For investors, gold isn't all that glitters

March 01, 2009|By Gail MarksJarvis | Gail MarksJarvis,Chicago Tribune

Gold is where investors go when they are scared - scared about war, scared about economic meltdowns or scared about runaway inflation.

The metal is repeatedly described as a "haven." On late-night radio ads, gold hucksters try to tantalize frustrated investors with the promise of safety and riches.

But just because gold never becomes worthless doesn't mean it won't churn your insides or leave you with a sizable loss in value.

Like any other investment, the price you pay matters. Last March, with investors worried about the potential failure of Wall Street's financial goliaths, nervous investors piled into gold and the price surpassed $1,004 an ounce just before investment bank Bear Stearns failed. The day after the government stepped in to handle the collapse, however, gold started heading down. By late October, it was at $713 an ounce. What looked like a haven in March had turned into a 29 percent paper loss by October.

And when people lose 29 percent, it often feels miserable, regardless of whether the loss is in stocks, bonds, gold or anything else.

Now, with gold topping $1,000 an ounce again last month before pulling back a bit, investors are asking themselves once again if they missed their opportunity to buy gold cheaply in the $700s. They wonder if they should follow the gold bugs into the metal now as some predict $2,000 an ounce or higher.

Gold bugs are the perpetual doom-and-gloomers who distrust paper money and always promote the value of gold. Their case for gold now is that with governments spending huge amounts to try to rescue their economies, inflation will run out of control in a few years and gold will be the savior as money loses value.

Outside the gold-bug circle, however, there is apprehension about the grandiose forecasts.

"We had a bubble in gold fueled by exasperation and the inability to make money in stocks," said Brian Dolan, chief currency strategist for Gain Capital, which offers individuals the opportunity to trade gold and currencies. "Investors were hit by all the bubble sales pitches that suggested gold was a 'can't-lose proposition.'"

Gold has fallen sharply of late as investors began to imagine the financial system ultimately stabilizing and the stock market reaching bottom.

Because it's unclear when the crisis will end, Dolan thinks gold will drift down to a trading range between $835 and $880, but eventually go below $700 as investors become more hopeful about stocks and bonds.

Dolan thinks the five-year uptrend for gold will be replaced by a five-year retreat back to the $300 to $400 range that existed before this decade's surge.

Although gold is a hard asset and can't become worthless, it falls out of favor among investors when they become more optimistic and can earn dividends and interest in a wide range of stocks and bonds.

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