There are lots of good reasons to take a stake in gold, and right now the price is one of them.
After topping $1,000 an ounce in mid-February, the price of gold bullion had tumbled to $940 Monday. That's very close to a band of technical support at $935. Yet another layer at $900 should keep it from falling much lower.
Despite the lull, these are all relatively high prices historically. Yet as we face the threat of substantial global inflation as a result of recession fighting, gold's upside is enormous.
Adam Strauss, a co-manager of Appleseed Fund (APPLX), a diversified fund with a significant stake in gold, says all the steps governments are taking to fight the downturn will lead to inflation. "In fact, if you think of the ultimate way out of the housing mess, it is to devalue the dollar to get housing prices up again," he says.
Strauss is no gold bug or hard-money zealot; his fund bills itself as "socially responsible," and he says he favors investments "that allow shareholders to sleep well at night." Gold fills that bill. Appleseed bought its stake because its managers believed "gold was undervalued, and we still do, which is why we continue to own it," Strauss says.
A weakened dollar is gold's best friend. Assuming the price doesn't fall significantly below $900, "then we will start heading up again, and if we can get firmly above $1,000, I think we could run anywhere between $1,200 and $1,500" an ounce, says Mark Arbeter, the chief technical strategist for Standard & Poor's.
"Of course, some of this has to do with the action of the stock market," he adds. "The weaker the stock market is, the better gold will perform."
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Call it gold lust
Individual investors have been flocking to gold in a way they haven't for at least a generation. And the longer we worry about stocks, recession, inflation and government bailouts and spending, the higher gold can go.South Africa's Rand Refinery said in February that it had doubled production of blank gold coins to 20,000 ounces a week. These become Krugerrands, and demand for Krugerrands has risen to the highest level since 1986. The Wall Street Journal reported that some dealers in gold coins and bullion have seen their business double in the past year despite the high cost of transporting and storing the valuable metal.
Also last month, SPDR Gold Shares (GLD, news, msgs) saw its assets top $30 billion, making it the second-largest exchange-traded fund after SPDR S&P 500 Index Trust (SPY, news, msgs). The bullion Spider owns more gold than all but five nations and the International Monetary Fund, and three times as much as Great Britain.
Supported by this demand, the price of gold has remained at or near its highest price in history, $1,003.30, for the past 12 months. It hasn't gone still higher because all of the other demand for the metal -- i.e., all except the desire of Western investors -- is price-sensitive and has been beaten down by recession.
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Why buy gold now?Commodity trader and fund manager Dennis Gartman is bullish on gold and explains how he's been managing his positions. (Feb. 7, 2009)
Industrial users, jewelers and Asian investors retreat from gold when its price spikes. Among Western investors, however, the opposite occurs: They get excited only when it rises.
Therefore, gold is an unusually volatile asset class. It's also a very poor long-term investment. It pays no dividend, that bit of cash a company delivers to shareholders just for owning it. In fact, owning actual gold costs you, because you have to store and protect it.
Expenses also cost you if you own the ETF. Shares of the Spider originally represented exactly a 10th of a troy ounce of gold, but the fund's expenses since it was launched 4 1/2 years ago have dragged the value down to 98% of that.
But gold's saving grace is its ability to retain its value. An ounce has roughly as much purchasing power today as it had in biblical times. That makes it an excellent inflation hedge -- and a good place for part of your wealth right now.
Continued: The inflation equation
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