Good as Gold? The Metal’s Investment Reputation Has Been Deservedly Tarnished

Q My brother-in-law keeps telling me I should buy gold. Can you explain what economic conditions are best for doing this?

Is this a particularly good time to be investing in gold?

--D.G.

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A For the individual investor, gold hasn’t been a particularly good buy for the better part of the last decade and a half. And the trend line shows no sign of improving any time soon.

In fact, some experts have gone so far as to call gold an anachronism as an investment vehicle. They say gold is little more than a commodity, no more significant--through certainly more expensive--than corn, soybeans or even pork bellies.

The critical question, it seems, is whether there is a role for gold beyond its traditional one as a hedge against inflation and political and economic instability.

Gold used to be the asset of choice in times of crisis. When inflation got out of control, investors flocked to gold, the “hardest” of the so-called hard assets. Gold hit its peak value of $850 an ounce in 1980, just as the country was being ravaged by a long bout of double-digit inflation. But once inflation was controlled, the price of gold fell into the low-$300 range. Although it has fluctuated over the years--it rose to $454 an ounce in mid-1987--gold has been trading in the mid-$300 range for several years now.

Clearly one of the reasons is inflation--or the lack thereof. And inflation shows little sign of making a dramatic comeback, despite sporadic bursts of worry. Furthermore, the federal government’s introduction early this year of inflation-indexed bonds may have put the final nail in the coffin for gold as an inflation hedge.

Not only do the bonds promise to return about 3% above the inflation rate, they carry government backing. Can gold offer such security? After all, if the U.S. government fails, do you really think a few ounces--or even a few hundred ounces--of gold is going to make a huge difference in your life? Don’t count on it.

Even recent global crises, such as the Gulf War, haven’t done much for gold’s popularity. When Iraq invaded Kuwait in 1990, gold rose 20% and then pulled back just as quickly. Subsequent crises have had even less impact on gold prices.

Finally, small investors should look at the limited potential for gains available through gold. For example, if you buy gold when it is $340 an ounce and sell when it hits $400 (a level considered magical these days), your maximum potential profit per ounce is $60. (It will be less because of sales commissions, but we’ll get to that later.) Sure, that’s a profit margin of nearly 18%, but you would have to buy a lot to make a four-figure profit.

Further, gold generates no dividends or interest while investors wait for possible profits. (And if recent history is any guide, you’ll be sitting for a while waiting for gold to make a dramatic rise.)

But if you’re determined to follow your brother-in-law’s advice, at least heed these guidelines:

* Take possession of whatever gold you purchase and keep it in your safe-deposit box. Brokers will try to sell you on their storage programs, but too many investors have been defrauded this way. Store your gold carefully. Pure 24-karat gold scratches easily, and the value of coins can be diminished by any blemishes.

* Untrained investors should

limit their initial purchases to legal tender from known countries. Gold bullion, futures contracts and options are for the truly sophisticated gold trader. Currencies from major countries are usually guaranteed by the government, and the gold content of the coins is certified, allowing for easy resale.

* Understand the difference between the currency value of gold coins and their potential numismatic (collectible) value. Some coins are issued as currency at the going market price for gold but later become prized as collectibles for their rarity. Only experienced and trained investors should consider the numismatic value of gold coins.

* Keep your sales commission charges as low as possible by buying in the largest quantity you can afford at a single time. Commission charges can range up to 10%, depending on the size and timing of the purchase.

In California, small purchases are subject to ordinary sales tax.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com