New essays by Ed Steer and Donald Luskin

Investors on a Gold Rush;
Global Worries Restore Yellow Metal's Appeal

By Anitha Reddy Washington Post Saturday,
Saturday, February 1, 2003
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Bill Bowler, a 77-year-old Baptist pastor in
Tucson, has been listening to the alarming
news from Iraq and North Korea and watching
the stock markets swoon. And every time
another headline screams war and another
certificate of deposit comes due, he adds to
the hoard of gold in his safe-deposit box.
Most of his and his wife's retirement savings
are now in gold.

Such a big bet on gold is risky, financial
advisers say. But Bowler is unmoved by the
warnings. quot;I feel safer with my investment in
gold,quot; he said. quot;I can take it out and look
at it and see it.quot;

Gold is the pessimist's investment of choice:
It rises when the dollars slides, the stock
market sinks, the economy slumps and the
world descends into war.

No wonder it just hit a six-year high.

quot;Gold has been around for 5,000 years as a
store of value, and during times of crisis
people tend to move toward gold as a golden
anchor,quot; said Michael Checkan, president of
Asset Strategies International Inc., a
Rockville, Md., firm that sells precious
metals and foreign currency to individual
investors.

Although gold is trading around at $370 an
ounce, it has been a poor investment over the
long run compared with stocks. The Standard amp;
Poor's 500-stock index has returned 692.8
percent since 1980, while gold has lost 27.9
percent during the same period, according to
Redwood/Technimentals Research Group, a
brokerage and market data firm in New York.

But in certain periods, it has shined next to
equities. When the economy was mired in
stagflation in the 1980s, gold soared to $850
an ounce.

Of course, during the decade-long economic
expansion of the 1990s, the yellow metal
plummeted, hitting $260 an ounce in 1999. But
after the stock market plunged, gold prices
headed up.

Gold mutual funds performed spectacularly
last year as the stock market dropped for the
third year in a row. While large value equity
funds slipped 19 percent, precious-metals
funds, which invest mainly in gold, averaged
a 63 percent gain in 2002, according to
investment research firm Morningstar Inc.

The major trading centers for gold are the
futures and options exchanges in London,
Zurich, Hong Kong, Singapore, and New York,
at the Comex division of the New York
Mercantile Exchange. A small volume is also
swapped at the Chicago Board of Trade.

Manufacturers and producers, such as mining
companies, which trade for business purposes,
have dominated trading during the long slide
in the price of gold. Retail investors
typically account for 15 percent of the gold
market, according to Checkan.

But as prices have recovered, there has been
an upsurge in interest from commodity mutual
funds and retail investors, said Charles
Nedoss, a gold futures trader at Peak Trading
Group, a brokerage in Chicago. Sales have
doubled since December at Goldline
International Inc., a Santa Monica, Calif.,
company that sells and ships bars and coins
to individual investors. Checkan said the
increase in gold sales at Asset Strategies
International has been quot;significant,quot; but he
declined to give details.

Gold is one of the few commodities to attract
retail investor or mutual fund interest.
Still, the gold market is tiny compared with
the equities market. The assets of all
precious-metals funds totaled $3.9 billion at
the end of 2002, a very small fraction of the
$72.3 billion managed by the biggest equity
mutual fund, the Vanguard Group's 500 Index
Fund.

The gold market's smaller size makes it too
volatile for many, say personal financial
advisers. Daily price swings of 5 to 15
percent are not uncommon. quot;It's like the baby
pool,quot; said David R. Petersen, president of
Financial Services Advisory Inc. in
Rockville. quot;It doesn't take a lot of water to
make a pretty good wave.quot;

In 1869, the infamous robber baron Jay Gould
attempted to corner the gold market, an
effort the U.S. Treasury foiled by dumping
its gold reserves on the market, causing the
price of gold to plummet. But there have been
no cases of gold market manipulation in
recent history, according to Checkan.

Individual investors who want to make a bet
on gold can purchase bars or coins from
retail dealers, such as Goldline
International or Asset Strategies
International. But an easier alternative, say
investment advisers, is to buy certificates
of ownership or shares in precious-metals
mutual funds, which are offered by some large
mutual fund groups. Certificates, often
issued by central banks or mints and sold by
retail dealers, are usually more convenient
than owning the actual ingots because storage
and insurance costs are absorbed by the
supplier.

A slightly more diversified alternative is
gold mutual funds, which invest in stocks of
mining companies as well as in coins and
bullion.

Then there is the strategy taken by former
investment banker Ian Watson, who lives in
San Francisco. Watson, who invested in a gold
mining company in the early 1980s and later
sold his shares, said that quot;for the past 22
years, gold has been the worst asset class to
own.quot; Yet he is now so bullish on gold that
last year he formed a mining company,
Shambhala Gold, and is deciding which ore
deposits to buy. A third of his portfolio is
invested in gold through his company.

Watson participated in the tech rally of the
late 1990s and was initially wary of
investing in gold again until the possibility
of war with Iraq began pounding a dollar
already fragile from a languishing economy
and a widening trade deficit. quot;I only got in
six months ago, so I missed a chunk of the
gold rally,quot; Watson said. But he said he
believes the gold surge will last well beyond
the war with Iraq. quot;The dollar's weakness is
a function of the current account deficit,
not of emotional concerns about Iraq. It's a
trend rather than a blip.quot;

Others disagree. quot;There are probably better
investments out there if you believe that the
economy will come out of this recession like
it has every other recession,quot; said Paul
Dietrich, chairman of Nye, Parnell amp; Emerson
Capital Management Inc. in Alexandria, Va.
Even Mark Albarian, who as president and
chief executive of Goldline sells gold to
Bowler, is uncomfortable that Bowler has all
his savings in gold. quot;I don't think it's
appropriate,quot; he said. He recommends that
clients invest 5 to 20 percent of their
portfolio in gold. quot;On the other hand, we
can't stop a person,quot; Albarian said. quot;Most of
our clients are not 'gold bugs.' Most people
take a more moderate stance than Bill.quot;