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William Shakespeare wrote in The Merchant of Venice that "all that glitters is not gold," but try telling that to investors. With Valentine's Day on the horizon and war looming in the background, luster has returned to gold in big way.
Gold has always been a financial safe haven in times of strife and unrest, and many investors in recent years have turned to gold as an alternative investment while the brutal bear market eroded the value of stocks. Over the past two years, the price of gold has risen more than 40 percent.
How did gold become so hot?
Keep in mind that gold is a commodity that is ruled by supply and demand. Supply comes from the mining of the precious metal, and it's an expensive extraction process. If the price of gold is too low to warrant mining, companies won't mine the precious metal and the supply of gold will fall.
Demand comes from several sources. Gold, one of the earliest forms of money, is an age-old hedge against inflation, going back to the days of the Bretton Woods agreement when units of currency were convertible to fixed amounts of gold. Many global central banks had stashes of gold to back up their currency as it exhibited the desirable properties that early economists recognized: durable; portable; divisible; and easily standardized. The gold standard was thought to be anti-inflationary and one that promoted economic growth.
Remember "demand notes," where the holder of U.S. currency could "demand" payment in gold? Up until 1971, an ounce of gold was fixed at $35. But Great Society Programs combined with the Vietnam War in the 1960s led to a crisis of confidence" that led other countries' central banks to demand gold for their "inflated" dollars. President Richard Nixon responded by decoupling the dollar from gold in August 1971. Since then, the United States and the rest of the world have allowed their currencies to float freely without any link to gold, and gold has found its own trading range. During the "stagflation" of the late 1970s and early 1980s, the combination of stagnant growth and rampant inflation caused the price of gold to soar to $850 per ounce.
From 1990 to 2000 -- the largest period of economic expansion ever -- gold fell by the wayside, falling to $260 per ounce. But as the stock market tanked, gold glittered again, and is now at about $370 an ounce. Even with that recent history, gold has been an inferior investment to large cap stocks: According to Redwood/ Technimentals Research Group out of New York, the S&P 500 has returned nearly 693 percent since 1980, while gold has lost 27.9 percent.
So how do you invest in gold?
Gold coins were popular for awhile. Remember the South African Krugerrand? It's joined now by the American Gold Eagle, Canadian Gold Maple Leaf, the Australian Gold Nugget (also called Kangaroos) and the Vienna Gold Philharmonic. As of Feb. 11, commission charges push the cost per ounce for these coins to $378.25, about $14 over the current price quoted for gold.
Bullions are pure gold, but difficult to carry around, and if you chose to put them in a vault, storage charges are incurred.
Gold manufacturers and producers (mining companies) dominate the gold trading market. Individual investors account for about 15 percent of the gold market. The price of gold is "fixed" or determined twice daily by selected gold specialists and bank officials in London, Paris and Zurich, according to prevailing supply and demand forces.
You can trade gold futures and options in London, Zurich, Hong Kong, Singapore and New York (at the COMEX division of the New York Mercantile Exchange), as well as the Chicago Board of Trade, but futures contracts are generally held for a short period of time and may be subject to ordinary income tax treatment as opposed to capital gains tax treatment.
You could also take a look at publicly traded mining companies such as Newmont Mining (Ticker: NEM), Barrick Gold (ABX), Placer Dome (PDG) and Ashanti Goldfields (ASL), but keep in mind that prices of gold mining shares are more volatile than the price of gold.
Another way to invest in gold is to look at gold mutual funds that invest in shares of mining companies as well as coins and bullion. Gold mutual funds have outshined many other investments as the stock market declined. According to Morningstar, precious metals funds (which invest mainly in gold) averaged a 63 percent rate of return in 2002, compared to a drop of 19 percent in large equity funds. However, keep in mind the danger of chasing past performance.
Gold has rallied quite a bit, but could continue to rally well beyond a war with Iraq. But many caution that you should never invest out of fear. There are other factors that should figure into your investment strategy.
To get an expert's opinion on the gold market, make sure to tune into this week's broadcast, when our Investor Spotlight focuses on Jean-Marie Eveillard, portfolio manager of First Eagle SoGen Funds, whose First Eagle Gold fund, rated 5 star by Morningstar, has returned 33 percent to investors over that past 3 years.
And if you haven't bought your sweetie a Valentine's gift, this might qualify. It's a perfect gift that appreciates while being appreciated.
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