Gold Funds Dulled by August Drop 1993, Bloomberg Business News

After five months of brilliance, gold mutual funds are losing their luster. Values are declining. Redemptions are rising.

This is major news in the investment business, which has always been perplexed by gold. The most precious of metals dropped to $366.30 an ounce Thursday on the Commodity Exchange in New York, a noteworthy decline considering that gold stood at its 52-week high of $411.30 as recently as July 30.

What had driven up gold's price were the fears - or hopes, on the part of gold mavens - that inflation was on the march once again. But that five-month buildup appears to have fizzled.

Now, though gold's price makes it tantalizing once again, gold bugs must decide whether they should prospect for gold mines or sidestep land mines. The provocative issue has fund managers split in a lively "point-counterpoint" debate.

"The demand for gold dropped in August, primarily in the Middle East and the Far East," said Ted Arnold, an industry analyst with Merrill Lynch & Co. "I wouldn't recommend buying shares of gold mutual funds right now."

On the contrary, said Malcolm MacNaught of Fidelity Investments. He manages $759 million in a gold fund and a precious-metals fund. "Twelve months from now, gold will be over $400 an ounce because of increasing demand from the jewelry trade and a drop in supply in South Africa," MacNaught said.

Gold's rise to its $411.30 high on July 30 - a 24 percent increase over March's low of $332.50 - was especially significant because gold hadn't broken through the $400 threshold in three years.

The surge was a bonanza to gold funds, which wooed plenty of small investors. The Investment Company Institute, the fund industry's largest trade group, said $1.5 billion had flowed into precious metals funds, which are dominated by gold. That's more than three times the $488 million that had been amassed in the comparable seven-month 1992 period.

But gold started to weaken, shedding a few dollars.