Gold’s not like oil or steel — it can’t run cars or heat homes, and it doesn’t build bridges. Unless you’re a jewelry maker, the high price of gold probably won’t cramp your style.
Still, the average person should take note of the surge in gold prices over the past few months. It shows that the precious metal remains a popular, accessible and legitimate investment vehicle, whether it’s in the form of gold coins, funds or stocks.
But investor beware — gold is apt to make some big price swings. On Monday, futures prices tumbled about 4 percent.
Gold has been rising for months, climbing as high as $732 an ounce last week, up from about $300 five years ago. While that’s still far from futures’ all-time high of $875, reached in January 1980, the advance has nonetheless been impressive.
Some market watchers expect gold to resume its march higher, and perhaps surpass $1,000 an ounce, since the metal isn’t anywhere near its record when adjusted for inflation — about $2,100 an ounce. But others say the peak could be near, and that going into gold now is risky.
“It’s a dangerous market beyond belief, because the fundamentals mean nothing. You don’t know what’s going to happen,” said Leonard Kaplan, president of Prospector Asset Management, noting that $700-an-ounce gold cannot be rationally explained when production costs are just $250 or $350 per ounce, and when inflation is nowhere near the 15 percent to 20 percent rate that fed its surge a generation ago.
Like that advance, gold’s latest rise is the result of fear — people are now worried about the weakening U.S. dollar and inflation. What’s different this time is that the economy is much stronger than it was in 1979.
The 2006 gains also are due to the snowball effect of big funds investing in commodities. As more money goes into oil, platinum, silver, copper, zinc, and sugar, the more attractive they become.
Demand for gold has grown faster than supply over the past five years, according to a study by Fortis Bank and Virtual Metals. While some of the gains were due to jewelry consumption and fabrication — which accounts for about 70 percent of demand — a big chunk has come from investors’ growing appetite for gold.
In the late 1970s, investors were drawn to gold itself. Now there are other ways to invest, including the increasingly popular gold ETFs, or exchange traded funds. These funds follow the price of gold futures dollar-for-dollar.
The gold ETF launched in 2001 by State Street has seen volume increase from about 3 million trades a day in early December to nearly 17 million a day last week. The iShares Comex Gold Trust ETF launched last year saw volume rise from about 100,000 in December to around 450,000 now.
But ETFs are as risky as gold itself. Even those who are bullish on gold, like Peter Grandich, who publishes the metals and mining commentary The Grandich Letter, say prices are going to go lower before they go higher.
Another option is Wall Street, where investors have been buying into mining companies whose revenue tends to rise along with gold prices. These stocks have been rising steadily over the past 5 years along with futures prices: Newmont Mining Corp.’s stock more than doubled, Harmony Gold Mining Co.’s almost tripled, and Meridian Gold Corp.’s more than tripled.
Investors should be aware, Grandich said, that some of the factors that have sent gold higher, such as labor problems, high energy prices and fears of industry nationalization in big gold-producing countries, are also weighing on mining companies’ bottom lines.
Physical gold remains an option. The U.S. Mint, which has a list of authorized dealers on its Web site, says they’ve seen increased interest in gold coins. Sales between October 2005 and April 2006 were 15.6 percent higher than in the same period a year earlier. It’s not, however, the most practical vehicle for most people — there are costs to store and insure gold bullion, so it’s really only a good idea for those with a lot of money to invest.
Investors interested in gold should approach it as just one part of a long-term strategy.
“To a certain extent, gold has a place in everybody’s portfolio as a diversification tool. But I’d be careful not to get swept up in the short-term,” said Michael Cuggino, president and portfolio manager of Permanent Portfolio Funds. He recommends mutual funds that invest in gold and other commodities.
Of course, most people don’t buy gold as an investment, but for its beauty as jewelry. Whether retailers pass price increases along to consumers depends on the merchants themselves — are they small or large, did they anticipate the price rise and mitigate it through hedging, and are they able to push the costs somewhere else along the supply chain, said analyst Marc Bettinger, who covers specialty retailers for security brokerage Stanford Group Co.
But retailers will have to be careful — jewelry is a discretionary item, one that consumers can easily forgo, and retailers risk losing business if they raise their own prices too much.