Fool's gold for your valentine

By Tim Middleton

Gold is the financial weed of the 21st century. You can't stamp it out. It has always been impermeable and incorruptible; now it's also inevitable.

You have to buy it. And not just because Thursday is Valentine's Day.

Exchange-traded funds have made gold bullion accessible to everybody. In less than four years, the biggest of these ETFs, StreetTracks Gold Shares (GLD, news, msgs), has acquired an amazing 631 metric tons of it. That's more than all but seven of the world's central banks.

"Everybody who's an expert in the market is optimistic about it," says George Milling-Stanley, a spokesman for the World Gold Council and one of the experts who created the StreetTracks gold fund. "All the reasons gold has gone up in the last six years are still with us and, indeed, are stronger now than they were then."

• Video: Is gold headed to $1,000?

The basic reason gold is rallying is that supply can't keep up with demand. Between 1980 and gold's nadir two decades later at $270 an ounce, investment in exploration and development in the gold-mining industry plunged 70%.

Then, in this decade, explosive growth in wealth around the world -- and especially in the traditionally gold-loving nations of India and China -- created fresh buyers. Also in this decade, the world's central banks, which own a quarter of all the gold that has ever been mined, have publicly pledged not to conduct large private sales. Their dumping of gold reserves in the 1990s helped hold the price down.

Nothing quite like gold

Gold enjoys a perverse and self-reinforcing advantage over every other product in the known universe. When the price of anything goes up, demand for it goes down -- except for gold. Investment demand for gold actually rises in line with the price.

For that reason alone, I know you want to buy it, because the big collective "you" is already buying it. Plus, it's your romantic duty. Gold does not tarnish; it does not break; nobody ever throws it out. It is indestructible, too: Some of your wedding ring could have come from a coin that Socrates gave as a token of love.

So go ahead. Buy gold. I own a bit of it myself. It's not much of an investment: In inflation-adjusted terms, today's price is less than half of what it was at its peak. But seen through that lens, last week's price of $904 per ounce is a bargain. The old record of $850 in January 1980 would be $2,143 in today's dollars.

Gold is touted as a defense against inflation, but if so, the relationship is elastic. Because gold, like oil, is priced in dollars, its rise in this decade has coincided with the dollar's decline. It has become more expensive in all major currencies but none more so than the greenback.

Forget the miners

Until this decade, few Westerners invested in physical gold. Nearly all precious-metals mutual funds invest in the stock of gold-mining companies. American Century Global Gold (BGEIX), which was up an annualized 29.8% in the three years ending Feb. 4, had nearly 10% of its assets in each of its two largest positions, Barrick Gold (ABX, news, msgs) and Goldcorp (GG, news, msgs).

The argument for gold stocks, as opposed to the metal itself, is that miners are heavily leveraged to the price of gold. Once their costs are covered, each additional ounce produced is pure profit.

Continued: A few problems

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