Economy boosts gold’s appeal, but is metal a practical investment? February 28, 2009 – Posted in: Press

By MEGAN V. WINSLOW
Published: February 28, 2009
Palm Beach Daily News

With stocks floundering and the future of the U.S. banking system uncertain, investors are increasingly looking to good, old gold as a security net.

In the past few weeks, area jewelry businesses such as Circa and House of Kahn Estate Jewelers and local financial advisers at companies such as Wachovia and Northern Trust have noted a steady influx of customers inquiring about gold values.

On Feb. 20, investment demand helped drive the price of gold to an 11- month high of more than $1,000 an ounce, but by early last week it began to slide, closing at $942.50 an ounce on the New York Mercantile Exchange Friday.

Only last month, gold was closing at about $885 an ounce, and this recent hike to $1,000 has caught investors’ attention, said Mark Rush, University of Florida economics professor.

“People are concerned about what’s going on in the financial markets, and they’re looking for a place to put some money,” Rush said. “They’re concerned: ‘Gee, I don’t want to go into the stock market because look what’s been going on there. I don’t know if I want to go into banks because the banking system looks weak and it might get nationalized and what’s that going to do for my money? And so gold’s maybe a place I could put it in.’

“I think some people are thinking like that. I’m not saying that’s the best thinking, but I think that’s what some people are thinking.”

Gold’s popularity coincides with the passage of President Barack Obama’s $787 billion stimulus plan, which many foresee as a cause for future inflation. Among them is Tobina Kahn, who predicts gold could climb to $2,000 an ounce — even $5,000 an ounce — in the years to come.

As vice president of House of Kahn Estate Jewelers, Kahn has a vested interest in the rising price of gold, and she keeps a close eye on the commodities market each day.

Kahn said the metal’s resurgence has attracted as many as three to four customers a day who pointedly eye the wares in the Palm Beach shop as much more than shiny baubles.

“The days are over when estate jewels are considered frivolous,” Kahn said. “They are not considered frivolous anymore. These are going to be considered huge investments.”

Tracy Sherman, buying director for Circa, has noticed more clients bringing in non-name-brand items in which the intrinsic value is in the weight of the gold.

Such pieces, such as gold chains, are easier to part with when times get tough.

“When gold is this high, it’s absolutely a time to sell,” Sherman said.

But financial experts are a bit more cautious when advising investors about buying gold, whether in the form of stocks, exchange-traded funds or physical commodities such as gold bars.

While investing in gold can serve as a hedge against existing portfolio exposures such as inflation and the declining U.S. dollar, it typically offers limited prospects for earnings growth, said Lydian Bank &Trust CEO James Meany.

“Gold provides diversification benefits to equity and fixed-income portfolios as it has historically demonstrated a low long-term return correlation with other portfolio assets,” Meany wrote in an e-mail.

A look at the futures market also gives Sandra Fleming, Wilmington Trust Florida’s president and director, reason to caution against expecting too much return from gold.

“It’s only pricing in a 10 percent return for gold for the next five years, which is only 2 percent per year,” Fleming said. “So the market as a whole is saying, ‘This isn’t going to do much for you.’ ”

Michael Rose, an owner and trader at Fort Lauderdale independent futures brokerage firm Angus Jackson, anticipates that the “gold bugs” feeding frenzy is slowly dying down.

Historically, when gold hits $1,000 an ounce, investors cash out their profits and the price falls back without reaching the same $1,000 benchmark for a while, he said.

“If you think of the markets as a seesaw, there’s usually an ebb and a flow with a buyer and a seller,” Rose said. “Everybody’s kind of weighed on the one side of this market. Everybody’s trying to buy it, and to me, it’s a very crowded trade.

“I’m not saying it can’t go to $1,200. … I just think that in this environment, it’s nearly impossible.”

Instead of the “next big bubble,” many financial experts consider the gold movement a natural and recurring progression that takes place when market-watchers become nervous about other asset classes.

During the economic slump of the 1980s, investors gobbled up gold in a similar fashion, Rush said.

“The inflation rate was really high,” he said. “People were concerned. Well, the sky was falling again. Oil was skyrocketing up to $40 a barrel, and the U.S. was facing imminent financial collapse. And you can tell my tongue is very much in my cheek when I say that.”

Part of the attraction to gold is the opportunity to possess an investment that can actually be seen and touched.

Fleming remembers how one client, just before the year 2000, called and insisted on buying gold. So Fleming began describing the trouble with testing it and paying the cost to store it.

“He said, ‘No, I want to take possession of it,’ ” Fleming said. “He ended up, I believe, putting it in his curtains, for God’s sake — in the hem. It keeps the curtains down straight because of the weight.”

More recently, some Palm Beach clients have asked Wilmington Trust financial advisers to review the contents of their safety deposit boxes to determine how much the gold is worth in case they need to sell.

Having gold on hand in the form of coins or bars can be beneficial if an investor has the room and wants easy access, but buying gold jewelry as an investment doesn’t make much sense because it’s difficult to acquire enough to make much of a difference, Fleming said. Plus, the value of a jewelry piece is derived from much more than its weight in gold.

For investors intent on buying gold in a physical form, Rush recommends taking actual delivery of the bars or coins and storing them in a safety deposit box. He warns that some scam businesses claim to hold commodities for clients but don’t do anything of the sort.

To Rose, a safer bet than gold is investing in certificates of deposits or municipal bonds because they earn interest without exposing their owners to too much risk.

And there’s always the currently counter-intuitive route of returning to the stock market.

“I think people need to take a hard look at what they’re trying to accomplish and whether gold’s really going to do it for them,” Fleming said. “I think people in general tend to make easy decisions like, ‘Oh, it’s moving up, let’s buy it,’ as opposed to taking a step back and looking more objectively at the economy and saying, ‘How much farther is this market going to go down? Maybe I should just buy a couple of good quality stocks as opposed to gold, and I’ll make more.’ “