Erratic Gold Funds Again Lose Their Luster, but Faithful Remain Bullish : Investments: Speculators retain hope that inflationary pressures worldwide will drive up prices, but such a scenario is still several years away.

NEW YORK — The old precept that it is dangerous to chase after “hot” mutual funds has just been given a real-life demonstration, courtesy of gyrations in the gold market.

Through midsummer, funds that invest in stocks of precious-metals companies were the top performing group of 1993.

As gold prices embarked on a run from about $330 an ounce to better than $400, gold-oriented funds accrued gains of close to 60% from New Year’s through June 30, figures compiled by Lipper Analytical Services Inc. show.

But after gold topped out around the end of July, it abruptly fell back below $350 in a slide that included a one-day loss of $22 on Aug. 5.

Just as suddenly, gold funds tumbled from the top rung to the bottom in the Lipper statistics. They ranked as the poorest performers among all stock fund groups in the third quarter with a loss of 9.63%.

“Those who jumped into precious-metals funds just as gold reached its peak prices of the summer, only to see the value of their investment drop, can only hope that the gold run isn’t quite over yet,” observed analysts at Morningstar Mutual Funds in Chicago.

The setback came as only the latest in a long series of disappointments for gold’s faithful following.

In early 1980, gold peaked at around $875 an ounce. Now, more than 13 1/2 years later, this traditional store of value against inflation, devaluation and other political and economic hazards is trading at far less than half that amount.

Indeed, to have been invested heavily in gold funds over the past 10 years was to have missed out almost entirely on a great bull market that embraced both stocks and bonds.

Over the 10-year period ended Sept. 30, the average stock fund tracked by Lipper showed a gain of 219.79%. Over that same span the average gold-oriented fund returned 26.25%.

Even so, many advocates of precious-metals funds or other gold investments haven’t given up.

“The recent sudden plunge shows the volatility inherent in this sector,” said James Stack in his InvesTech Market Analyst advisory letter. “In 20-20 hindsight, one could say we should have sold at the top.

“But we established this position based on long-term fundamental and technical reasons. Our decision to sell or add to these positions will depend on these same reasons.”

To a great extent, the current bullish case for gold rests on one or two simple assumptions.

One is that a strengthening in economies around the world will step up inflationary pressures, naturally stimulating investment demand for gold and other standard inflation hedges.

A second is that, barring such economic improvement, governments will inflate their currencies anyway with measures aimed at stimulating activity, producing the same inflationary result.

“The major reason for the gold selloff appeared to be the view that a weakening economy means little or no inflation, and therefore little or no incentive to own gold,” said Charles LaLoggia, an investment adviser in Rochester, N.Y.

“I find this view to be shortsighted,” he said. “If the economy weakens dramatically from here, a wide range of political-economic difficulties are sure to surface, all of which should be favorable for gold.

“My view, therefore, is that gold is still in the frustrating, erratic and potentially very profitable early stage of a major bull market,” he said.

But in the eyes of some more skeptical observers, the frustration could continue for a long while yet. “Historically, inflation begins to intensify when an economy starts bumping against its capacity constraints,” said David Resler, chief economist at Nomura Securities International Inc. in New York.

“At the 3% growth rate foreseen by a consensus of forecasts, it would be three to four years before the economy approached levels of activity that have historically led to rising inflation.”