Nevada cashes in on climbing gold prices

The gloomier the nation's economy gets, the brighter the prospects grow for Nevada's No. 2 export industry, gold mining.

"Gold is viewed as a safe haven in uncertain times," said John Dobra, professor of economics at the University of Nevada, Reno, and director of the Natural Resource Industry Institute.

With the nation's financial sector crumbling and many leaders warning of calamity if Congress fails to pass some version of the $700 billion bank bailout bill, the price of gold has increased about 250 percent from its 2001 low of about $250.

The price of gold slipped $14 to $874.20 on the New York Mercantile Exchange on Tuesday as Wall Street recovered from the jitters over the bailout bill defeat.

The Nevada gold mining industry has been enjoying a renaissance since gold prices started to climb out of a slump in 2002 when prices were about $300 an ounce.

State and local government taxes increased an estimated 3.7 percent in 2007 from the prior year, the Nevada Mining Association reported Tuesday in its annual economic overview of the state's mining industry.

Mineral industry taxes grew to $199.5 million from $194.2 million in the previous year. That's almost double the $103 million in state and local mining tax payments in 2004.

Revenue from the net proceeds of mineral taxes jumped to $75 million from $61 million in the prior year. The industry also pays sales and use taxes and property taxes. Under the state's tax revenue system, the Clark County School District is one of the biggest beneficiaries of mining sales and use taxes -- even though the state's 18 gold and silver mining operations are in Northern Nevada.

Dobra, the study's author, also reported:

•Gold mining in Nevada creates more export dollars than any other business sector in Nevada with the exception of casino gambling, which, in effect, exports its services to tourists.

•The Nevada Division of Minerals reports that the value of mineral production, which gold dominates, jumped $500 million to $5.4 billion from 2006. Gold accounted for $4.2 billion based on production of 6 million ounces.

•Gold production declined slightly from 6.3 million in the previous year, as miners started to exploit more costly deposits, because higher gold prices justify mining lower grade ore.

"We expect Nevada production to remain fairly steady, and perhaps increase slightly over the next few years as long as prices hold near their current level," the mining association report said.

•Nevada remains the fourth-largest gold producer in the world behind China, Australia and South Africa, according to Gold Fields Mineral Services.

•Employment continues to grow, reaching 14,470 jobs, up from 13,800 in the previous year. Mining payrolls grew to $974 million from 2006. The average wages are $80,000, up from $74,000 in the prior year -- well above the $42,000 average for all industries.

•Equipment and labor are in short supply.

•Gold mines are not "gold mines." The popular expression belies the truth about industry profits, Dobra said. Value Line's Investment Survey shows the return on equity (a measure of profitability) for precious metal miners was 5.3 percent in 2007, down from 7.1 percent in the previous year.

Nevertheless, Jag Mehta, adjunct professor of finance at the University of Nevada, Las Vegas, recommends that individuals hold 3 to 5 percent of their investment portfolios in gold, silver, platinum and the companies that mine those metals.

Individuals can buy gold coins, gold bullion or shares in an electronically trade fund, SPDR Gold Shares, which holds one-tenth of one ounce of gold for each share.

Precious metals protect investors against "a doomsday scenario," such as a total financial system collapse or a nuclear strike, Mehta said.

Even in relatively good times, gold and precious metal holdings can benefit investors.

Gold prices have been correlated with oil prices recently. When the dollar increases in value, gold and oil prices go down and vice versa.

With some analysts comparing the economic conditions to the Great Depression, Dobra offers an interesting historical investing note.

The federal government prohibited citizens from holding gold bullion during the depression although Uncle Sam allowed individuals to keep gold jewelry and collectible gold coins, Dobra said.

The government also increased the price of gold to $35 an ounce from $20 for the first time since 1790, Dobra said.

The result: "There was a gold mining boom in Nevada in the '30s."

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.