Gold finds its old glitter, and may shine more in 2004

The Insider

Your Money

January 04, 2004|By BILL BARNHART | BILL BARNHART,CHICAGO TRIBUNE

WATCHING the Twilight Zone marathon on cable TV last week, I couldn't help thinking about the price of gold.

If there's one number investors should watch as the New Year begins, it's gold's price.

Like matter and antimatter, gold is the anti-stock, especially vs. the U.S. stock market.

Buying stocks reflects willingness to take risks. For many investors, gold is a way to protect against risks.

Hardly anyone mentioned gold in the booming stock market of the 1990s. It was a loony investment theme defended only by people called gold bugs.

But despite all the talk last year about deflation and the rally in speculative stocks, gold was one of the year's big winners.

Sure, the stock market staged a nice rebound in 2003. But so did gold - up 20 percent, to $416.10 an ounce in New York futures trading. Unlike stocks, gold advanced in 2002 as well - up 25 percent.

This year the precious metal could hit the big time.

The World Gold Council has filed with the Securities and Exchange Commission to offer exchange traded funds (ETFs), trading on the New York Stock Exchange, based simply on gold's price.

ETFs are one of the most successful Wall Street innovations of the past 20 years. Investors seeking broadly based exposure in stocks have found ETFs to be a sensible alternative to individual securities and conventional mutual funds.

"The goal of the World Gold Council in launching this [ETF] product is to create a vehicle which will make it easier for investment institutions, such as pension funds, to participate in the gold market," economist David Hale said in a recent report.

"The introduction of the ETFs for gold will give the metal a chance to become more competitive with traditional financial assets by vastly simplifying the process of ownership as well as reducing the costs," Hale added.

Until now, ordinary investors seeking exposure to gold were encouraged to buy shares of gold-mining companies and mutual funds invested in those shares.

But buying stock in a gold-mining company is not really buying gold. You're actually betting on the gold-hedging strategies of the mining company.

If authorized by the SEC, gold ETFs will represent a purer play in the precious metal on the NYSE.

Chances are, the dynamics of the gold market will be at least as interesting as, say, small-cap stocks in 2004.

Much of the rally in gold reflects the declining value of the dollar. That's because gold is quoted worldwide in terms of dollars.

A cheaper dollar, reflecting a lack of confidence in the U.S. economy, guarantees higher gold prices. But there's more to the story.

Gold represents a general increase in basic commodity prices, spurred by emerging economies in China and India. At the consumer level, demand for gold is a barometer of consumer sentiment in many Asian nations.

This year, an informal agreement reached in 1999 among major central banks to curb the sale and leasing of gold bullion from their reserves comes up for review.

It remains to be seen whether the agreement will spring a leak this year or whether central banks, like many investors, will prefer to hoard their gold.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper.

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