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Gold investments as inflation hedge

- Alan Lavine and Gail Liberman

Should you invest in gold or precious metals mutual funds that own mining stocks?

The answer: Own a little of each asset as a long-term hedge against inflation. But don't be the ranch on the price of gold over the short term. Gold prices are volatile. You could lose your shirt.

If inflation increases due to a strong economy, weak dollar and big government deficit, prices of everything are sure to rise. Rising inflation typically results in higher gold prices.

People that have a vested interest in selling gold bullion or mining stocks often talk about all the good reasons to invest in gold. They cite China, and demand for gold in Asian and Arab countries.

These investment advisers may be right half the time. Gold prices and mining stocks shoot up during economic and political crises as well as during fears of higher inflation.

Nevertheless, gold prices often fall just as much as they go up.

For example, an index of gold mining stocks has grown at about 3 percent annually since 1988. In 2001, 2002 and 2003 gold stock gained 159 percent. But from 1996 through 2000, gold mining stocks lost 85 percent.

What about the current outlook for gold?

James Turk, editor of the Free Market Gold & Money Report, North Conway, N.H., is bullish. The reason: He says the dollar will decline in value. That will push up inflation.

"Gold has risen three years in a row," he said. "It is well-poised for year number four. The flight out of the dollar for three years in a row is expected to accelerate. China, Japan, Korea and India are talking about diversifying their reserves out of the dollar. This trend toward a declining demand for dollars by central banks, as well as other dollar holders, will continue."

Sounds good, but this is no sure thing. Over the past year, gold mining stocks, for example, have lost -8 percent, according to a report by American Century Investments, a Kansas City investment company. By contrast, gold bullion price rose more than 5 percent.

Gold mining stocks, the report said, do not always move with the price of gold bullion. The reasons: Gold is priced in dollars. A weaker dollar makes gold more affordable to foreign investors, and boosts its appeal as hedge for dollar-denominated investments.

What about platinum and palladium? Many precious metals mutual funds invest in companies that mine these scarce metals. Investors often purchase platinum and palladium bullion along with gold bullion.

The price of platinum is at a record high. So expect a pull back. But if gold rises due to inflation rears, so will platnim,according report by Johnson Matthey North America, New York.

So what should you do? It's always a good idea to have an inflation hedge along with stocks and bonds. This way, if your stock funds and bond funds decline due to inflation or an economic crisis, your gold should increase in value and cushion your losses. Most experts recommend keeping about 5 percent to 10 percent of assets in gold or precious metals mutual funds that invest worldwide.

There are other inflation hedges that include: Real estate, real estate stock funds, inflation-indexed U.S. Treasury bonds, inflation-indexed corporate bonds, inflation-indexed U.S. savings bonds and inflation-indexed bank Certificates of Deposit.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

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