NYTimes: Gold's quirk -- It's volatile, but holders feel secure

By Jane Birnbaum
The New York Times
Saturday, December 8, 2007

http://www.nytimes.com/2007/12/08/business/yourmoney/08money.html?_r=2&o...

On Nov. 7, the market price of a troy ounce of gold bullion briefly touched $845.50, the top so far in gold's current eight-year bull market and a 28-year high in New York trading. The news made headlines and became a hot topic on radio talk shows.

At Lexington Coin, a shop in affluent Lexington, Mass., the number of customers seeking to do business in gold coins spiked, the owner, Eric Carlson, said. Some customers were there to lock in profits, selling bullion coins containing an ounce of gold that they had bought five years earlier when gold traded under $350. Some were selling just one coin, telling Mr. Carlson they needed money to pay property taxes or car repair bills.

And some were buying, saying that they thought gold's price would continue to climb. "The ones purchasing 10 coins at a time told me they were taking the money out of stocks and bank accounts," Mr. Carlson said. "A woman buying three American Eagles told me she was buying them as a hedge against the price of her home heating oil shooting up this winter."

Gold has a long history of waxing and waning in allure. At the moment, it holds a particular attraction, given Americans' worries about inflation, the risks in the financial market and the falling value of the dollar.

"People understand gold's intrinsic value," said Katherine M. Porter, an associate professor of law and a bankruptcy specialist at the University of Iowa. "But because it's beautiful and they can hold it in their hands, they may not perceive how volatile, like all traded commodities, gold is."

It closed yesterday at $800.20, down $6.90.

Trading and owning gold have never been easier, thanks to the Internet.

"There's been a democratization of gold ownership and new ways to acquire it," said Jon Nadler, a senior analyst for Kitco Inc., a bullion dealer based in Montreal. (Kitco makes money when consumers buy or sell gold, and the profit of its scrap operation is tied to the price of gold.)

"While gold coins or bars remain popular, investors no longer have to worry about storing their gold when they can buy gold certificates or digital ounces," Mr. Nadler said. "And with exchange-traded funds, the metal can be traded much like shares of stock."

Gold investors tend to buy on bad financial news. Rich Checkan, vice president of Asset Strategies International Inc., a precious metals and currency broker in Rockville, Md., said purchases at his company started picking up substantially after the subprime mortgage turmoil began in August. Most of his buyers were acquiring Perth Mint Certificates entitling them to gold held in a government-owned vault in Australia.

James K. Galbraith, an economist and public policy professor at the University of Texas, however, cautioned that investors who are considering a gold purchase now, either to hold or trade, should "be prepared to take a bath." They should know, he said, what happened to those who waited in long lines outside shops on Jan. 21, 1980, eager to pay more than $900 apiece for coins containing an ounce of gold.

While gold is a hot commodity now, the demand by average investors is still far from what it was then. That was the top of the previous gold bull market, which had begun in January 1975, after President Gerald R. Ford signed a bill legalizing private ownership of gold coins, bars and certificates.

Gold ownership had been illegal since 1933, when, to forestall Americans from demanding that banks give them gold for their dollars, President Franklin D. Roosevelt issued an executive order prohibiting it. (In the early 1970s, President Richard M. Nixon severed the last remaining links of the so-called gold standard that had made currency redeemable for actual gold.)

The early gold buyers in 1975 included Kenneth J. Gerbino, 62, who now manages private accounts and a hedge fund of gold mining stocks and who profits when buyers push up gold’s price.

"I could see that when the federal government prints money to pay its bills, inflation always results, and buying gold was the best way to keep up with it," recalled Mr. Gerbino, whose business is based in Beverly Hills, Calif. "I'd go to a coin shop, give a guy $1,000 and get some coins."

Gold started climbing strongly in 1978. In January 1980, with inflation nearly 14 percent, average investors afflicted by gold fever jumped into the market. So did experienced sellers like Anthony Calcagno, who was dealing rare coins in San Francisco. Less than six months earlier, he had purchased many South African Krugerrands for around $300 apiece.

On Jan. 17, the so-called second London fix -- the price of gold that the London market, the world's largest for physical gold, establishes each afternoon as the New York market opens -- was $750. The next day, it was $830.

"It was wild on the 18th -- buyers and sellers all coming in, bulls and bears battling it out," recalled Mr. Calcagno, who today deals the card game 21 in a casino in Reno, Nev. "Most dealers were not paying even near spot, so I felt lucky selling for around $800 a coin."

Mr. Gerbino, however, sat tight. "I wasn't into trading," he said. "When you buy gold as an insurance policy against inflation and currency devaluation, you don't sell unless you have to."

On Jan. 21, gold hit a historic $850 and buyers lined up outside shops in the cold, frantic for coins and bars. Then suddenly, the herd turned. The next day, sellers suddenly outnumbered buyers and gold tumbled to $737.50 an ounce. It continued falling and then traded sideways from $300 to $400 for nearly two decades.

When gold bottomed at about $250 in the summer of 1999, seasoned investors made their first forays back into buying. Robert Moriarty -- who describes himself as "probably on the very fringe" of gold aficionados and owns a precious metals Web site partly sponsored by gold mining companies -- was tipped to a Sotheby's London auction of Middle Eastern commemorative gold bullion coins.

"They were selling below spot," recalled Mr. Moriarty, 61, who lives in the Cayman Islands. "They were so cheap I couldn't afford not to buy them."

Other buyers agreed, and the current gold bull market commenced, this time with the Internet giving average investors constant access to 24-hour global gold prices.

Thomas Trottier, a glass artist who lives in Hawaii, had lost $20,000 day-trading stocks when he decided to trade gold four years ago. Using Kitco.com, Mr. Trottier first ordered delivery of gold bars. After selling those to buy Perth Mint Certificates, he discovered trading digital ounces of gold online through Kitco's pool account.

"Trading gold I've doubled my money," said Mr. Trottier, 54. Declining to specify gains, he disclosed he had taken some profits to buy California rental property.

Alongside virtual gold ownership, physical gold remains popular. Jeffrey Osborn, 48, a retired computer entrepreneur and private investor who lives in Maine and Florida, has about 5 percent of his liquid assets in American Eagles purchased in 1997. Mr. Osborn keeps the coins in the vault of a "very large bank's branch," which he occasionally visits "to hold them."

"When I tell people to buy American Eagles, they’re usually skeptical and tell me about some midcap stock their broker suggested," he wrote in an e-mail message. "But I question holding assets denominated in a depreciating dollar. For now, I am not selling my coins. They are a good hedge against the unforeseen."

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