Gold rush or not?

By CLAIRE BURSTON
Updated: 19:00 EST, 10 October 1999

Patient investors whose money has languished in poor-performing gold and commodity funds for years have something to smile about at last - an unexpected gold rush.

Shares of gold mining companies, in which several specialist unit trusts and investment trusts have holdings, have rocketed over the past week, fuelled by the soaring price of gold.

For years the metal has been losing its lustre. It hit a 19-year low in May when its price fell to $278 an ounce. Sentiment for mining shares plummeted the same month when Chancellor Gordon Brown told the Bank of England's Eddie George to open the vaults because he wanted to sell a big slice of the UK's gold reserves.

That triggered fears that oversupply would force the gold price even lower. And a series of high-profile gold mine closures in South Africa left the industry reeling.

But the gold price has confounded the experts and surged about 23% since September 26 when 15 European central banks said they would limit gold sales in the next five years. It is now $324 an ounce.

Experts believe that a 10% rise in the price can push up the value of a gold producer's shares by 20%. That is encouraging for those who have invested in these companies through specialist funds.

Further positive news came last week from South Africa, the world's biggest gold producer, where the Johannesburg All Gold index rose more than 5% to its highest since March 1997.

But investing in gold funds is not for the nervous. International commodity brokers and dealers trade in gold without physically holding the metal. They are professional speculators who can make big profits.But they can also make big losses, which can affect the gold price.

Private investors who venture into the gold market are entering a complex world where the ups and downs of fund values may seem to bear little relation to other economic or stock market trends.

Graham Birch is head of natural resources at fund manager Mercury Asset Management, which runs a Gold & General unit trust and World Mining investment trust. He says: 'The gold merry-go-round that has caused prices to plummet over the years ended overnight with the announcements from the European central banks. 'That sent the operating profits of many mining companies up fast, which was good news for funds such as ours.'

But savers who have caught gold fever and want to pile into commodity funds such as those run by Mercury, M&G and Save & Prosper should be careful. Gold, like any other commodity, is a volatile investment, and likely to remain so. The recent recovery in its price may be only temporary. In 1980 it soared to more than $800 an ounce, only to fall back to below $500 within two months. 'It would be dangerous to tell investors to fill their boots,' says Birch.