When Times Are Tough, Investments in Precious Metals Can Be Pure Gold
Back in the 1600s, an ounce of gold was worth enough to buy a fine men’s suit of clothes. And if you cashed in an ounce of gold today, you would have roughly enough money to dress up like an investment banker.
The point is this: Styles change, generations come and go, but over the years gold hangs on to its purchasing power.
That partly explains why some financial advisers are encouraging their clients these days to put more money into gold and, to a lesser extent, platinum and silver. The lasting value of precious metals makes them excellent long-term hedges against political upheaval or economic disruption. So with investors currently worried about inflation heating up and the possibility of another stock market crash, precious metals are gaining allure.
“You want to hold gold not out of the motivation of greed but out of the motivation of fear,” says Jeffrey Nichols, president of American Precious Metals Advisors in New York. “It’s an insurance premium you pay for protection.
“When stocks and bonds go down, more often than not gold goes up,” Nichols adds. “The reverse also is true. The point isn’t to make a killing on gold--it’s to even out the volatility in your portfolio.”
Not everyone is sold on gold, however. Even though precious metals’ values hold up nicely over the long run, prices can swing dramatically over a matter of months, making such investments too nerve-wracking for some people. During times of low inflation--the past five years, for example--stocks and bonds can do far better than gold.
Tarnished Image
Some investors are put off by, among other things, the transaction costs, storage expenses and lack of dividends with precious metals investments. And experts differ sharply on the short-term outlook for gold, which finished Wednesday at $449.50 an ounce, off $2.30, on New York’s Commodity Exchange.
Precious metals investing also has been beset with fraud. The chief problem lately is with promoters selling interests in gold mines that are nearly worthless or nonexistent. “We’ve probably got 30 to 40 gold mining scams going on now in the Western United States,” says G. William McDonald, enforcement chief for the California Department of Corporations.
Still, the image of precious metals has come a long way in the United States. In the 19th Century, cartoonists lampooned robber barons by depicting them with stacks of gold.
Inflation Expected
“It used to be the symbol of everything antisocial, unhumanistic and evil,” says Ray Browne, who directs the Center for the Study of Popular Culture at Bowling Green State University.
The idea of putting money into precious metals also was tarnished by a federal ban on buying gold for investment purposes from 1933 to 1975. In little more than five years after the practice was legalized, prices shot up from about $160 to a peak of $850 an ounce amid high inflation, the oil crisis and the hostage episode in Iran. But the frenzy was inspired at least slightly by alarmists, known as “gold bugs,” who urged people to stock up on gold, guns and food to prepare for a possible international disaster.
Today, level-headed financial planners commonly recommend that investors keep anywhere from 5% to 10% of their assets in these investments.
“Gold has moved into the mainstream,” says Joseph C. Battaglia, chairman of Gold & Silver Financial Group, a precious metals and rare coins firm in Encino.
That trend was helped along by the introduction of the Canadian Maple Leaf in 1979 and the American Eagle in 1986. When the U.S. and Canadian governments got into the business of minting gold coins, gold investments became legitimate in the eyes of many people. Gold also became more available in small increments--the coins weigh as little as one-10th of an ounce.
Silver and even wildly volatile platinum have earned respectability, too, but most experts say that gold should make up at least half of an investor’s precious metals portfolio. Unlike gold, silver and platinum are used primarily as industrial materials, so their prices drop even more sharply during most recessions.
Financial experts who are bullish on gold largely base their outlook on the prospect for renewed inflation and a weaker dollar. They also cite rising demand, particularly from investors and central banks in East Asia. Bruce L. Kaplan, senior vice president with A-Mark Precious Metals, a large wholesaler in Santa Monica, says gold prices could climb to $600 an ounce within 12 months.
But a current argument against speculative gold investing is that the market will be swamped by increased mining in North America and Australia and surging sales by China and the Soviet Union. For those reasons, WEFA Group, an economic consulting firm in Bala-Cynwyd, Pa., recently co-authored a report predicting that gold prices will sink to $300 to $350 an ounce in the early 1990s.
The report also found that in 13 of the past 16 years, stocks and bonds were better investments than gold. But when gold “is better, it’s hugely better,” concedes Robin G. Adams, president of the consulting firm of Resource Strategies, which participated in the study.
“You have the possibility of making a killing one year in five but losing all of the other years.”
According to the Salomon Bros. brokerage firm, investments in gold over the 10 years ended June 1 produced a compounded return of 9.6% annually--surpassing the consumer price index’s 6.1% annual rate but behind stocks, at 13.3%, and bonds, at 10.3%. Over the past five years, gold trailed the CPI as well as stocks and bonds.
But in the past 12 months, gold finished in the middle of the pack. It advanced 3.1%, same as the CPI, while stocks were down 4.9% and bonds were up 6.2%.
‘Investment Insurance’
Mainly because of their unpredictability, precious metals are a bad bet for some investors. Lewis M. Wallensky, a Century City financial planner, says such investments might be wrong for, say, someone nearing retirement who has only $10,000 to invest.
Wallensky explains that gold primarily should be considered investment insurance, not something to increase your wealth. Consequently, he says, people who want to build their assets steadily and who have relatively little to lose might be better off with conservative stocks and bonds or other investments.
Even for investors who have good reasons for investing in precious metals, financial advisers offer words of caution. For one thing, if you buy gold or another precious metal, either go to a reputable dealer or make sure you can get your hands on it. That’s the best way to make sure you really are getting something for your money.
And be wary of promoters who offer interests in gold mines. These deals sound enticing because they promise gold for perhaps half the market price; the explanation usually is something along the lines that the mine operator has a secret process or special technique for extracting the metal. All too often, it’s actually a case of a promoter with a special technique for extracting money from your pocketbook.
“If something sounds too good to be true in precious metals, it is,” Kaplan says.
