Gold, as an investment, has been a 24-karat loser

Investing

July 28, 1997|By Gene Meyer | Gene Meyer,KNIGHT-RIDDER NEWS SERVICE

THE GOLD RUSH is back.

But this time around, low prices are driving the demand for the precious metal, industry sources say.

That's a significant change from the late 1970s, when fears surrounding double-digit inflation drove prices to a record $875 an ounce.

This summer's recent drop to a 12-year low of $318.10 an ounce has pushed sales of U.S. American Eagle gold coins more than three times higher than normal for June and July, reports Jack Szcerban of the U.S. Mint in Washington.

"Bargain hunters are buying," Szcerban said.

"We think the low prices are attracting a lot of people who worry that the stock market is awfully high right now and want to diversify," he said.

But pure gold has several drawbacks as an investment.

"Gold has no return, no dividends, no interest payments," said Bryant Barnes, president of Financial Counselors Inc. of Kansas City.

"If you look at it on a chart, it's pretty sickening," he said.

Authorities aren't sure how many Americans own gold coins or bullion they bought for up to $875 an ounce as a sort of Armageddon hedge when the economy seemed out of control two decades ago.

But they are sure that those who've held on since then have lost money on their investment, at least on paper.

Many of these gold owners, however, "aren't really concerned with annual returns," Barnes said.

"They want something of value if the world comes to an end."

Those buying now also need to remember there is no guarantee that overseas government selling, the main cause of the current price drop, won't continue as more countries try to balance their budgets, Barnes said.

The price could drop until mining the stuff is no longer economical.

"Personally, I wouldn't step in and buy right now," Barnes said.

However, regular consumers could be reaping benefits from the recent drop for the next several months or longer.

One of the most obvious effects will be on the price of gold jewelry, which is likely to be steady or lower between now and Christmas, said Ollie Keene, the Helzberg Diamonds division vice president in charge of buying gold.

"If you are looking at lighter-weight pieces, which don't have much metal to start with, or pieces where much of the value is in the stone, prices might not change that much," he said.

"But if you are looking at heavier pieces with more gold in them, the difference could be dramatic."

Used in industry

But many consumers may not even notice a far bigger effect, said Ed Schifman, president of Interconnect Devices Inc., a Kansas City, Kan., maker of testing equipment for the electronics industry.

Electronics companies -- the makers of everything from television sets and computers to navigation equipment -- are the nation's second-largest buyers of gold after jewelry manufacturers.

"If you want a really good electrical contact, you need gold," Schifman said.

That makes gold prices a big deal to manufacturers who buy $20 billion worth of electrical connectors annually, he said.

Years ago, when gold prices were higher and changing more violently, many manufacturers were forced to impose surcharges cover costs, Schifman said.

"Three cheers for these gold prices," he said.

The recent price drop probably won't affect the cost of dental fillings much, however, said Mike Super at Myron's Dental Laboratory Inc., also in Kansas City, Kan.

That's because gold accounts for a relatively small share of the cost of a filling, which actually may be made of many alloyed metals, he said.

Also, many dentists are turning to new ceramics that look more natural.

"About the only way you might notice any difference is going to a dentist who buys from a lab that charges maybe $50 plus costs," Super said.

So, for now, only investors who think the current price is a bargain are buying avidly.

"Anything made out of gold is hot right now," said John Ryan, who owns American Rare Coin and Jewelry in south Kansas City.

"To a lot of people, gold at today's prices looks a lot like $35-an-ounce bargains that were available years ago," said Michael J. Kosares, owner of Centennial Precious Metals Inc., a regional dealer in coins and bullion in Denver.

Below production cost

And the perception is accurate, said Kosares, who also has written a book, "The ABC's of Gold Investing," for individual investors.

At current market prices, gold bullion brings less in global trading than the $320 to $345 per ounce that it costs to extract from big mines in South Africa, the United States or Australia, he said.

Gold use, for jewelry, electronics and other industrial applications and to make those extra coins investors have begun snapping up again, has climbed about 75 percent during the past 10 years, to 3,290 metric tons last year.

Output from the world's mines has risen only 35 percent in the same period, to 2,346 metric tons. Fabricators, as users of gold are called, make up a lot of the difference by buying previously mined gold.

Yard full of gold

Even so, the amounts involved might be a lot less than would first be imagined.

The U.S. Mint estimates that all the gold ever mined in history would fit into a single cube that, with 54-foot sides, could sit in many suburban back yards.

Given the increasing gulf between supply and demand, "the fundamentals favor a rise in gold prices," Kosares figures.

But Super, who also watches gold trends carefully, is less enthusiastic.

Investing in gold requires paying storage fees and other costs that don't come with investments such as stocks or bonds, he points out.

Also, gold doesn't pay interest as bonds do, and its price history is far more volatile than many stocks.

"I'd guess that if you didn't buy gold for less than $375 an ounce, you probably are losing money," Super said.

Pub Date: 7/28/97

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