Despite gains, gold lacks broad investor appeal


By Muralikumar Anantharaman
Thursday, September 20, 2007

BOSTON -- Many investors are mystified by gold and aren't warming to it even as prices hit 28-year highs and the world's top producer says market conditions are a positive "perfect storm" for the precious metal.

But while money managers are allocating only a small portion of their funds to gold, an increase in investment in bullion exchange-traded funds and new gold ETFs show some investors are getting into the action in new ways.

Physical gold and gold-oriented securities are not mainstream investments as they are volatile and difficult to understand, financial advisers and analysts say.

"It's esoteric," said Richard Bregman, chief executive of New York-based financial advisory firm MJB Asset Management, which has $85 million in client assets.

"The primary retail use of gold is in jewellery. It's difficult for me to see what drives the prices," he said.

Gold prices rose to levels not seen since 1980 on Thursday as the dollar fell to 15-year lows in the wake of this week's cut in U.S. interest rates, which aroused concerns about inflation. The metal is also getting a boost from safe-haven buying spurred by worries about a global credit crisis.

Spot gold touched $738.10 an ounce, its highest price since January 1980 when it hit an all-time high of $850.

Greg Wilkins, chief executive of Barrick Gold Corp., the world's biggest gold producer, said on Wednesday current U.S. conditions of low interest rates and potential inflationary pressures were a "perfect storm" for gold prices.

He also noted that jewelry demand had been coming largely from developing countries that have enjoyed strong economic growth and that even a global chill from a worst-case scenario U.S. recession would not take a major bite out of that demand.

Some investors called the price rise speculative and driven by expectations that inflationary pressures would increase after the rate cut.

"I don't think we are seeing or hearing from our clients that they have a desire to increase their allocation, even after (the rate) move," said David Jeter, senior vice president of Allegheny Financial Group, which manages $2.9 billion of client investments.

Jeff Tjornehoj, senior research analyst at Lipper Inc, part of Reuters Group Plc, noted that all of the 19 gold-oriented U.S. mutual funds with total assets of $28 billion tracked by his firm get the lowest rating for "preservation," or the ability to avoid losses.

"They are very volatile as a group, so they are typically not a place you would focus your investments on," he said. "It's not the vehicle that most people look to provide for their retirement or to meet their investing goal."

William Rutherford, president of Rutherford Investment Management, said gold and gold funds were "a very specific kind of investment for specific people."

But not for his clients.

"It hasn't become mainstream yet," said Oregon-based Rutherford, who manages $25 million for some pension funds, individuals and foundations.

Lipper's Tjornehoj said that for investors seeking some exposure to gold, funds would be a better bet than physical metal as the funds have outperformed gold over the past 10 years, posting average annual returns of 10.23 percent against gold's 8.3 percent.

"Gold could be flat, yet a gold stock could be moving up or down. A gold mining stock can produce dividends. And we've seen a lot of consolidation in the industry over the past several years," Tjornehoj said.

ETFs, index-based mutual funds that trade like stocks on exchanges, are one route that have attracted gold investors, though firms say it is difficult to estimate if the investment is coming from institutions or individuals.

On Thursday, Lyxor Gold Bullion Securities became the latest to introduce a bullion-backed ETF, launching in Europe.

State Street Corp said assets in its StreetTRACKS Gold Shares ETF have risen to $13.2 billion from $9.3 billion at the start of the year.

Barclays Plc said its iShares Comex Trust ETF has $1.1 billion in assets. Both are backed by physical gold.

"There is an increased recognition of the value of having commodities in a portfolio," said Christine Hudacko, a Barclays spokeswoman. "And for individual investors and their financial advisers, an exchange-traded product is a good alternative."

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