It Will Take More Than Last Week's Spike to Restore Gold Funds' Sheen - TheStreet

It Will Take More Than Last Week's Spike to Restore Gold Funds' Sheen

They still dominate the bottom of the long-term performance rankings.
Author:
Publish date:

The dramatic move in the price of gold has taken some of the tarnish off of gold funds, long the doormat of mutual fund sectors.

Reaction to an agreement last week by 15 European banks to limit how much gold they'll sell over the next five years has inflated gold prices to $324.50 at Wednesday's close from a low of $252.50 an ounce on Aug. 26. It slipped slightly Thursday, closing at $322.30.

That has pushed some gold funds into the ranks of the third quarter's top performers. The

(BGEIX) - Get Report

American Century Global Gold fund, for example, returned 28.9% during the quarter, boosting its quarterly ranking to 12th among all funds, according to

Lipper

. Five other gold funds are among the top 25 performers for the third quarter.

But don't be blinded by gold's sudden sheen. Of the 25 poorest-performing funds of the last five and 10 years, 15 are gold funds. And while the European bank agreement could cause short-term shortages in supply, it does nothing to counteract the longer-term forces that have depressed gold prices for years.

Though some gold fund managers were giddy last week about their suddenly rising fortunes, some analysts were less than impressed by the central banks' agreement.

Peter Ward, a mining analyst at

Lehman Brothers

in New York, says the European sales cap -- 400 tons annually for the next five years -- isn't as dramatic as some have made it out to be.

"I was only looking for between 350 and 400 tons of gold sales by central banks

globally

on an annual basis anyway," Ward says. "So finding out now that there's now going to be 400 tons just from Europe, I don't see as a cause for great celebration."

In addition, under the agreement, the

Bank of England

still will be allowed to unload 365 tons of its gold stores, while the

Bank of Switzerland

is permitted to dump 1,300 tons onto the market over the next five years. Ward says that actually accelerates the pace at which he was expecting Switzerland to auction off its gold.

"I was looking for the Swiss sale to take between eight and 10 years. And now if you read between the lines, it appears that it's going to be done over five years instead. That's not good news," Ward says. "If anything, I think we can look for an even bigger pace of central bank divestment over the next five years than we've had over the past five years."

He forecasts the average price of gold to be $280 an ounce over the next three years. Long term, "nothing's really changed here," he says.

Don't tell that to exuberant gold fund managers, though.

Matthew Ford, co-portfolio manager of the

(USERX) - Get Report

U.S. Global Investors Gold Shares fund, says his firm had been turning more bullish on gold in recent weeks before the Sept. 27 announcement by the European central banks.

"When I got 18 phone calls on Sunday night from Australia about the European central bank announcements, that was the icing on the cake," Ford says.

"Prices are more likely to be higher a year from now than lower," insists Mark Johnson, manager of the

(USAGX) - Get Report

USAA Gold fund. "That's because you do have certain supply caps that you didn't before."

But here's the thing about gold when it comes to supply and demand: For the last decade, demand

already

has outstripped the supply of new gold coming out of the mines. But the shiny metal has still traded down in value. That's because there was always the looming cloud of a secondary source -- the central banks.

But Douglas Cohen, gold equity analyst at

Morgan Stanley Dean Witter

, says the central bankers' agreement will merely keep gold from retreating back to its lows, not push it up to new highs.

"We believe a rally within the next 12 months toward gold's mid-1990s perch in the $375- to $400-an-ounce range is ... unlikely," he writes in a recent report. "Our 2000 forecast goes to $305 an ounce from $295 an ounce."

If Cohen and Lehman Brothers' Ward are right, gold will soon lose its luster once again.

The mixed view on gold points to another oddity you should remember if you're thinking about investing in gold. Unlike other commodities like orange juice and wheat, there can only always be more gold in the world, not less.

Add to that the fact that gold has backed less and less of the world's currency in the last quarter-century and that its uses have become fewer -- and not more -- over time, and you've got a recipe for sagging gold prices beyond the current rally, not higher ones. And, by the way, it's not much of an

inflation barometer anymore, either.

"It's no longer a storehouse of value," says J. Clarence Morrison, precious metals analyst with

Prudential Securities

. "It's a high-priced commodity having a certain amount of usage in the world."

Your own portfolio probably isn't one of those uses. Just something to think about if you've been bitten by the gold bug.