All of a sudden, gold funds are back in favour. Everyone is talking about them - and they want a piece of the action. Gold once again is showing the shine it lost for the past few years. Boosted by the rather surprising joint announcement of 15 European central banks to restrict gold sales on September 25, gold prices have shot up by 20 per cent, from the yearly bottom of US$252.5 on August 25 to $325.5 on October 5. On Friday, in New York trade, it rose $2.20 to $316.40. The precious metal's rally has pushed some gold funds into the ranks of the third-quarter's top performers. Mercury's Gold and Mining Fund, one of the best performing funds in the category, returned 52.46 per cent for the first three quarters of this year. Five other gold funds are among the top 25 performers for the third quarter. Gold funds, together with Japan funds, 'the two single worst investment arenas for almost a decade' are the star performers of the period. But are gold funds still a good investment now, like most are claiming for Japan funds? Or is it already too late to jump in? According to some in the funds industry, there are many reasons for optimism. Gold experts are predicating that the shortage of gold is going to continue until at least 2002, during which period the shortage will be 1,600 tonnes. Evy Hambro, fund manager of Mercury's Gold and Mining Fund, also mentioned that substantial short positions in the gold market was another important positive factor. It is estimated that the short positions built over years by gold producers and speculators in anticipation of further gold-price declines ranges from 3,000 to 5,000 tonnes of gold. It would take one or two years of supplies from new mines to cover the positions, Mr Hambro said. There are also signs of global economic recovery: the demand for gold seems to have recovered, especially from Asia, where gold is still regarded as a symbol of wealth and as having an almost mystical power of preserving value. But other observers are cautioning not to be blinded by gold's suddenly recaptured lustre. The bears point out that the 25 poorest-performing funds of the past five and 10 years, 15 are gold funds. According to Standard & Poor's Micropal, one of the recent stars, Sogenlux Fund Equity Gold Mines, lost 26.24 per cent of its value over a five-year period, and Schroder Gold fund lost more than half of its principal (-54.07 per cent) over 10 years. It was so bad that at Sogen, Gold Fund manager Jean-Marie Eveillard planned to give shareholders the option of liquidating the fund if the price of gold did not rise appreciably by the year's end. Looking ahead, most do not believe that the gold price will return to its good old days when it was trading above $400 an ounce. Gold does not usually fare well when inflation is under control - and many economists are predicting a deflationary environment. Mr Hambro said he believed that the gold price could move significantly higher, to the $350 level. 'But it is going to be a volatile ride,' he said. Sogen's Mr Eveillard agreed. 'Perhaps the price can go up to $350 an ounce, but no higher without [a correction being] triggered by something like inflation, poor performance by financial markets, or a financial crisis,' he said. There was price resistance on jewellery, he said, particularly in Asia. The steep price rise could drive buyers out of the market. Contrary to the perception of some, gold funds were not designed for speculative purposes. Traditionally, gold funds are for those who believe in investing gold for its 'safe haven' qualities, as a hedge against economic uncertainty. That is why one of the reasons for gold's recent strength is Y2K concerns. While gold's recent upsurge has many investors considering jumping on board, the prospect for significant appreciation for your investment looks slim. The lack of long-term positive returns, high volatility, no income and the presence of better alternatives suggest gold or gold funds simply will neither add much peace of mind or growth potential to your portfolio.