Gold Is Holding Up in a Tough Season

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"The dynamics of the gold-mining industry might also help keep the commodity price aloft. . ."

Gold has long been viewed as a hedge against inflation. Lately, however, this precious metal has been holding its own, even though the prospect of deflation has become a bigger concern for many investors.

"Gold does well during periods of price instability," whether that involves inflation or deflation, said Paul Justice, an investment strategist at Morningstar. Indeed, the spot price for gold in London rose 5% last year, while prices of most other assets sank, and gold rose an additional 5% in the first quarter.

Of course, some strategists say inflation could roar back soon because of deficit spending and monetary expansion by governments and central bankers around the globe. While the dollar has been fairly strong lately, it could weaken as federal deficits rise. All of this could benefit gold investors, or so the gold bulls say.

The dynamics of the gold-mining industry might also help keep the commodity price aloft, said George Milling-Stanley, a managing director at the World Gold Council. He said that many industry analysts were predicting either flat or declining gold production over the next five years.

Some strategists say gold-mining stocks may be more attractively priced than the commodity itself right now, largely because the stocks plummeted in the broad market downturn last year. The Amex Gold Miners Index, which tracks these shares, fell 27% in 2008 but rose almost 10% in the first quarter this year.

"Gold miners are more correlated with equities," Mr. Justice said, while gold prices generally have a low correlation to stock markets.

John C. Hathaway, the manager of the Tocqueville Gold mutual fund, attributed the steep fall in gold-mining stocks last year to risk aversion. "There has been a radical shift from risk-taking to risk-avoidance," he said.

In addition to owning shares in mining companies, the fund owns 100,000 ounces of gold bullion. While this amount of gold has remained constant during the last 12 months, its share of the portfolio has roughly doubled, to 13.5% of assets. "That just shows you how much the metal has outperformed the stocks," Mr. Hathaway said.

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