Many punished by stock market look to gold to ease their pain

Dollars & Sense

February 02, 2003|By CHICAGO TRIBUNE

After watching his stocks sink for three years, Ken Jensen began 2003 looking to diversify. His search led him to Harlan J. Berk Ltd., a coin and collectible shop in Chicago. There, Jensen went shopping for gold.

"The stock market keeps going down," said Jensen, 55, a Chicago executive. "I invested in gold a long time ago. I thought it was time to revisit it."

Gold enjoyed a resurgence in 2002, as the precious metal reclaimed its traditional role as a financial haven during precarious times. During the year, gold futures shot up 25 percent, or $69.20, to $348.20 a troy ounce in trading at the Comex division of the New York Mercantile Exchange.

Economic and political uncertainty, including terrorist threats, war fears, higher oil prices and a weaker dollar, drove last year's rush to gold.

Today, a lot of small investors such as Jensen are thinking of adding gold to their portfolios as insurance against another decline in stock prices.

There are several traditional ways to invest in gold. Investors can buy bullion (coins or gold bars), stock in gold-mining companies or mutual funds in gold-related stocks.

The most popular form of bullion, according to dealers, is 1-ounce coins, such as American Eagles, Canadian Maple Leafs and South African Krugerrands.

When the price of gold rises, gold-related stocks often exceed the performance of the bullion. This is because the value of mining companies' reserves increases while their costs remain fixed, analysts said. Last year, shares of Newmont Mining Corp. of Denver rose 51.9 percent. Gold-oriented mutual funds increased 62.88 percent in 2002, compared with the average stock mutual fund's decline of 20.84 percent.

"We believe this is not just a fly-by-night rally," said David Meger, director of metals trading at Chicago-based Alaron Trading Corp. "The fundamental factors [that drove gold prices higher] are not going away anytime soon."

Nevertheless, some financial advisers point out that gold has not been a good long-term investment. Also, the metal's volatility makes it a risky play for most investors.

"Gold is an asset class we used to use way back in the '80s," said Armond Dinverno, co-president of a money management firm in Schaumburg, Ill. "We don't use it now. We view it as more of a trading play, where you have to get in and get out quickly."

Gold has a history of temporary runs. It rallied more than $40 an ounce, to above $400 per ounce, when Iraq invaded Kuwait in August 1990. But within 24 hours of the start of the war to oust Iraqi forces, it fell more than $25 an ounce.

In fact, gold's value has fallen by more than half since 1980, when inflation fears helped drive prices to historic highs.

Still, many individuals are seeking alternatives to equities.

"I've got people coming in and buying 100 ounces," said Harlan J. Berk, who owns the Chicago coin and collectible shop. "I had one customer, a secretary, buy $70,000 worth of gold."

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