Are gold funds the bargain-hunters' dream?

NEW YORK -- In movies like Treasure of the Sierra Madre and Goldfinger, people would lie, cheat, steal, even kill for gold. These days it looks like no one wants to go near it, including mutual fund investors.

Funds that focus on gold mining stocks have dropped along with the price of gold itself, which went for $875 an ounce in 1980 but trades today in the $250 range. Through mid-July, gold funds turned in the worst year-to-date performance of all the fund categories tracked by Lipper, with a return of minus 11.46 percent. By comparison, funds linked to the Standard & Poor's 500 index had a positive return of 15 percent.

Look back over the past five years, and the carnage continues, with gold funds suffering an average return of minus 15.35 percent each year.

The fact is, investors who have been in gold funds long-term have lost money, and they're understandably not happy. But for bargain- hunters looking for an undervalued investment, gold funds might be worth considering.

"It doesn't mean it has lost any of usefulness. It's just out of favor," James Turk, strategic adviser to the Midas Fund, said of gold. "When it becomes this extreme on the negative side as it is now, it's a sign that a price reversal is lurking."

Joseph Foster, co-manager of the Van Eyck gold funds, has a similar view.

"The downside risk is extremely limited -- we can go down from here, but not much farther to have to be at or near the bottom," said Foster, who expects gold funds to rebound "when conditions are right -- whether it's three months or 12 months, I don't know."

Gold's problem is that relatively few people believe they need to continue holding it as a hedge against inflation or political uncertainty. Central banks including the Bank of England have begun selling off some of their reserves, believing their money would be better invested in other assets, including stocks, and that has helped send gold prices down even more.

Foster says supply and demand and fundamental economic issues will help lift gold prices. Demand currently is running ahead of supply, but selling by central banks rather than gold-producing companies is helping to fill that demand.

Foster predicted that as central bank sales slow, mining companies will have more opportunity to improve their sales, and their stocks should rise.

Of course, fund managers try to be upbeat, although plenty of other people believe gold is no longer a worthwhile investment and have backed up that belief by selling gold mining stocks and funds.

But in making their case for gold, fund managers can point to other investments that have made dramatic comebacks recently.

Two years ago, when Asian economies began to collapse, there was a similar negative sentiment about funds that focused on Pacific Rim stocks, and investors bailed out. But many others hung on, and today, they're being congratulated for their tenacity as net asset values climb back above their mid-1997 levels.

Funds specializing in Japanese stocks have returned 52.27 percent so far this year, according to Lipper's calculations, and funds specializing in Pacific region stocks have returned 44.8 percent.

Then there's the example of another commodity, crude oil, which had slumped to the neighborhood of $10 a barrel late last year and is now trading at nearly twice that amount. Natural resource funds, which include oil stocks, have returned 30.55 percent so far this year, and in the past 13 weeks, 14.96 percent, more than double the 6.73 percent returned by S&P funds.

Oil's comeback could indirectly help the gold funds. "The doubling of crude oil prices in the last six months will be reflected in inflation numbers sooner or later," Turk said. He also noted continuing economic uncertainty in Argentina and Brazil may make gold -- which is a universal currency -- more attractive to investors.

It's important to keep in mind that gold should be just one part of a diversified investment plan. Both Turk and Foster suggest devoting between 5 percent and 10 percent of a portfolio to gold.

Gold funds have made themselves less vulnerable by adding non-gold stocks to their portfolios. Oppenheimer Gold & Special Minerals Fund has outperformed other gold funds by placing 20 percent of its assets in platinum and palladium producers, according to the Value Line Mutual Fund Survey.

Turk said the Midas Fund has approximately 10 percent of its holdings in platinum-related stocks, and another 10 percent in silver-related stocks.

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