Dollar sinks, gold regains luster

Investment: The price of the precious metal hits $456.89 an ounce, a 16-year high.

December 03, 2004|By Robert Manor | Robert Manor,CHICAGO TRIBUNE

CHICAGO - After two decades as a wretched investment, gold is on a tear, hitting a 16-year high yesterday in the most glittering example of how the falling value of the dollar is reshaping global commerce.

For consumers, gold at a whopping $456.89 an ounce - its intraday high in New York yesterday - means paying a tiny bit more for jewelry and dental work. Beyond that minor immediate impact, however, the rising price of the precious metal reflects far-reaching economic forces that affect everybody.

The weaker dollar is helping to propel the U.S. economy by making American-made goods cheaper overseas and discouraging imports. The benefits of that phenomenon come largely at the expense of America's trading partners.

On the downside, a weaker currency tends to make dollar-denominated stocks and bonds less attractive to foreigners. As the dollar has fallen precipitously in recent months - hitting a 12-year low of $1.9344 against the British pound and a new low of $1.3348 against the euro on Wednesday before falling back slightly yesterday - overseas investors have sought gold as a refuge.

That has prompted much bullish talk from some precious-metals analysts.

"I think gold is going to go higher," said Michael Fowler of Desjardins Securities. "There is about a 90 percent correlation between the U.S. dollar going down and the gold price going up."

Other factors have played a role in gold's rise, too, including worries about inflation, the war in Iraq, higher demand and stagnant supply as a result of production logjams.

Not everyone believes gold will be going ever higher, because over the years it has proven to be such a bad investment.

At the close of trading on Jan. 21, 1980, gold reached its record of $850 an ounce. Anyone who bought that ounce would have seen their investment, after accounting for inflation, dwindle to about $197 today. In contrast, if the $850 had been invested in the Standard & Poor's 500 index of major companies, it now would be worth more than $7,100 after inflation.

A solid run

Although its long-term record is remarkably poor, gold has had a solid run in the last few years. In 2001, when the dollar was strong, gold briefly sold below $260 an ounce. It has risen approximately 75 percent since then. Some economists say there is little reason to think the dollar has hit bottom.

BMO Nesbitt Burns, an investment and corporate banking adviser, has told investors that the dollar could remain soft through mid-2005, at least. "We look for dollar weakness to persist," the firm said.

America's trade deficit and national debt continue to grow, with no end in sight. That trend floods the world with dollar-denominated securities that many foreign investors believe will depreciate, and it also could set the stage for inflation, as imported goods become more costly.

Gold is a traditional hedge against inflation, and it was fear of rising prices that pushed gold to its record 24 years ago.

And industry analysts say the conflict in Iraq may be influencing the cost of gold. In periods of geopolitical uncertainty, many investors look for the security it provides.

Other factors

But factors other than the dollar also are inflating gold prices.

The World Gold Council says demand for jewelry is rising faster than the production of gold. Consumer demand is expected to accelerate further in India, the world's largest buyer of gold, and China.

Larry Michals, owner of Michals-Kagan Jewelers in Chicago, said holiday shoppers in the United States won't have to worry about sticker shock.

"It does have an effect on an all-gold item," he said, "[but] if you're selling a diamond ring for $2,000, and it has $75 of gold in it, it's not a factor at all."

Because gold is only part of the cost of jewelry - fabrication, marketing and many other costs play a role - prices do not rise as fast as the price of the metal itself.

Nor is there likely to be a sudden surge of gold production anytime soon.

Demand is growing

"Worldwide gold production has leveled off and may even be declining, while gold demand continues to grow at 2 percent to 3 percent a year," said Douglas Silver, president of Balfour Holdings Inc., a mineral economics firm.

Silver noted, however, that gold is a commodity that is rarely consumed. Most of the gold ever mined remains in human hands today.

"The concept that there is a shortage in supply is not entirely correct," he said.

Most gold is traded as bullion by governments or large institutions. Small investors typically buy coins, and sales have been strong, said John Kozicki, owner of Glenview Coin & Collectibles Inc.

A way to diversify

"People look at it as something to diversify into," Kozicki said. "They don't put all their money into gold. Even I don't do that."

Small investors also can invest in mining companies, though that has proven to be risky this year. After a strong 2003, the Philadelphia Stock Exchange gold and silver index of mining companies is down nearly 2 percent in 2004.

But some observers say the metal itself hasn't lost its shine yet.

"The trend remains up with the market," said J.P. Morgan analyst Robin Wilkin, who predicted that gold could reach $500 an ounce next year.

The Chicago Tribune is a Tribune Publishing newspaper.

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