TIME TO BUY GOLD? 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."
BEYOND GOLD
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.
BOTTOM LINE: AVOID