Gold shines as many see a lackluster economy

Bull markets are supposed to make investors feel good. But the hot market in gold this year has an aura of dread about it.

The yellow metal is nearing a lofty $850 an ounce, a height not seen for almost 28 years.

That has triggered primal fears on Wall Street. If investors are turning back to this ancient form of money, one implication is that they’re losing faith in the modern financial system.

Indeed, the higher gold goes, Bill Roberts of Westchester says he can’t help but see a deepening message of doom.

The dollar is sinking, banks are reeling from soaring mortgage defaults and the stock market is tumbling anew. With that backdrop, Roberts says he’s happy that he has most of his investment portfolio in shares of gold-mining firms.

“I see gold as one of the things that can save a small investor like me,” said Roberts, 55, a retired attorney. He believes that the commodity’s price could jump above $2,000 an ounce.

Many veteran precious-metal investors, however, prefer not to play the apocalypse card to promote gold these days.

“It brings up the ‘gold-bug’ image: old guys in threadbare suits, with wild tufts of hair, jingling Krugerrands in their pockets,” said Tom Winmill, who heads the New York-based Midas Fund, which owns mining stocks.

Winmill wants the metal to be viewed simply as another element of a diversified investment portfolio -- not a haven during the end times.

Even so, gold’s rally in recent months to 1980 levels is bringing back awful memories of that era: galloping inflation, a collapsing dollar and a general mood of despair about America’s future.

In New York on Friday, gold ended at $832.50 an ounce, down $2.70 for the day but up $27 for the week. The price is closing in on the record high of $850 set in January 1980.

Adjusted for inflation, however, the price is far from the old peak. It would have to rise to about $2,200 to match it, according to the World Gold Council, a group funded by the mining industry.

Gold has been in a mostly steady uptrend since 2000, when it sold for about $275 an ounce at year’s end. Its advance has coincided with a boom in commodity prices overall, as demand for raw materials soars in economies such as China and India.

Rising consumer wealth in those and other emerging markets also has stoked consumption of precious metals. More than two-thirds of gold demand worldwide is for jewelry.

Many mainstream investors paid little mind to gold in the last few years, as the stock market continued to rally and rising home prices underpinned consumers’ net worth.

But in the last three months the metal’s hot streak has stood out against a deteriorating outlook for the U.S. financial system and economy. Record oil prices are triggering inflation fears and the dollar’s value is plunging -- a casualty, some experts say, of global investors’ dimming view of America’s economic prospects amid a horrendous housing bust.

“The markets’ statement is that the U.S. has lost its way,” said Allen Sinai, head of Decision Economics Inc. in New York.

So gold is back in the role it had played for thousands of years: as a store of value, a way to preserve wealth and a hedge against financial calamity.

Robert Fazio, an executive at Santa Monica-based gold coin dealer Goldline International, says many customers who come in to buy coins such as the government-minted American Eagle mention their concern about the dollar’s eroding purchasing power worldwide.

“The hot buttons are the falling dollar and the lack of faith in the dollar,” he said. “It’s definitely waking people up.”

But as gold rockets, investors who witnessed the metal’s last bull run are reminded of how fast it was over once the price began to rise almost vertically.

Gold’s spike above $800 lasted all of a couple of days in mid-January 1980. By the end of that year, the price was back below $600.

Then began two decades of mostly falling prices. By mid-1999, an ounce of gold went for about $250 -- a 70% loss to someone who bought at the 1980 high and held on.

What quashed the last bull market in gold was the Federal Reserve’s campaign to dramatically raise interest rates, beginning in 1979. That dealt a fatal blow to the inflation mentality of the era. Once the economy began to recover in the early ‘80s, stock and bond markets boomed and investors found better places for their money.

The trend continued in the 1990s. And the world’s central banks added to the pressure on gold by periodically selling some of their massive reserves. Gold went from laggard investment to bad joke.

The long bear market left many longtime fans of the metal chastened, said George Milling-Stanley, chief analyst at the World Gold Council. That was particularly true for gold bugs in the end-is-near camp, he said.

“They cried wolf for 20 years. People learned to ignore them,” Milling-Stanley said.

Winmill, the Midas Fund manager, says any number of forces could trigger a plunge in gold’s price this time around. A pullback in oil prices could easily do it, he said.

So could a sharp rise in interest rates if the Federal Reserve and other central banks decided the inflation threat warranted tighter credit, Winmill said. A turnaround in the dollar’s slide, for whatever reason, also could cool gold fever in a hurry, he said.

Larry Heim, who has run a gold investment-advisory business in Portland, Ore., since the early 1970s, says his client base has doubled in the last year.

But Heim, who predicts that gold will reach about $3,400 in this run-up, says he doesn’t tell his investors that the metal’s bull market will last indefinitely.

“It’s not the right thing to own forever. It will be the right thing to own for the next few years, though,” he said.

Yet many individual investors say they still can’t bring themselves to add gold to their portfolios, either in the form of coins or via mutual funds that own the metal or mining stocks.

“To make money on your investments in the long run, I think you need to own a piece of a growing economy,” said Byron Angel, 54, of Tacoma, Wash. “To me, this means buying the stocks of companies that are leading the growth.”

Sinai, the economist, said he agreed on the need to own classic growth investments. But he also believes that gold again deserves a place in a portfolio.

“It’s no longer a no-no for a serious person like me to own it as part of an investment strategy,” Sinai said.

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Back story

Americans have a limited history investing in gold.

In an effort to bolster the financial system during the Depression, Congress in 1933 made gold hoarding illegal in the U.S.

Then, in 1944, the Bretton Woods global monetary agreement reinstated the so-called gold standard. The dollar, the world’s most important currency at the time, was officially backed by the metal. Western governments, in turn, pegged their currencies to the dollar and kept the official price of gold controlled at $35 an ounce.

It held there until 1971, when President Richard M. Nixon abandoned the gold standard. In effect, Nixon declared that the dollar didn’t need gold behind it. Free to find its own level, gold began to surge, reaching $200 an ounce by 1974.

U.S. citizens were legally permitted to own gold as an investment in 1975.

-- Tom Petruno