Gold bugs fly high as value soars

It’s a hedge against a lot of bad things — but a risky one

John W. Schoen Senior producer • Profile • E-mail

Were you smart enough to sell your tech stocks in March 2000? Or your house in July 2006? If so, you should seriously consider buying some gold. A lot of it.

But if — like most people — you don't have the gift for knowing when a financial bubble is about to burst, you may want to take a deep breath before calling the 800-number on that infomercial, selling your jewelry at your friend's "gold party" or converting 5 percent of your hard-earned savings into shiny Maple Leaf gold coins.

It certainly is a great time to be a "gold bug," as fans of the shiny metal are known. Gold typically thrives in times of crisis and uncertainty, and that is one reason the metal's price has jumped 15 percent since February and nearly doubled since late 2007.

The latest surge has been driven by worries about the European debt crisis and its impact on the euro. The “safe haven” metal has also become popular with investors and savers who are worried about swollen U.S. deficits, some of whom may be influenced by conservative talk-show hosts including paid gold pitchman Glenn Beck.

While gold benefits from its status as a "hard" asset — unlike paper currency or securities — as an investment it can be extremely volatile.

“Gold is not something that we would classify as safe investment," said Michael Crook, investment strategist at Barclays’ Wealth. "It’s quite volatile. We see periods of significant price appreciation and significant price declines relatively frequently.”

Some of the biggest price drops have followed the biggest financial crises, including the Great Inflation of the 1970s.

From a low in August 1976, gold prices rose more than eightfold, peaking at $850 in January 1980. From there, the price crashed below $500 within a few months and went into a 20-year slide, bottoming at $263 in January 2001.

If you’d bought at the height of the 1980 gold bubble and held on for two decades you would have lost 85 percent of your investment after adjusting inflation.

But what happens if the world financial system collapses completely? Won’t you feel safer with a little gold buried in a can in the backyard?

Some gold investors say owning the precious metal gives them peace of mind. Still, if you're worried that your community is headed for a period of social unrest worthy of a Cormac McCarthy novel, you might be better off investing in firearms.

“I don't think anyone is going to go into a store and exchange an American Eagle worth $1,300 for a bottle of water,” Tom Pawlicki, a gold analyst at MF Global.

If you do decide to invest in gold, there are a number of ways to buy or sell it. One is to own the gold itself — either as gold bars (bullion) or coins. So-called “physical” gold has some drawbacks. First, the surge in price has brought a flood of gold parties, infomercials, telemarketers and Internet come-ons that don't always translate to the best deals.

Last month, Rep. Anthony Weiner, D-N.Y., assailed metals dealer Goldline, a sponsor of Glenn Beck's radio program, for its "aggressive sales tactics."

Weiner said in a report that Goldline marks up the price of gold an average of 90 percent over melt value, and cited one case in which the price was 208 percent above the melt value.

Beck and other conservatives use “their shows to prey on the public's fears of inflation and socialist takeovers while actively promoting the purchase of gold coins as insurance against this purported government overreach," Weiner said.

If you do find a reputable dealer, you’ll have to decide whether you have it delivered to you (for a fee) or held in storage (another fee). Together with the dealer’s commission, expect to lose at least 5 percent of your investment up front.

“It’s like driving a new car off the lot,” said Michael Daly, a gold specialist at PFGBest Gold. “The minute you get it, it loses value.”

If you don’t want to own physical gold you can invest in “paper gold,” such as stock in gold mining companies that is easier to buy or sell than actual gold. But gold mining companies don't always trade in concert with gold prices.

That’s one reason gold investors turn to so-called exchange-traded funds or ETFs, which trade like stocks on an exchange. The most popular fund, State Street Global Advisors’ SPDR Gold Shares, has attracted $50 billion of investment since it was launched in 2004. That’s up from $35 billion a year ago.

Unlike ETFs for other commodities, SPDR Gold Shares are backed by physical gold. That demand for physical gold from ETF investors has helped support the recent price run-up. But it may also set the stage for a bigger price drop.

"As the market realizes that the events that it's working though are not the end game, the selling from the ETFs creates source of downward momentum that we actually haven’t seen before,” said Crook. "Investment demand has become a much a larger source of demand than it used to be. So the question is that a true shift in preference or it is it a bubble? We’re wagering it’s the lat