But don't hide the bricks under your bed

The Canadian Press

Investors looking for a Midas touch amid analysts' Cassandra-like warnings of impending stock market gloom might consider gold.

It's a traditional favorite as a hedge against unexpected inflation and the cyclical stock market. After a record-setting surge this fall, stock-watchers fear the TSE 300 index and the Dow Jones industrial average may both be headed for a downturn.

Gold is hovering around $380 US an ounce, after a brief peak at $419 US in February.

While it's not advisable to stack gold bricks under the bed, investing in gold mining companies is a worthwhile strategy, the experts say.

"Some gold in a portfolio, or some direct exposure to gold, is a good idea," says Peter Brewster, editor of The Canadian Mutual Fund Adviser.

"Probably for no other reason than that gold has been so boring for so long."

Over the next couple of years, gold should shoot upwards, agrees Steven Kelman, a consultant in the metals fund industry.

As world economies expand, more people in China, India, Latin America and even the former Soviet Union will have something left for savings, Kelman said in an interview.

But political and economic uncertainty breed distrust of institutions like banks.

"That leaves tangibles such as gold the major alternative," Kelman said. "And the demand for gold, primarily in the form of high-carat `investment jewelry' will exceed supplies from mining.

"It is a serious investing route for people who have to bury their wealth in their backyard."

All that "burie" wealth should push up the price -- provided gold selloffs by the International Monetary Fund and central banks don't flood the market with the precious metal.

Conservative investors shouldn't have more than about 11 per cent of their portfolio in gold, since that's the percentage of the Toronto Stock Exchange made up of gold companies.

Risk-takers could consider more.

"The traditional view is you hold between five and ten per cent. I think it's an undervalued commodity at this point and it wouldn't upset me to see a higher level in a portfolio," says Kelman.

Brokers and financial planners agree that for the average investor, the way to buy gold is either through specialized mutual funds or individual stocks.

"If gold prices go up two or three per cent, gold equities tend to go up 20 per cent," says Dunnery Best of Richardson Greenshields.

Of course, if the price of gold bullion falls two or three per cent, gold stocks fall a lot more too.

So gold is a better bet for investors who can wait, say, 10 years or more, to maximize their returns.

Best recommends individual companies with longterm growth prospects, like Eldorado Gold, Goldcorp Inc. of Toronto and TVX Mines.

"Over the longer haul they're going to build their production, and so the share prices have a certain amount of stability as a consequence," he says.

"If gold prices go up, then they'll tend to go up quite quickly as well."

It can take a great deal of research -- and luck -- to spot the next junior gold mining bonanza that turns into a Bre-X or Arequippa Resources, two small Western Canadian gold explorers that became stock market giants after gold discoveries in Indonesia and South America.

For most investors, it might be wiser to leave the prospecting to a good mutual fund.

"Most of the fund managers will have a core of large companies but they'll also have small ones, so they all from time to time are likely to get their share of winners," says Brewster.

Kelman and Brewster both like the same mutual fund companies that specialize in gold.

"To get the biggest bang for your buck, look at those gold mutual funds managed by individuals who have either the in-house expertise or who purchase the expertise to run around to the various areas of the world where exploration and development is taking place," Kelman advises.

"Look for geographical diversification."

Don't fix on a fund that invests solely in companies promising to follow Bre-X into Indonesia, for example.

Brewster and Kelman both like Dynamic Precious Metals because of its longterm record.

Over five years, the fund has averaged a 24.6-per-cent return for its investors. The return is 12.2 per cent over 10 years -- a whole lot better than the current rates on GICs, for example.