Gold prices and gold-mining stocks are hitting multiyear highs, boosting interest in one of the most ignored market sectors of the 1990s.
Amid continuing worries about terrorist activity worldwide and general uncertainty about the economy and markets, jittery investors in the United States and abroad have pushed gold prices to their highest level in more than two years.
Near-term gold futures in New York surged $5.10 an ounce Monday and inched up 10 cents to close at $315.80 an ounce Tuesday, the highest price since February 2000.
Gold is up 13% year to date. Meanwhile, shares of most gold-mining firms and mutual funds that focus on those stocks have racked up much bigger gains. The average gold fund was up 59% this year through Friday, according to Morningstar Inc. By contrast, the average diversified U.S. stock fund was down 2.4%.
Through a combination of stellar returns and investor inflows, assets in gold-oriented stock mutual funds swelled to $3.14 billion by the end of April from $1.93 billion at year end, according to fund tracker Lipper Inc. in Denver.
About $361 million of that growth has come from inflows, meaning new cash invested minus redemptions, Lipper estimated. That's a hefty sum for a small fund sector.
Numerous gold rallies have fizzled over the last 20 years, and gold remains one of the tiniest stock fund categories, representing just 1% of total industry assets, Lipper said.
Gold lost its classic "safe haven" status in the boom years of the 1990s, but its appeal has blossomed again. Some gold fund managers say that with supplies low and international tensions high, the sector's rally could continue.
"People have discovered it's a good time to be diversified, with 3% to 5% of your portfolio in gold," said Frank Holmes, co-manager of two of this year's hottest stock funds, U.S. Global Investors Gold Shares, up 95.2% through Monday; and U.S. Global Investors World Gold, up 88.4%.
"There's still a lot of skepticism," Holmes said, "but investors are starting to believe in this rally."
Holmes said gold fund cash inflows have heated up in recent weeks at San Antonio-based U.S. Global Investors Inc. Combined inflows into the two funds have soared from about $10,000 a day in February to about $1 million a day in the last two weeks, he said.
Message boards at Web sites such as Morningstar (www .morningstar.com) and Yahoo's finance channel (www.yahoo.com) are starting to buzz with gold chat.
Said one recent Morningstar posting, "I first posted about gold stocks in September. I got laughed off the board. I'd like to chat with the doubters now."
Another wondered, "Is it too late to profit from the gold bubble?"
Fund managers say there are several reasons for the gold rally--and several reasons it could continue.
Shanquan Li, manager of the Oppenheimer Gold & Special Minerals Fund (up 48.1% year to date through Monday), said gold producers aren't rushing to lock in current prices with long-term contracts, signaling that they anticipate higher prices.
Bullion also may be rising in anticipation of inflation eventually reemerging in the U.S. as the economy recovers, Li said. As a tangible asset, gold is viewed as a traditional hedge against inflation.
But the main reason is international chaos, Li said. Pakistan and India could be on the brink of war, Israeli-Palestinian tensions haven't dampened much if at all, and Vice President Dick Cheney and other administration officials have warned that new terrorist attacks in the U.S. are possible.
"When people get scared, they often rush to gold," Li said.
International developments will play a huge role in whether the gold rally continues, Li said. "If nothing happens with India and Pakistan or in the Middle East, eventually gold could stay flat or fall back a bit."
Holmes agreed that geopolitics will be a key factor, noting that if the U.S. increases its deficit spending in part to battle terrorists, that could spur an inflationary cycle. The dollar's recent weakness also is boosting gold, as foreign investors' confidence in holding dollars may be waning.
Japanese investors, in particular, have been stocking up on gold, concerned about the softening U.S. dollar as well as their own uncertain economy, analysts say.
Meanwhile, gold traders believe global central bankers may abate their selling of gold reserves, which surged in the 1990s and helped depress the metal's price.
Holmes said gold could hit $400 an ounce within the next 18 months. And because gold-mining stocks trade like options--typically leveraged 3 or 4 to 1 against the price of gold bullion--that could translate to a 75% to 100% gain for gold stocks from current levels, he said.
Still, investor skepticism abounds.
Gold fund inflows "are not what you might expect given the recent performance," said Bob Adler, head of AMG Data Services in Arcata, Calif. Twenty years of laggard performance could be a big reason for the tentative embrace, he said.
Some postings on Morningstar's site question the strategy of using gold to guard against inflation. Inflation-protected Treasury securities "have displaced precious metals as an inflation hedge," one said.
A posting Tuesday on Yahoo's message board for Newmont Mining suggested--perhaps lightheartedly--that the rally may have run its course: "CNBC is going to cover gold stocks? If that's not a sign to sell, I don't know what is. Run! Run away! Closing my long positions now!"