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By Elizabeth O'Brien - SmartMoney - The Wall Street Journal Magazine

After seeing other investments wiped out, Americans are giving gold a new look. Our take on the metal's prospects. Investors buying gold now are "looking for something that won't go to zero overnight."

DR. JAMES COMAZZI LIKES to think of himself as a good boss. Not only does the Sonora, Calif., cardiologist take his 13 employees on white-water rafting trips, but he also happily researches investment opportunities for them. Last fall Comazzi did something he thought would benefit his charges most over the long haul: He sold $200,000 worth of mutual funds in his office's pension plan and used the proceeds to buy gold coins. The gold, now stored at a bank, is like an insurance policy against tough times, with Comazzi figuring it will retain its value if there's rampant inflation. "At least we could divide it up and pay for food," he says. The seemingly unorthodox move was wildly popular with his employees. "He's watching his back and ours so we won't end up with nothing," says Rosalee Sellick, an ultrasound technician.

Gold, it seems, is the new black. Across the country ordinary Americans are buying up the metal as if they are hard-core "goldbugs," the longtime fans who believe gold is always the best investment. Spooked by the stock market crash and the deepening recession, investors bought a net $9.7 billion worth of gold last year through exchange-traded funds, according to the World Gold Council. Anxious buyers are also scooping gold coins as fast as the government can produce them. From September 2008 through January, the U.S. Mint sold 816,500 American Eagle gold coins more than triple the sales from the same period a year earlier and is now rationing some types of coins until it can catch up with booming demand. Behind this new gold rush: fear.

Gold dealers say demand skyrocketed immediately after the bankruptcy of BROKERAGE giant Lehman Brothers in mid-September. "Investors are scared," says David Beahm, vice president for economic research at Blanchard & Co., a large New Orleans-based coin dealer.

"They're looking for something that won't go to zero overnight."
Gold is often thought of as the currency of last resort, the one thing that retains its value when stocks, currencies and everything else are falling apart. But while the precious metal isn't about to go to zero, it has a remarkably unreliable history. Yes, gold has more than tripled its value since 1999, trouncing the Standard & Poor's 500 stock index. But gold's long-term track record as an investment has been much shakier inconsistent at best and a huge money loser at worst. And in a puzzling twist, when stocks and the financial system were falling apart this past fall, gold prices fell hard, more than 30 percent from March through October. Whether gold, which recently hit $ 1,000 an ounce, will resume its decade-long climb is a multibillion-dollar question now that individuals are selling stocks, bonds and even houses to stock up on the precious metal.

THE FASCINATION with gold as a currency certainly isn't new. The indestructible yellow metal has been used in coins since around 550 B.C. The United States has used paper money since the country was founded, but until 1933 savers could still bring U.S. paper money to the bank and exchange it for gold. However, gold has taken a backseat to paper currency since 1971, when President Nixon stopped pegging the value of the U.S. dollar to a fixed amount of gold. Gold buying surged around 1980, when the metal price soared as people sought something that would retain value during a period of rampant inflation. But when inflation waned, gold began a two-decade-long price decline. Gold dealers recall a spate of Year 2000-related buying in 1999, although demand soon fizzled when the world didn't plunge into chaos when the calendar changed. Now gold investing has surged again, spurred by the ongoing financial crisis, both buyers and dealers say. The market meltdown brought in new buyers like Wendi Friesen, a clinical hypnotist who helps people stop smoking. In October she took the proceeds from the sale of her house in Sacramento, along with money from her 401 (k) and cash from her bank, and bought 300 U.S.-minted gold coins. An armed delivery man met Friesen at her bank and escorted her and the 18-pound box filled with the coins to the vault. New buyers now make up about half the customers at online bullion dealer Goldline International, says the firm's CEO, Mark Albarian, up from only 30 percent before September. The dire economy also has made people who already own gold buy even more. One gentleman, who, as part of his Mormon faith, keeps a supply of goods in case of emergency, recently added more gold coins and bullion. The gold, along with a year's supply of dried and canned food, sits in the basement of his Appleton, Wis., house.

Professional money managers also have turned to gold in increasing numbers. Steven Roge, comanager of the Roge Partners fund, bought gold through an ETF in November for the first time, seeking a hedge against inflation. Gold is viewed as good insurance because it should, in theory, retain its value even if inflation eats away the purchasing power of the dollar. Roge thinks inflation could rise to 8 percent a year in three to five years, as the government spends hundreds of billions of dollars of borrowed money to jump-start the economy. (Inflation is now running at an annual rate of about 2 percent.) Gold gives some investors comfort in these times because it's not an IOU. Unlike bonds and more esoteric instruments like credit default swaps, gold doesn't depend on someone else's financial health.

However, it's the mom-and-pop investors, not the pros, who are causing problems for the U.S. Mint. The Mint has sold so many gold coins that it keeps running out of gold blanks the metal discs that the Mint strikes with an eagle, buffalo or other image to turn it into a legal coin. One of the companies that makes the blanks for the Mint, Sunshine Minting, has more than doubled its gold production capacity in Coeur d'Alene, Idaho, and hired 15 new employees to handle the extra gold-related work, says Tom Power, the company's president. Even so, he admits, "we're way, way behind on trying to meet physical demand." The shortage has forced the Mint to ration certain types of gold coins, including the popular 1 -ounce American Eagle. It's only the second time the Mint has used rationing; it curtailed sales during the Y2K buying binge.

Delays at the Mint have made it tougher for both suppliers and retail customers to get the gold they want. Wholesaler Michael Kramer had been used to an armored car pulling up outside his New York City vault, dropping off bullion and coins as often as three times a week. Now, he says, he gets only one delivery a week. At U.S. Coins in Houston, customers have had to wait nearly two weeks for the delivery of their gold, compared with less than a week before demand spiked last fall, says assistant manager Nick Koutsodontis. Even as they wait longer for the metal, gold buyers are paying more for it. In normal times many dealers charge a 3 to 5 percent markup over the spot price of gold for a new 1-ounce American Eagle coin. Now the markup is closer to 8 percent, dealers say. Markups can soar much higher at the Home Shopping Network, which in January was offering a set of four 2006 U.S. gold Eagle coins for $5,000, about 64 percent more than the $1,800 coin dealer Blanchard would charge for the same set, Beahm says. (A Home Shopping Network spokesperson says the company does not comment on its product margins.)

But is gold really worth all the fuss? Last fall, when economic fears mounted and the stock market tanked just the conditions that might ordinarily cause a run-up in gold the spot price of gold inexplicably dipped. Gold hit a closing high of $1,003 an ounce in March 2008 on the collapse of Bear Stearns and inflation concerns, and fell to as low as $682 in October, even as global demand for gold bars was up 69 percent over the third quarter of 2007. Theories abound regarding what happened. Some say the massive deleveraging process the unwinding of financial positions by hedge funds and banks artificially pushed down the price of gold and other assets. Indeed, hedge funds were forced to sell high-quality assets, including gold, to meet margin calls and investor redemptions.

Some goldbugs say the U.S. government tried to suppress gold prices as policy makers struggled to contain the downturn. Gold prices are seen as a barometer of U.S. economic health, so the government quietly injected some of its gold reserves into the market to keep prices low and stave off the impression of an escalating crisis, says Bill Murphy, who runs Le Metropole Cafe, a Web site that caters to goldbugs. The U.S. Department of the Treasury declined to comment on the goldbugs' theory.

As long as the economy stays weak, some analysts expect gold to retain its luster. Inflation could return as the economy absorbs all the dollars injected into it by the U.S. government, potentially making gold a good'hedge. Some professional investors are using gold as a placeholder because they don't find any of the major currencies attractive, says Robert C. Doll, global chief investment officer of equities for BlackRock, an asset management firm. For his part, Kramer doesn't care about gold's actual price. He makes money off the spread, or the difference between what the Mint charges him and what he charges his customers. The Mint never increases the markup it charges Kramer over the spot price of gold, but Kramer has been able to increase his price to dealers. "Everyone's making more money," Kramer says. "Business is fun when it's like this."


Unlike gold, other precious metals are valued because they have a wide array of industrial applications. Their prices often depend on the strength of the industry that uses them or the global economy in general. Here are three of the most common.

SILVER: It's found in batteries and other devices, but most silver winds up in jewelry or flatware. Silver's price has fallen from $21 an ounce to $1 2 because there's a surplus of the metal and demand is falling thanks to the weakened economy. That makes silver the precious metal with the worst outlook over the next few years, says Joel Crane, commodities analyst at Deutsche Bank. One bright spot: Silver's price often rises when gold moves higher. BOTTOM LINE: HOLD

PLATINUM: When platinum was near $2,200 an ounce in March 2008, there was a rash of thefts of catalytic converters from cars. Each converter contains several grams of the metal. Unfortunately for thieves (and platinum investors), the metal's price has since collapsed 60 percent, to $900 an ounce, and analysts don't expect a rebound unless things improve dramatically for the auto industry, says Jon Nadler, senior analyst for metals dealer Kitco. BOTTOM LINE: AVOID

PALLADIUM: This metal is often called platinum's cheaper cousin since it's used in many of the same places. Its price peaked in spring 2008 at nearly $600 an ounce. It ended the year at $200. Palladium's price also is dependant on the health of the auto industry, Nadler says.


Time to buy Gold

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