Market Watch : Some Say Times of Trouble Mean Time for Gold : Investments: Precious metals may be a good bet during severe recessions, but over the long haul they usually only mirror the inflation rate.
These are times for people like Howard Ruff. The stock market is in turmoil. The junk bond market has crashed. And people are uncertain about prospects for the economy, inflation and interest rates.
In the worst of all possible worlds for investors, the U.S. economy might fall into stagflation--a period of rising inflation and stagnant economic growth like that of the 1970s. And in the 1990s, with both the government and private industry weighed down with debt, stagflation could be even more difficult to handle.
Ruff, who through his financial newsletter “The Ruff Times” has been telling readers to prepare for financial disaster for the past 14 years, believes that it is time to stock up on gold.
He likes other precious metals such as silver and platinum, too, for several reasons. They are things you can hoard with your canned goods in times of economic Armageddon. And they are likely to stage a rally when the U.S. economy falls into a severe recession, which Ruff believes is just around the corner.
“I think we are moving into one of the most dangerous recessions we’ve faced, certainly since 1981 and 1982, which came within a gnat’s eyelash of a depression,” he said. “And we may be moving into a recession as bad as the one in 1928 and 1929. Will it turn into a depression? That depends.”
Gold is a prime investment for bad times because it retains its value through the ages. An ounce of gold would buy a fine suit of clothes in the time of King Henry VIII, and it would still buy a suit at Brooks Bros. today, said Bruce Kaplan, president of Kaplan & Co. in Santa Monica.
Over the long haul, gold’s performance generally only mirrors the inflation rate; it rarely exceeds it. And bullion or coins may carry storage and insurance costs, further trimming the total return. But when it looks as though inflation will wipe out gains in other investments, such as stocks, bonds and money market accounts, gold can be rewarding.
Most economists don’t agree with Ruff’s gloomy predictions, expecting that growth will simply slow in 1990, not come to a grinding halt.
Still, some industry experts believe that a number of factors have combined lately to make gold--and possibly other precious metals--a stellar investment.
Not all of the factors are bad news, either. Some industry experts believe that price appreciation in gold and platinum will be driven, at least in part, by rising demand. There are indications that both the Japanese and Soviet Bloc countries might be interested in storing up gold, and platinum prices could rise because more uses are being found for it in industry.
The argument for silver is simply that it’s cheap. An ounce now sells for less than $5.50, compared to 10 times that when it hit its peak in 1980. In addition, it tends to move in conjunction with gold. So, if gold stages a rally, silver is likely to follow.
In the past several months, gold and platinum have produced modest run-ups. Since Nov. 1, Gold prices have risen $45 an ounce to $417.95 Friday, for example, and platinum is up about $20 to $505. Silver, however, has risen only several pennies, closing Friday at $5.28, up 12 cents since Nov. 1. Gold stocks have risen even faster. One gold mutual fund, in fact, posted a near 65% annual rate of return in 1989.
Industry experts do not believe that the rally is over, either. Kaplan predicts that gold prices will hit $450 by year-end. And J. David Edwards, chief investment officer of United Services Advisors, believes that the metal will be worth $500 by then.
Not everyone agrees.
“If you are expecting dreadful inflation, gold is a tremendous thing to own,” said Abby Cohen, chief investment strategist for Drexel Burnham Lambert in New York. “But I don’t think we are on the brink of high inflation.”
And even if higher inflation is a distinct possibility, there may be better investment options, said David Wyss, chief financial economist with DRI/McGraw-Hill.
“Part of any investor’s portfolio should be in real assets, whether that is gold or land or Oriental rugs,” Wyss said. “I don’t like gold as an investment because there are very few times in history that it’s out-performed other investments.”
TRACKING GOLD AND SILVER
Weekly close for gold and silver, cash price per ounce (Handy & Harman).
GOLD Friday’s close: $417.95
SILVER Friday’s close: $5.28
