Gold provides glint of hope during economic downturn

As dark as the economic news has been lately, with jobless benefits claims rising and unemployment lingering, some investors see shine cutting through.

It's from gold.

Futures prices for the precious metal hit a seven-week high Thursday; Dow Jones Newswires said gold for December delivery, the most actively traded gold contract, rose $4 to settle at $1,235.40 an ounce on the New York Mercantile Exchange. On the spot market, gold prices were up $4.10 to $1,233.80 an ounce, a price gold and precious metals dealer Mark Scott will tell you is up about 30 percent from a year ago.

He's seen the rise right in his shop, Sahara Coins & Extraordinary Collectibles on West Sahara Avenue. On Jan. 4, the first shopping day of 2010, one-ounce American Eagle gold coins sold for $1,189. They cost $1,253 on Aug. 12, he said, and $1,305 on Thursday.

Scott said his shop buys and sells $300,000 to $400,000 in gold and other precious metals (silver, palladium and platinum) every day and has $2 million to $3 million on site and in stock. And he said he's seen a recent shift toward net gold buying and away from net gold selling.

Scott, 50, believes in gold so much as a long-term holding that 70 percent of his personal investing portfolio is in the metal. He says the metal holds its value and is tangible, which can assure investors in the long term and offer flexibility during disasters.

"Think of when (Hurricane) Katrina hit," he said. "You couldn't get to a bank because all of them were closed. And you couldn't ask your stockbroker to wire you $1,000. But if you had gold, you could go into a coin shop and get your $1,000."

Scott said he'd "bet his store" that gold spot prices will hit $1,300 an ounce by year's end.

Analysts suggest he may be spot-on. Richard Ross, a technical analyst with Auerbach Grayson in New York, said gold prices could challenge a mid-June intraday high of $1,265 by October. And analyst Jon Nadler of Kitco said some short-term charts see gold prices hitting $1,300 or $1,325.

Ross said gold has a lot to attract investors. Foreign nations, including China, have been folding more gold into their portfolios. So have giant hedge funds led by George Soros, David Einhorn and John Paulson. And, he said, gold prices have risen from around $250 an ounce in March 2001 to their current mark.

"If you've owned gold for the last decade, you've made money," he said.

Ross acknowledged that all investments are volatile and can fall as fast as they can rise, a lesson some local homeowners may have recently learned the hard way. But, he said, he's witnessed the dot-com, housing and financial bubbles, and this gold rise smells different. Excitement is hot, he said, but not overheated.

And, he said, gold prices have momentum.

"Objects in motion tend to stay in motion," he said. "And momentum can carry investments very far very fast."

John Dobra, an economics professor at the University of Nevada, Reno, said that gold prices from 2002 to 2008 had been closely tied to oil prices. Oil and gold rose in tandem, he said, and gold generally rose when the U.S. dollar fell. But the pattern unhinged in fall 2008 with the financial meltdown. Oil prices, which had hit $140 a barrel of that summer, slid to $70 a barrel. And the dollar rose. But gold kept climbing.

He acknowledged that gold can seem attractive to investors when the economy is uncertain. And with some observers foreseeing a double dip for the recession, that's now.

Fear would have to ease, he said, helped by recoveries in the stock market and the bond market, for investor attention to shift from the metal.

"Demand for gold is based on fear," Dobra said. "As long people fear the market, fear the government and fear the bogeyman, they're going to want gold."

Furthermore, Kitco's Nadler warns, partly given hedge-fund speculation in gold markets, he sees the downside risk that gold prices could fall, perhaps to the low $1,000s or high $900s per ounce, being twice as high as the chance that they could continue rising.

"This means these short-term investments are not for novices," Nadler said.

Although Scott suggested investors keep 25 percent of their investments in gold and other precious metals, Nadler suggests it be closer to 10 percent.

Gold, Nadler said, should be looked at like life insurance. Unlike other investments, gold doesn't pay interest or yield earnings. And like life insurance, he said, gold is something people hold and hope not to have to cash.

Nadler acknowledged that headlines blaring gold's climbing price are exciting, particularly in a state like Nevada, where mining matters in the state economy.

But he said forecasts of $2,000-an-ounce-or-higher gold prices are predicated on the return of global economic crisis, like the one Europe endured in the second quarter over debt.

"It begs the rhetorical question of just what are the goldbugs wishing for. The end of the world?" he said. "Because that's what would have to happen. It would mean you have seen everything else you own go up in smoke.

"Is that what they really want?"

Contact reporter Matthew Crowley at mcrowley@reviewjournal.com or 702-383-0304.