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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 bit of each asset as a long-term hedge against inflation. But don't bet 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 on everything are sure to rise. Inflation triggers higher gold prices.

People who have a vested interest in selling gold bullion or mining stocks typically talk about all the good reasons to invest in gold. In addition to inflation, they often cite 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 and amid fears of higher inflation.

Nevertheless, gold prices often fall just as much as they rise.

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

So what should you do? It's always a good idea to have an inflation hedge along with your stocks and bonds. If your stock and bond funds, for example, decline due to inflation or an economic crisis, your gold funds should increase in value and help cushion the losses. Most experts recommend that you keep about 5 percent to 10 percent of assets in gold or gold mutual funds.

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 believes the dollar will decline in value, leading to inflation.

"Gold (bullion) 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...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-based investment company. By contrast, gold bullion prices 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.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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