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Investing in gold stocks, funds may be a smart move

Updated: May 3, 2013 12:14PM

Originally published: September 4, 2003

Is it pure coincidence that gold prices broke out to new highs above $375 per ounce in the same week that the Congressional Budget Office predicted that the federal deficit could exceed $500 billion next year?

Or is it that the world is awakening to the fact that America has been borrowing its way to economic growth--and is likely to print its way to paying off all that debt?

So what has a better track record than any government’s paper currency over the centuries? Gold.

If you’re tempted to pass on the rest of this column because you “know” that gold is a relic of the past, you might miss the next big bull market. In fact, a bull market already has started. Morningstar’s index of gold mining mutual funds was up 66 percent in 2002, following a 23 percent gain in 2001.

Why buy gold stocks, funds?

It’s a move that has escaped public notice, perhaps because rising gold bullion prices haven’t hit the headlines. The stock prices of gold mining companies can do better than the actual bullion, because the companies are leveraged: A rising gold price turns into pure profit for the mining companies. They can sell their product at higher prices without incurring higher costs.

Investors like gold shares because many of them pay dividends, while simply owning gold bullion or coins involves storage costs, and the foregoing of interest on your investment dollars.

How high could gold go? My old friend and mentor Don Hoppe, who retired from writing a regular newsletter several years ago, thinks the price of gold could go a lot higher.

Says Hoppe: “When gold is overvalued, it takes only about 1 or 1-1/2 ounces of gold to buy one unit of the Dow Jones industrial average. Just think back to 1980 when the Dow was about 850 and gold briefly traded around $850 an ounce, a one-to-one ratio.

“But when gold is undervalued, it takes anywhere from 24 to 42 ounces of gold to buy one unit of the Dow. In 2000 it took 42 ounces of gold to buy one unit of the Dow. Today it still takes 25 ounces of gold at about $375 to buy one unit of the Dow at 9,500.

So gold is still way undervalued. To get back to overvalued, it will take about an ounce of gold to buy a unit of the Dow.”

Surely he doesn’t think gold could trade at nearly $10,000 per ounce? But he won’t rule it out. Or a stock market decline along with a rise in gold prices. Still, Hoppe has a long time horizon for this forecast--as long as 10 years.

Before you even consider investing in gold shares, keep in mind that these are truly speculative and volatile investments, suitable only for the risk-tolerant, and only for a small portion of your investment assets. That caveat aside, there’s one more big question: Is it too late to buy?

“It’s not too late to buy,” says James Dines, editor of The Dines Letter, in his most recent issue, even though he gave his “buy” signal nearly two years ago. Dines keeps several lists of both conservative and more speculative gold and silver stocks in his newsletter, and almost all show double-digit gains. (Go to www.theDines for subscription information.)

He notes that more speculative low-priced stocks are currently leading the way, but advises a diverse portfolio of at least 10 stocks from his lists.

Dines, who has an enviable track record for his bullishness on gold in the late 1970s and for getting his followers in and out of the technology boom with huge profits, says: “By the time you see a bandwagon on Wall Street, you’re too late. . . . There has not yet been a gold bandwagon, but the train is pulling out of the station. If you want to make serious money, we believe that this is a great shot at it.”

Names of gold mutual funds

You can buy a portfolio of individual stocks, as noted above. Or you can buy no-load gold mutual funds. Here are a few that will diversify your gold investments for you (with the disclosure that I own some of these funds). Other popular gold funds are closed to new investments.

American Century Gold Fund (800) 345-2021, $2500 minimum initial investment; Tocqueville Gold Fund, (800) 697-3863, $1,000 minimum or $250 minimum for IRAs; Fidelity Select Gold, (800) FIDELITY, $2,500 minimum, $500 minimum for IRAs.

I’ll conclude today with a statement I heard James Dines utter in 1973: “When my girlfriend asks for a bracelet made of paper, I’ll know that paper is as good as gold!” Now that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange and McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast, and can be reached at her Web site,

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