$600 gold: Want in? Think twice

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Gold's meteoric rise over the past five years has enriched precious metals investors -- should individual investors follow suit?

By Rob Kelley, CNNMoney.com staff writer
April 6, 2006: 5:29 PM EDT


NEW YORK (CNNMoney.com) - There was a time when investors didn't want gold's gleam anywhere near their portfolios, but it's long forgotten now.

As gold futures surged past the $600 an ounce barrier Thursday (full story), it was easy for investors to forget that in 1999 gold was stuck around an anemic $250 an ounce.


As gold futures surged past the $600 an ounce barrier Thursday, it was easy for investors to forget that in 1999 gold was stuck around an anemic $250 an ounce.

But with oil shortages and inflation fears making headlines again, the commodity has staged a full-blown return to glory, earning outlandish returns for precious metals investors. Nymex gold futures are now up 38 percent over the past year, and a scorching 126 percent over the past five. Stock markets, eat your heart out.

Now individuals want in -- should you follow suit?

Precious metal prospects
The first crucial question is whether the jump to $600 was a temporary boost or a level that's here to stay. The recent bout of high oil prices has made investors worry that it will push up prices on all kinds of goods and services, eating away the purchasing power of the dollar. Gold is one of the rare investments that maintains its value during periods of inflation.

"So long as there's the threat of higher energy prices and the dollar remains low, metals could rise even higher," said Jim Quinn, commodity floor analyst with A.G. Edwards. "From a technical perspective, the market could certainly exceed $600."

Analysts caution, however, that investing in gold can be a risky move, one that's usually handled by traders who've built up years of experience understanding metals markets.

But if investors want to speculate on gold, how can they put their money in bullion?

The most direct way to jump into the gold markets is to invest in one of the two major gold exchange-traded funds (ETFs).

Barclay's has the iShares COMEX Gold Trust (up $0.60 to $59.37, Research) and SSGA offers the competing streetTRACKS Gold ETF (up $0.62 to $59.28, Research). Both have made gains in the double digits over the past year, and are subject to the same forces that drive the daily gold futures market.

Andrew Clark, senior research analyst at Lipper, said the gold ETFs had seen a huge inflow of money since their recent introduction. "The Street Tracks fund has performed immensely, he said. "It's been out about a year but already it's in the billions of dollars invested."

There are also many mutual funds with exposure to gold markets, but they don't deal purely with the commodity itself. The funds invest in gold miners and manufacturers, and depending on their goals, may hold the commodity itself.

"Most gold funds are plays on stocks, not plays on metal itself," said Clark.

Karen Wallace, a fund analyst at Morningstar, says that the two such mutual funds with lowest fees and most experienced managers are the Vanguard Precious Metals and Mining (Research) and the American Century Global Gold (Research). However, the Vanguard fund attracted so many investment dollars that managers decided to close it to new investment, she said.

Investors still need to consider their investment goals -- and especially their risk tolerance -- and consider gold alongside other market options. "There are other ways to hedge inflation -- gold can be extremely volatile," said Wallace. "Real estate investment trusts (REITs) are another investment option that has a low correlation to the stock market. But it all really depends on what somebody's portfolio looks like."

Volatility
Few investment vehicles have seen as much shakeup over the past 25 years as gold. In 1980, it touched $873 an ounce after rampant inflation engulfed the nation, but then plunged to a low of $254.80 in August 1999.

And these huge long-term swings are now being complemented by larger day-to-day shifts.

"We're seeing price swings that we haven't seen in decades. We used to see a $6 range in gold over a week, and now we see it in a single day," said Quinn. "The gold market is really going to be in play over the course of the year."

For investors, that means that they should be prepared for the possibility of major short-term losses.

"Not everybody could handle losing 40 percent in one year," said Wallace. "Most people probably don't need an investment in precious metal funds."