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. Last Updated: 07/27/2016

Speculative Investments Bring Gold Back Into Fashion

NEW YORK -- Remember gold?

The metal was selling for more than $800 an ounce in the inflation-wracked 1970s, when social climbers tried to impress people by saying how many South African Krugerrands they owned.

Gold's price plummeted along with the inflation rate in the 1980s, but now it's making a comeback. The price of an ounce of gold hit a 5 1/2-year high of $414.70 on Friday at the New York Mercantile Exchange's Comex division. Tuesday the price was $412, down $1 from Monday's close but up more than 9 percent from a year ago.

Gold stocks and mutual funds have done even better. Gold-oriented mutual funds were up an average of 21.7 percent in the first five weeks of the year, according to Lipper Analytical Services. The average equity fund, by contrast, was up less than 5 percent.

This surge occurred at a time when inflation is generally perceived to be no threat, removing the traditional motivation for buying gold: as a hedge against declines in the value of financial assets.

So what's going on?

"Gold has become a speculative investment," said Joel Isaacson, a Manhattan financial planner. "Investors are focusing on [gold] supply and demand."

Gold investors can encounter sickening downdrafts. Recent one-day plunges include a $35-an-ounce drop in 1991, when the Persian Gulf ground war began, and a $22-an-ounce drop in 1993, partially blamed on billionaire investor George Soros. And for the past 15 years, gold has greatly underperformed stocks and other investments.

Isaacson and other experts say investors are better off buying mining stocks than gold itself, because the stocks can be pushed up not only by increases in the gold price, but by growth in company profits.

"Some of these stocks also pay dividends, while gold is a dead instrument" that generates no income, Isaacson said.

Assets of gold-oriented mutual funds had fallen to $4.7 billion as of Dec. 31 from $5.6 billion a year earlier, according to Lipper. But there are indications that investors are now jumping in.

At Lexington Management Corp. in Saddle Brook, New Jersey, Robert Radsch said assets have been rising in the three Lexington precious-metals funds he manages, particularly Strategic Investments, which has a heavy exposure to South African mining stocks.

While inflation is not a problem in the United States, Radsch said, some investors elsewhere are concerned about their currencies. But rising gold prices "are more of a commodities story," he said, adding that the demand for gold jewelry -- especially in Asia -- has exceeded production.