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NEW YORK -- That yellow metal is hot again – well, according to some investors anyway.
Gold has reached prices that haven’t been seen since Jimmy Carter was president. “Gold bugs,” or people very bullish on gold, are boasting the metal’s return to prominence as a lucrative investment opportunity. It's helped the cause that gold has almost tripled in price since its low in 1999.
But before someone starts melting down their grandmother’s jewelry, consider what’s driven gold to these prices.
Despite its religious, financial and historical attachments, investors and economists said that gold, like any other commodity, is just an investment – like lead, platinum or tin. And every investment has its ups and downs. In fact, other commodities have been even hotter.
“For hundreds of years, mankind has been attempting to turn lead into gold,” said commodities trader Jim Rogers. “However, for the last 30 years, you would have been better off trying to turn your gold into lead.”
Gold's rise is part of a broader commodities boom, investors said. Various commodities have gained since 2001: oil is pushing $100 a barrel, nickel soared from the mid $4,000s to a high earlier this year in the mid $50,000s. Agricultural commodities are in a similar situation -- wheat and corn all have hit record prices this year.
"You really shouldn't look at gold alone," Rogers said. "I am invested in gold, but I am also invested in other commodities. Gold's rise is part of a larger picture."
Gold has some industrial uses – namely in the jewelry industry. The other face of gold is what is traditionally thought of what’s known as a “value store” – a material that an investor can turn to when their faith in the market has diminished.
The thinking by “gold bugs” is that if the global capitalist system collapsed tomorrow, gold would be the only thing of value.
“Even though there have been large gains in the stock markets globally, gold is not driven by stocks; it’s driven by investor sentiment,” said Suki Cooper, a gold analyst with Barclays Capital in London. Cooper estimates that gold’s price will decline and stabilize to the mid-$600s by 2008.
Because of its attachment to things like political events and uncertainty in the markets, bad news usually pushes gold higher. The last time gold was at this level in 1980, the U.S. faced an oil embargo, the Iranian hostage crisis and double-digit inflation.
Now, because of events like the war in Iraq, 9/11, oil reaching record-high prices and geopolitical tension between the U.S. and countries like Iran and North Korea, gold is once again at similar prices. Gold has basically doubled in price since 2002, compared with the S&P 500, which has gained approximately 75% over the same period of time.
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Human fascination doesn’t equal profits all the time though, investors and economists said.
“If you had purchased an ounce of gold in 1979, you would probably still be holding onto that ounce of gold now,” said Dennis Hoffman, professor of economics at the Arizona State University’s W.P Carey School of Business.
Also, one of the biggest drivers of gold has not just been political tension but raw demand, investors said.
“Commodities are in a boom cycle right now, especially with the economic growth round the world, especially in places like India and China,” said Tom Winmill, who helps manage the $220 million Midas Fund, which invests in precious metals and their related industries. “There’s just not enough supply. It was easier to get a mine up and running in the 1980s. Today it will take a decade of environmental permitting before you can start.”
In contrast, if an investor had purchased a stock portfolio of the S&P 500 stocks in 1979, that investor would have made a 1,491 percent return on investment, Hoffman said.
Gold is often thought as an inflation hedge, because the U.S. dollar was once backed, dollar for dollar, by gold. The dollar is no longer backed by precious metals and is allowed to float. It’s because of this historic attachment that gold is often considered an inflation hedge – or something you can purchase when the purchasing power of your dollar begins to weaken.
“If you look over a long period of time, 60, 70, 100 years, gold has moved with the inflation rate,” Winmill said.
There's another factor driving gold, Cooper and Hoffman said. The U.S. dollar has lost 28% of its value against a basket of currencies since 2001. Because gold is priced in dollars, gold has increased in price to match the dollar’s decline.
However both investors and economists agreed that gold’s “hedge” against inflation is not what it used to be.
“I think, in some incidents, gold is no longer an effective hedge against inflation as it used to be,” Cooper said. “It’s more a gauge of government and investor sentiment.”
If someone is concerned about inflation, it might be better to invest in bonds or securities not backed by the U.S. dollar, Rogers said. Purchasing T-bills or Treasury Inflation Protected Securities, or TIPS, are one option.
“T-Bills are one way to hedge against inflation, but the problem with T-Bills is that their value will continue to lose value as the U.S. Dollar loses value,” Rogers said, who said he does own some gold. “I would suggest non-U.S. investments like the Euro or the Chinese Reminbi.”
Winmill said gold is often too volatile for individual investors than much people can stand.
“We’re no gold bugs here,” Winmill said. “If you’re going to invest in gold, we recommend no more than 20 percent of your portfolio for younger people and 10 percent for people closer to retirement age. Gold’s just another commodity.”
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