by miners. In such deals, miners arrange sales of future production, an arrangement that capped prices.

This year, two things are different, said Kjeld Thygesen, who runs the Midas Fund, the top performing domestic gold fund last year.

Whereas demand in the recent past has been mostly for jewelry and fabrication, it is now being bought as a financial investment. That has pulled speculators into the market, making the price more volatile. More speculative buying has pushed the price up.

``Gold was overdue to make an adjustment,″ Thygesen said. ``I think we’ve moved into a new trading range of $400 to $430 (an ounce). The effect that has had on the gold stocks has obviously been quite dramatic.″

Lipper Analytical Services, Inc.’s index of gold mutual funds is up about 18 percent so far this year.

That’s not an unusual short-term gain for gold stocks, said Sam Stovall, a Standard & Poor’s Corp. analyst who handicaps the various industrial sectors in the market. He points out that over the past 15 years, gold stocks have risen an average of only 2 percent per year. But that modest long-term rise came in wide short-term swings.

``In two out of every three years,″ Stovall said, ``you could have a return as high as plus-44 (percent) _ or as low as minus-40.″

Consider the Lexington Gold Fund of Saddle Brook, N.J. According to the American Association of Individual Investors, in 1994 it fell 7 percent. That was after shooting up 86.9 percent in 1993. It fell 20.5 percent in 1992, 6.1 percent in 1991, and 20.6 percent in 1990.

It takes a strong stomach to handle those gyrations.

And Stovall said one major piece of the gold-demand equation is missing: Inflation. Especially for the small investor, ``gold is primarily a hedge against inflation,″ Stovall said, ``and no matter which rock we look under, we just don’t see inflation.″

Stovall concludes: ``Even though these asset allocation people tell you that you should hold gold stocks in your portfolio as a hedge against inflation, based on 15-year averages, I don’t think that’s a very good idea.″

On Friday, the Dow Jones industrial average followed bonds higher and gained 54.92 to close at 5,271.75, setting its third record for the week. The blue-chip index added 87.07 points for the week.

The NYSE composite index also managed a new high, rising 2.29 to 332.84 on Friday and inching past its previous record of 332.63 set on Jan 3. The NYSE index rose 4.98 for the week.

The Standard & Poor’s 500-stock index rose 4.59 Friday to 621.62, gaining 9.79 for the week. The Nasdaq composite index rose 5.01 to 1,040.96, rising 22.51 for the week.

The American Stock Exchange’s market value index rose 3.60 Friday to 545.24, climbing 14.62 for the week.

The Wilshire 5000 index, the combined market value of NYSE, over-the-counter and American Stock Exchange issues, finished at $6.08 trillion, up 102.751 billion for the week.

End Adv Weekend Editions Jan 27-28

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