A little bullion is bullish for a balanced portfolio
People looking for a little extra protection against inflation and economic uncertainty have long taken a shine to precious metals as part of their investment portfolios. ``They're a stabilizing influence,'' explains John Norris, vice-president of Citibank's precious-metals center. ``They move inversely to other investments, like stocks and bonds, so they lower the volatility of a portfolio.''
``Gold, in particular, is insurance against the shrinkage of purchasing power,'' notes Bette Raptopoulous, senior metals analyst at Prudential-Bache Securities. ``These are very uncertain times, given the direction of the world economy. The better part of wisdom is to hedge.''
Investment advisers recommend that gold, silver, and platinum make up from 5 percent to 20 percent of a portfolio. Metals are hard assets that provide high liquidity and diversity. Because the supply is finite - metals are mined, not printed - they hold their value against an infinite supply of paper assets.
The bottoming out of oil prices, concerns about the large federal budget and trade deficits, third-world instability, and uncertainty about who will succeed President Reagan and Federal Reserve chairman Paul Volcker also affect precious metals, says Jeffrey Nichols, president of the American Precious Metals Advisors Inc., New York.
Because of these factors, ``in today's environment, they [metals] will perform better than most conventional assets,'' Mr. Nichols adds. ``They are bullish now and will be well supported.''
Not everyone is bullish on precious metals, however. David R. Sargent, president of the United Business Service Company in Boston, believes it is better to invest in a high-performance stock.
``Gold doesn't pay dividends, and you have to pay to store it,'' Mr. Sargent says. ``Gold is simply a commodity, like wheat or corn. The price reflects whether people want to buy or sell.''
Sargent says he doesn't see a situation in 1987, such as inflation, that justifies the investment. ``And, as far as long-term considerations, you're just speculating anyway.''
Right now, precious metals are not trading at record highs. In 1980, platinum reached $1,040 an ounce. In 1985 the price was $340, and now it's around $580, an increase of 70 percent.
About 82 percent of the world's platinum comes from South Africa, which means the metal's already volatile price responds to anxiety about that country. ``Under the best of circumstances, platinum is under short supply,'' says Jacques Luben, executive director of the Platinum Guild International USA Inc., in New York.
Platinum is generally an industrial and strategic metal, used for catalytic converters in automobiles, jet engines, jewelry, plastics, and medicine. Investor demand for platinum, however, has gone from 4 percent of supply to 9 percent in the last year, says Kenneth Tropin, director of managed futures and precious metals at Dean Witter Reynolds, New York.
Gold hit $850 an ounce in 1980. Last January, it was selling for $326, its low for the year, and has since gone as high as $440. ``The price has gone up over 30 percent; this year gold has outperformed the Dow [Jones industrial average],'' Mr. Norris notes. Gold is used for jewelry, electronics, coins, and investment. South Africa produces about half the world's supply.
In 1980, silver reached $50 an ounce, but now sells at less than $6. Called ``the poor man's gold,'' silver is depressed and underpriced. With a combination of anxiety over the Soviet invasion of Afghanistan, lower inflation, and the Hunt brothers' attempt to corner the silver market in 1980, the bottom fell out of the silver market and huge stocks became available. ``It will take a long time for supply to be drawn down,'' Norris says. The photographic industry uses 40 percent of all silver. The metal is also vital to electronics, refrigeration, air conditioning, and jewelry.
Given the supply fundamentals for these metals, another reason to invest is capital appreciation. ``Gold can be a very speculative investment,'' explains Bruce L. Kaplan, a senior vice-president of A-Mark Precious Metals Inc. in Beverly Hills, Calif. ``It's not necessarily for middle-class families.''
The futures market, which can provide big wins and losses, involves a fair amount of leverage and risk. While precious metals give skilled speculators the opportunity to make money, there is an important difference between a speculator and an investor, emphasizes Howard Segermark, president of the Industry Council for Tangible Assets (ICTA), in Washington. ``We've seen investors who got burnt, because they thought they'd multiply their money overnight.''
Investors must be realistic about metals. ``They are not a quick moneymaker. You are buying for the day you hope will never happen,'' cautions Luis Vigdor, senior vice-president at Manfra, Tordella & Brookes Inc., New York.
Metals comes in many forms: coins, bars, paper, and funds. Currently four major countries are issuing gold coins (see story, Page B8). Bars, ranging from fractions of ounces and grams to 1,000 ounces, give more metal for the money, but they are bulkier and not as liquid as coins.
Citibank's Norris says the fastest-growing investment related to precious metals is the gold-storage account. ``It's a convenient way of buying metal without having to store it yourself,'' he says.
Another alternative is a gold-oriented mutual fund, such as the one operated by Van Eck Securities in New York. John Van Eck, chairman and president of the firm, says the fund has a 26 percent annual compound rate of growth during the last 10 years. A gold fund started by Fidelity Investments in January already has some $95 million in assets.
The Investment Company Institute in Washington counts 19 gold-oriented mutual funds, some investing internationally and others only in North America. By September assets in these funds had reached $114 billion. A year ago the level was $54 billion.
Gold-oriented mutual funds have spurred interest in gold mining stocks, says Michael Chender of the Metals Economics Group, in Boulder, Colo., which compiles data on mines and exploration.
His group estimates that yearly additions to American gold-mine capacity could reach close to 750,000 ounces this year, which represents well over 20 percent of current capacity. Mr. Chender explains that gold has been the only nonferrous metal in the 1980s that's been profitable for a majority of producers, one factor leading to the increased funding for exploration.
One survey indicates that perhaps only 3 percent of investors own precious metals, says Kevin Cloud of Johnson Matthey Ltd. USA, which refines, assays, and fabricates precious metals. ``Much investment education needs to go on,'' he adds.
In 1933 the US government prohibited Americans from owning gold, in an effort to build confidence in paper money. This ban lasted until 1975. As a result, a whole generation of investors is not familiar with investing in metals, Mr. Cloud points out.
People should learn about the market before investing, suggests Cindy Arenberg, of ICTA. ``Check out dealers, be wary of unsolicited phone calls, check with local Better Business Bureaus or the attorney general's office'' in your state, she advises.