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The dollar is weak. The housing market is bleak. And the stock market is volatile.
In the midst of that unsettling scenario, is it any wonder that some investors are flocking to gold, which last week hit a peak of $916.10 an ounce?
Gold, some believe, is a safe haven because it’s relatively rare and it’s real.
And, let’s face it, the alternatives aren’t very tempting.
Bank savings accounts are paying paltry interest rates. Unhappy homeowners are finding their real estate is worth only as much as someone is willing to pay for it. Importers and international travelers have learned their money doesn’t go as far as it used to. And stock values can suddenly plummet after a disastrous earnings report.
But whether gold is a good investment, local financial advisers say, depends on when you buy, where you buy and how much you buy.
The Journal Gazette decided to demystify the precious metal.
Q. Why is the price of gold going through the roof?
A. When the economy is in turmoil, investors tend to turn conservative.
They want to make sure they don’t lose their savings by sinking money into something that can quickly lose value.
The most conservative among these investors figure that gold is forever. It doesn’t earn interest, but it doesn’t disappear, either.
In a post-apocalyptic world that resembles Mel Gibson’s Mad Max movies, gold could be traded for food and fuel. (In case you hadn’t figured it out, these investors don’t tend to be optimistic.)
Deb Romary, president of Romary Financial Services, said investors are looking for security.
“People get a little anxious when they think inflation is going to be high, and they’ll purchase gold as an inflation hedge,” she said. “But, actually, what I think is going on is people are very scared of the stock market because it’s up, down and all over the place. And they’re frightened of real estate, and so gold is something that people are looking at again.”
TV commercials that extol gold’s merits just add to the excitement.
Gold’s relative scarcity also contributes to its value. The amount of gold produced each year is only a fraction of the amount of other metals, according to the U.S. Geological Survey.
In 2004, worldwide production of steel was more than 1 billion metric tons; aluminum was almost 30 million metric tons; copper was more than 14 million metric tons; silver was almost 20,000 metric tons; and gold was 2,430 metric tons.
Through history to the end of 1999, only 140,000 metric tons of gold had ever been mined in the world, according to the Geological Survey.
Q. Who buys gold?
A. Christopher Moore, a certified financial planner, works with three types of investors: the wealthy, the rich and the affluent.
Moore, a founder of Fort Wayne-based Moore, Reimbold & Anderson, described the difference: wealthy people can’t outspend their money; rich people could outspend their money; and affluent people have good incomes and good savings plans but don’t have significant wealth.
The wealthy are the most likely to follow Moore’s advice to diversify by putting some of their holdings into gold bars. The rich aren’t as likely. And the affluent don’t do it.
Instead, the rich might invest in an exchange-traded fund that includes gold. And the affluent might figure that whatever commodities are included in their mutual funds are enough diversification, Moore said.
Buying gold requires some effort, effort that can seem too daunting for those looking to put $1,000 or even $20,000 into it, he said. Taking physical possession of gold is more effort than merely buying a stock or mutual fund. But the wealthy, who can buy $1 million or $2 million worth of gold, consider it worth the trouble to take delivery and arrange storage, he said.
But you wouldn’t necessarily know that from talking to people. The wealthy don’t tend to brag about their gold holdings, Moore said. Often those who talk big about buying gold don’t take their own advice, he said.
Moore says the best way to know who’s buying gold, he said, is to visit a place where the precious metal is sold.
Fort Wayne has such a trading place.
Jim Fairfield, owner of Fairfield’s Rare Coins & Jewelry, recently has seen “tremendous interest” in gold by local buyers and sellers. The fever has been increasing for about six months, along with the price of gold, he said.
“People that are buying it now are typically worried about the economy, the weakness of the dollar and the strength of the euro,” said Fairfield, the second-generation owner of the store at 3101 N. Clinton St. “There’s only so much of it, and that’s what makes it desirable.”
Many of those folks are conservative, small-town residents who aren’t into flashy displays of wealth, he said.
“It is interesting to notice how many people who don’t look like tycoons have a holding in gold and silver,” Fairfield said. “It’s something that is of real value.”
Q. Is gold a safe investment?
A. The price of gold goes up and down, like the prices of other commodities. Gold investors aren’t guaranteed a profit any more than investors in other commodities.
Investing in gold is more about circling the wagons and protecting what you’ve got.
Gold prices hovered between $300 and $500 for a couple of dozen years before the recent surge that brought them in line with prices from 1980. So investing in the precious metal isn’t for those who want to get rich quick – or at all.
“We’re not big fans of gold as an investment because of the returns over the last several decades,” said Albert Kohout, a certified financial planner with Galecki Financial Management Inc. in Fort Wayne.
Gold is in one of the poorest performing long-term investment classes when compared with the stock market, Kohout said.
Even Fairfield, the merchant, doesn’t advise customers whether to buy or sell gold. He simply facilitates the trading.
Q. If I decide to buy gold, how much of my savings should I use?
A. Your gold holdings shouldn’t amount to more than 10 percent of your total investment portfolio, some advisers say. Others put the percentage even lower.
Ian Boyce, a certified financial planner for Dickmeyer Boyce Financial Management Inc., steers clients interested in gold toward a broader investment: precious metals. Even so, he wouldn’t allocate more than 10 percent of a portfolio in that one asset class.
“Certainly we wouldn’t plunk our assets in one particular metal,” he said.
Kohout, of Galecki Financial Management, said gold can have a place in a portfolio, but he’d cap the amount to 5 percent or 10 percent of the total.
Jerry Harms, a senior portfolio manager with Wells Fargo in Fort Wayne, said investors should hold the line at putting 5 percent of their holdings into mutual funds that invest in commodities, including gold.
Q. How can I invest in gold?
A. You can buy individual hunks of the metal, but many investors prefer to make gold part of their portfolios by buying stocks of companies in the gold industry or mutual funds that hold numerous commodities, including corn, cotton, wool, soybeans, cattle, zinc, lead, copper, natural gas and gold.
Stock and mutual funds are bought through brokers, financial advisers, 401(k) plans or, in some cases, directly from the company.
Dickmeyer Boyce, a local fee-only financial planning and investment management firm, tends to recommend the T. Rowe Price New Era Fund because of its diverse holdings in mining and energy companies, Boyce said.
Harms, of Wells Fargo, advises clients interested in gold to choose one of these routes. The ability to sell stocks and mutual funds makes the investment more liquid, he said. In other words, investors can usually turn it into cash more quickly than if they own gold bars or coins, which have to be physically taken out of safekeeping and transported to a dealer for sale.
Another option is investing in gold exchange-traded funds. Exchange-traded funds, or ETFs, are baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular mutual funds, ETFs can be bought and sold throughout the trading day, according to Morningstar.com.
Again, the advantage of gold ETFs is that they are not tied to the success of one company.
In Harms’ opinion, the worst way to invest in gold would be to buy gold bars and store them in a safe deposit box. The assets – let’s say $10,000 worth of gold – wouldn’t be drawing the guaranteed interest that would be given for $10,000 invested in a certificate of deposit, for example.
And that same $10,000, if invested in the stock market, could potentially earn even more than if it were tied up in a certificate of deposit. The stock market historically has reaped higher rewards over time than savings products. The down side, of course, is that the $10,000 investment could be reduced or wiped out if the market crashes or the company issuing the stock went bankrupt.
Q. But what if I
want
to hold my gold in my hands?
A. You can do that. Gold comes in bars, bullion and coins. Fairfield’s Rare Coins & Jewelry sells each type.
At noon on Wednesday, gold’s “spot price” was $875 an ounce. So Fairfield was selling U.S. Mint-made American Eagle gold coins for $910 for 1 ounce; $460 for 0.5 ounce; $230 for 0.25 ounce; and $95 for 0.1 ounce.
The spot price reflects the price the commodity is traded at on the current open market. Futures prices, which predict the price two months in advance, are usually higher, Fairfield said.
Prices can change every 5 minutes and aren’t guaranteed the following day or week. Various factors can affect the final sales price of coins, Fairfield said.
Also on Wednesday, the store was charging $885 for a 1-ounce South African gold Krugerrand and $900 for a 1-ounce Canadian maple leaf gold coin. The demand for Krugerrands is weaker than for U.S. coins because they were banned for a while in this country during the former apartheid era in South Africa, Fairfield said.
Fairfield sells 1 ounce of gold for $25 to $35 over the spot price.
The North Clinton Street store also sells gold bars and bullion. On Wednesday, Fairfield was charging $895 for a 1-ounce gold bar. The bars are made by independent refineries. Fairfield has seen higher demand for American Eagle coins and thinks investors feel reassured by the fact that they are made by the federal government, which backs their authenticity.
Some online offers might feature more attractive prices. But beware.
Boyce, of Dickmeyer Boyce, is leery of companies that sell gold over the Internet or by advertising on TV. Because he has no experience dealing with them, he doesn’t know which ones are reputable.
Any company that offers ownership in gold that will remain in its possession for safekeeping could be working a scam, Boyce said.
“How do you know it’s there?” he asked.
Q. What’s the difference between gold bars, ingots and bullion?
A. “Bullion is money in the form of bars, coin, wafer or ingots,” according to William Youngerman Inc.’s Web site, www.goldcoinsdealer.com.
Bullion is made of precious metal – not necessarily gold – and often minted with 10,000 or fewer coins.
Many people think a coin must be issued by a country as legal tender for it to be classified as genuine bullion, the Web site says.
But that isn’t the basis for their value.
“They are designed to be bought and sold based on their metal content, not their face value, as a way for people to own gold or other precious metals (as an alternative to ‘gold bars’ and ingots),” the Web site says.
Gold bars carry a serial number and a stamp identifying the company that refined them and certifying weight and purity.
“Gold ingots are basically gold bars that are cast from a mold rather than stamped like a gold coin,” according to GoldPrice.org. “They tend to be rougher and thicker than stamped bars. …”
Q. How do you make money off gold?
A. If you own a gold ETF or mutual fund, you sell it after the price has risen higher than what you paid for it. If you own a coin, bar or ingot, you have to find someone who’s willing to buy it for more than you paid.
Those are the most basic ways.
Investors holding pieces of gold can also hedge their bets with puts and calls, complicated financial strategies that allow them to limit potential losses. Moore likens them to buying insurance for your house or car to protect the asset in case of fire or accident. Anyone considering such a strategy needs professional guidance.
Q. Is it too late to get in on the gold boom?
A. Probably.
“With gold at over $900 an ounce, I have to feel it’s near top end,” said Harms, of Wells Fargo. “I couldn’t in good faith advise anybody to buy it at an all-time high.”
Boyce, of Dickmeyer Boyce Financial Management, believes the price of gold has climbed high enough to warrant an exit from the investment. He’s looking for another entry point, but one that isn’t at record highs.
Moore, of Moore, Reimbold & Anderson, usually sees gold as a smart play. But even he thinks this isn’t the best time to direct a lot of your assets toward gold holdings.
“It’s already about 87 percent too late,” he said. “Buying low and selling high doesn’t mean you buy it when it’s hot, hot, hot, going up.”
Moore has been talking to his clients about gold for six years.
“The thing about gold is it’s been undervalued for a long, long, long, long time,” he said. “People haven’t been paying attention to it.”
Moore initiated those discussions before gold prices hit record highs. Now his clients are the ones bringing up the subject.
“Whenever anything is going like gangbusters, I get inquiries,” he said.
Moore believes it’s never too late to add at least some gold to your portfolio. Most of his clients have 20 percent of their assets invested in hard assets, including metals and real estate. Diversification is key, however.
“A financial planner is a fan of the run, the pass andthe punt,” he said, lapsing into football terms. “You have to do everything to win.”
But investors can’t ignore the basics, even when it comes to owning shiny metals. One of the basic concepts of investing is to redistribute your holdings by selling a portion of the assets that have risen in value and using that money to buy more of the holdings that have fallen in value.
“It’s critical,” Moore said. “You’ve got to take profits. Most people forget to take profits.”
For some reason, one segment of investors tends to hold on to gold too long, he said.
“Gold is glitzy,” Moore said. “It’s like diamonds are a girl’s best friend. But gold is a man’s hang. They hang on it.”
sslater@jg.net
