The new rules of the gold game

By now, we seem to be getting used to spectacular, Acapulco-like dives in the stock market. Several years ago such plunges - including the 76-point-plus drop in the Dow Jones industrial average on Monday - would have sent the price of gold soaring in the opposite direction. You also used to be able to depend on gold and the dollar to head in opposite directions. When the dollar went up, gold went down. Or, with the dollar going down as it is now, gold is supposed to go up.

Lately, however, it hasn't worked out that way. Sure, gold is about $100 an ounce more expensive than it was a year ago, but the climb has been fairly steady, without the big spikes and troughs of the past. The result is a metal that is even less useful as an investment - where in return for some risk, you expect to share in profits as well as get some gain in price.

``Gold has been a bit weaker than expected in 1987,'' says John Dessauer, publisher of Dessauer's Journal of Financial Markets, in Orleans, Mass. ``The price of the dollar has gone down on international markets, but gold has not gone up.''

The reason for this, Mr. Dessauer believes, is the inflation outlook, which is good for consumers but bad for people hoping to make a killing in gold.

``The outlook for high inflation is not as strong as some people felt it would be a few months ago,'' he says. ``If the dollar keeps going down and there's a real expectation of higher inflation, then you'll see a real rise in gold.''

``Gold's been quiet because inflation has not accelerated anywhere near what we had in the 1970s,'' agrees August F. Arace, managing director of Tucker, Anthony & R. L. Day Inc., the brokerage subsidiary of the John Hancock Insurance Company. ``The move in gold has been much less dramatic this time.''

Still, Mr. Arace points out, ``the dollar's been going down since 1985. In '85, gold was selling at $300 an ounce. Now it's around $470.'' So a relationship between the dollar and gold does exist, one that still bears watching, even without a prospect of higher interest rates.

Another reason gold is not the all-popular haven it once was is a wider selection of alternatives. Today, if people are worried about stocks, interest rates, inflation, or the value of the dollar, there are other places they can go. Treasury securities, international stock funds, option and hedging techniques, and competitive rates on certificates of deposit have become popular alternatives. With some, you can get the security and the liquidity of gold without the worry of storage or the loss of principal.

Forecasts for the price of gold don't make a buying decision any easier. Many analysts see its price climbing to more than $550 an ounce in the next year. They cite a continually falling dollar, concerns about an eventual recession, higher inflation, or all three.

Dessauer doesn't agree. ``I see gold coming down to $350,'' because of lower industrial demand for the metal and slower inflation.

With a $200 range of predictions, then, what about an investor who thinks a little gold is a good insurance against an eventual round of severe inflation? The answer: Don't change that thinking.

``Gold is insurance against the financial disaster that can come in the form of inflation,'' says Dessauer, who agrees with the traditional advice of holding a modest share of your investment assets - no more than 5 to 10 percent - in gold. ``Gold is not there to make a profit, but it is insurance.''

For average investors, Dessauer favors gold coins like the American Eagle, the Canadian Maple Leaf, or one of the coins issued by several other countries. For more well-to-do investors, he suggests adding gold bullion, ``but then you have the problem and cost of storage.''

Tucker Anthony's Mr. Arace goes along with the 5 to 10 percent limit and favors a 50-50 mix of gold coins and bullion, along with gold mining shares. ``Sometimes gold acts better than shares, and sometimes the profits of mines give you a better return than the metal itself,'' he says. The mines on his list include Echo Bay, Arno Barrick, Newmont, Placer Dome, International Corona, and Pegasus.

Some investors also like certificates of ownership. Certificates can also be used for silver or platinum. While a couple of metals certificate programs have turned out to be frauds, a carefully chosen one can be safe and much more convenient than owning coins or bullion.

The certificates specify that you own a certain amount of gold stored in bank vaults and you can sell it with a phone call. Commissions to buy, store, and sell the gold can run more than 4 percent. And remember, like gold itself, the certificates don't pay any dividends.

If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115.

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