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The rising price of gold

Will the gold fever continue?

Stephen Beard Nov 12, 2010
The rising price of gold

Will the gold fever continue?

Stephen Beard Nov 12, 2010


Tess Vigeland: The gold bugs are out in force these days. Folks who’ve decided they want a little or a lot of the shiny, precious metal in their portfolios, or sitting in a safe at home.

Gold passed $1,400 an ounce this week. The price is up more than 20 percent so far this year, prompting something of a gold fever on international markets. But will that fever break?

From London, our gold star correspondent Stephen Beard reports.

Stephen Beard: Buying gold is what investors do when they lose faith in the financial system. And that’s why Ian Dunbar took the plunge. A 73-year-old retired doctor from Kent, he got interested in the yellow metal after reading about widespread cocaine use by financial traders.

Ian Dunbar: I think that the judgment of the traders has been severely compromised by cocaine abuse, and that that lies at the root of a lot of the problems that we’re facing today in the financial world.

Dunbar believes that the Great Debt Bubble was partly inflated by traders high on cocaine. That may seem an eccentric view. But it led Dunbar to invest some 10 percent of his wealth in gold bullion. And so far he’s glad he did.

Dunbar: I mean my holding has been increasing at the rate of 40 percent a year for several years. That’s rather better than a savings account.

Sixty-nine-year-old Ray Hill, a retired computer consultant in Scotland, is another gold bug.

Ray Hill: I am not someone who claims any expertise at all in the business of investing.

But he was worried about central banks in the U.S. and Europe printing more money and in the process debauching their currencies. He was anxious to protect the value of his cash savings.

Hill: I’d rather put it all in a sock and hide it under the bed, if only that worked. Gold is one of the few areas where that does actually does seem to work.

Ray Hill has now put about 20 percent of his savings — some $70,000 — in gold bullion, using a company that’s bringing bullion ownership to a wider investing public.

BullionVault.com — based here in the West End of London — hit on a formula for cutting the cost of gold ownership. The cheapest way to buy gold, the way the professionals do it, is in so-called “good delivery bars.” But they weigh 400 ounces each and are currently worth about half a million dollars. This company, says founder Paul Tustain, lets people buy — over the Internet — part of a bar.

Paul Tustain: We buy the bars and have them shipped to the vaults in London, Zurich and New York. And then we use the Internet to distribute as little or as much of those bars that people want.

Once installed, the gold never moves from the vault; only the ownership changes. The bullion just sits there. Unlike a share or a bond or real estate, it is not generating any income. So think very carefully before getting into gold, says Tustain.

Tustain: It is the wrong thing to do if you’ve got an environment where you strongly believe in economic growth. If you think there’s going to be economic growth, participate in it, and buy shares or other instruments.

Or says the company’s research director, Adrian Ash, leave your cash in the bank if you’re getting a good return. But the chances are, you’re not.

Adrian Ash: You currently earn less than zero on cash in the bank. That’s true in the States, it’s true across Europe, it’s true in Japan. It has been true of Japan now for, what, 12 years.

So in comparison with cash, shares, bonds and real estate, gold has put in a dazzling performance. But the yellow metal doesn’t always glitter. After reaching a peak at the end of the 1970s, it slumped and slid and stagnated for the next 20 years. How do we know we’re not on the brink of another golden crash?

Tustain: I don’t think we’re anywhere near the top of this market because I don’t see any sign of policy anywhere in the western world being anything else than trashing their own currencies.

Gold investors will hope he’s right. But most should pray he’s wrong. It would mean low growth, high inflation and unemployment. What’s good for the gold bugs is bad for the rest of us.

In London, I’m Stephen Beard for Marketplace Money.

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