Investors Find Gold in Fashion
Gold is the answer to a riddle that might have been posed in the 1990s if anyone had cared enough to bother: Name an asset that is always in fashion, yet grossly unfashionable.
As an ornamentation, gold never has and probably never will go out of style with humankind. But as an investment, very little fared worse than the yellow metal in the final decade of the last century. Its price fell 29% in the 10 years ended in 1999, a period in which the Dow Jones industrial average returned 439%.
The new millennium, however, has been much kinder to gold. As an asset class, it is shining again. The price has risen 15% since Oct. 1 and is up 45% since mid-February 2001, to $369.90 an ounce in New York futures contract trading as of Friday. At midweek the metal hit a six-year high.
American Eagle gold coins, the most popular form of bullion with U.S. investors, are in hot demand at coin shops this year, according to dealers. They say the people who are buying have all sorts of reasons but short-term speculation isn’t at the top of the list. In other words, by the dealers’ reckoning, most average investors aren’t buying gold on a bet that it will double or triple soon.
“I see people looking for asset protection first,” said Robert Fazio, senior account representative at dealer Goldline International in Santa Monica.
With war looming, the federal budget deficit soaring, the dollar’s value falling overseas and the stock market on its way to a fourth straight losing year, Fazio believes that many gold buyers are recalling the financial advice usually attributed to Will Rogers: “I am not so much concerned with the return on capital as I am with the return of capital.”
It sounds logical enough, but there have been other times in the last two decades when gold buyers sought the metal for its historic role as a store of value. They found that it didn’t store value for very long, and that they would have been better off putting their money almost anywhere else.
Indeed, for the first time in human history, gold over the last century increasingly has been viewed as an anachronism -- the “barbarous relic” that economist John Maynard Keynes labeled it in 1923. It’s beautiful to look at, but it pays no dividends or interest, and so far clerks at Vons aren’t accepting it in exchange for your weekly groceries.
Even if gold’s image is improving with U.S. small investors, they are a minor factor in determining what happens with the metal’s price.
Gold’s stage is crowded with far more important players. For example, hedge funds -- those secretive, multibillion-dollar portfolios managed for the rich and powerful -- are getting much of the credit, or blame, for driving gold futures prices higher over the last few months.
Hedge funds never met a short-term market trend they couldn’t climb aboard with the intention of staying only as long as the trend is up.
Last week, there were signs that some short-term traders were tiring of the gold rally. February gold futures in New York peaked at $384 an ounce early Wednesday, and lost ground Thursday and Friday even as the Bush administration continued to threaten military force against not only Iraq but also against North Korea.
In terms of sheer volume of purchases of the metal itself, jewelers worldwide are by far the biggest source of demand for gold, according to the World Gold Council. And that demand is sensitive to rising prices, particularly in nations such as India.
In the first nine months of last year, as the price of gold in futures trading rose 16%, global jewelry demand for the metal fell 13.2% from the previous year, the council said. (Fourth-quarter data aren’t yet available.)
On the supply side, many of the world’s central banks have been selling off their gold reserves over the last decade in favor of interest-paying government bonds, and they may continue to do so, experts say.
“From a fundamental point of view, what matters most is what central banks do ... because they are such large holders” of gold, investment firm Bridgewater Associates in Wilton, Conn., said in a recent report.
What gold mining companies pull from the ground also affects supplies, of course. Last year mine production worldwide fell 2.3% from 2001, the first decline since 1995, according to Gold Fields Mineral Services Ltd., which tracks supplies.
With prices up, many mining companies have pulled back from “forward selling” future production as a hedge against market fluctuations, Gold Fields said in its annual report on gold trends in 2002. That should help to support prices in the first half of this year, the firm said.
By contrast, the small investor’s relatively modest power to move gold was evident in 1998 and 1999.
Those were the peak years for sales of American Eagle gold coins, reflecting many peoples’ fears of the supposed year 2000 computer bug, coin dealers say.
The U.S. Mint, which sells to a handful of major dealers that then resell coins to smaller dealers and retail investors, sold 1.8 million ounces of Eagle coins in 1998, then more than 2 million ounces in 1999. Those numbers were up dramatically from 275,000 ounces in 1996 and 771,250 in 1997.
Despite the coin demand, the price of gold in futures markets showed virtually no net change in 1998 or 1999, beginning that period at $289.90 an ounce and ending at $289.60.
Gold did surge in September 1999, but that was tied to an announcement by 15 European central banks that they would limit their sales of gold to 400 tons a year through 2004 -- a deal struck partly out of exasperation, as the metal’s price slid to near $250 an ounce, devaluing the banks’ official reserves.
After the Y2K bug proved to be a no-show, American Eagle coin sales dried up in 2000, and the metal’s price fell as well.
But last year, even as total coin sales by the Mint to dealers totaled 315,000 ounces, down from 325,000 in 2001, gold’s price soared.
January sales figures from the Mint back up coin dealers’ pronouncements that retail gold purchases are rocketing: The Mint said it sold 96,000 ounces of gold coinage last month, up tenfold from January 2002.
Ken Edwards, vice president at California Numismatics, an Inglewood-based dealer, estimated that more than half of the firm’s gold coin customers in recent months have been first-time buyers.
“These are people who are worried about the dollar, worried about the stock market, about real estate,” Edwards said.
The appeal of gold and other metals, he said, is that they “provide a feeling of security and independence,” such as from disastrous decisions that corporate executives or government officials might make.
But if the overwhelming fear is of war, and a conflict either doesn’t occur or is decided quickly in favor of the United States, many analysts believe gold could fall sharply, at least initially.
Stocks of gold mining companies already appear to be reflecting that concern. An index of 11 major gold miners has stalled out this year, after jumping 41% in 2002. The index, which includes such firms as Newmont Mining Co., Barrick Gold Corp. and Placer Dome Inc., is down 2.9% this year.
The average gold-stock mutual fund is up just 0.3% this year after a 63% advance in 2002, according to Morningstar Inc.
But to some gold bulls, the widespread doubts that the metal can sustain its rally of the last two years is comforting.
After a 20-year bear market, “My take is that gold still is very under-owned,” said John Hathaway, manager of the $225-million Tocqueville Gold Fund in New York. “Some people have been paying attention to the rally, but most aren’t,” he said. That leaves room for gold to surprise skeptics, he said.
A classic argument for gold is that it’s a hedge against rising inflation. But gold’s fans say the reverse may be more relevant today: The potential for gold to hold its value if deflation, rather than inflation, is the most dangerous risk ahead for investors.
Given the state of competing markets -- the continuing slide in the stock market and the dollar, for example, while yields on Treasury securities remain close to generational lows and real estate prices are at record highs -- it’s conceivable that gold is appealing to many investors by default: There isn’t much else they may feel comfortable buying.
As a small piece of a diversified portfolio, gold may in fact make perfect sense. It already has for the last two years.
In the long run, however, unless you’re a survivalist who is stocking up on shotguns and canned food for Armageddon, it isn’t really in anyone’s interest to hope that long-maligned gold has the last laugh.
Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to: www.latimes.com /petruno.
