Gold Funds Not Keeping Pace

Mutual-fund investors who rely on gold funds to protect them from inflation and economic uncertainty have lately been paying a steep price for that “insurance.”

As most other types of equity funds racked up bull-market gains in the first half of 1997, gold funds were a conspicuous exception.

An average of 46 gold-oriented funds tracked by Lipper Analytical Services Inc. fell 12.16 percent in the January-June period, while Lipper’s average of more than 2,800 general equity funds gained 15.37 percent.

In other words, $1,000 that would have earned $153.70 in stock funds instead lost $121.60 in gold funds. So if you look at it that way, the semi-annual “premium” paid on your gold “insurance policy” came to $275.30 for each $1,000 invested there.

There were some special reasons for the recent woes of gold funds, most notably the collapse of Bre-X Minerals Ltd., a Canadian company whose shares had been flying high. But the problems with gold funds are by no means just a recent phenomenon.

The average annual return for the Lipper gold fund average is minus 4.27 percent for the last three years, and minus 0.54 percent for the last 10 years, while stock funds overall have been racking up average gains of 12 percent to 22 percent annually.

Of course, corporate profits and economic growth have proved unexpectedly strong in recent years. Inflation has been subdued, at annual rates in the neighborhood of 3 percent, and lately has shown signs of abating further when many people thought it might revive.

Gold, with its ancient reputation as a store of value, traditionally appeals to investors who fear inflation and economic instability. As Bill Martin, manager of the American Century Global Gold Fund, a $350 million fund based in Kansas City, Mo., put it recently, “This is not exactly the ideal environment for gold bugs.”

In fact, gold funds have failed to keep pace with the inflation that has occurred over the past decade or so. Gold has behaved increasingly like just another prosaic industrial commodity at a time when industrial commodities in general aren’t generating much excitement.

In the meantime, investors who still want to hedge against inflation have gained some new alternatives to gold - in particular, the inflation-protected securities that the U.S. Treasury began issuing at the beginning of this year.