By John Byczkowski
The Cincinnati Enquirer
The trade deficit is ballooning, the budget deficit is expanding, the dollar is falling, the rich get richer and the poor can't find jobs. What do you do?
Mike Wills of Coins+ on East Fifth Street in downtown Cincinnati holds a Canadian Maple Leaf gold coin (left) and an American Eagle gold coin. The prices of gold and other precious metals have increased a great deal in the past year.
The Cincinnati Enquirer/GLENN HARTONG
That's the remedy some investors have found, and even if you don't believe the world is going to heck in a handcart, investing in gold, silver, platinum and palladium over the past year was a veritable gold mine.
Gold hit $400 an ounce Dec. 1 for the first time since 1996, up nearly $100 over the past 19 months. Other precious metals have posted proportionately bigger increases. Silver is up 44 percent from a year ago, flirting with $7 an ounce, a price not seen in 20 years. Platinum was $600 an ounce a year ago, and is now around $850.
Whether the run-up continues is impossible to determine, and economists cite many possibilities that could influence prices. But much like other investments in which buyers and sellers trust gut feelings and intuition, the precious metals market may be rising because of a prevailing sentiment among traders: pessimism.
Mike Wills, a partner in Coins+, a Cincinnati coin dealer that sells American Eagles and other bullion gold coins, said he believes the growth in precious metals prices is 70 percent emotional. "Our economy is not good and has not been good for several years, no matter what you read in the Enquirer," he said. Unemployment was 5.6 percent in January, but he said he thinks it's closer to 20 percent.
Inflation - "have you bought gas lately?" - is more like 15 percent than the official 2 percent figure, he said. "I think a lot of people buy gold because they read between the lines" and see a darker picture of the economy.
Gold and the other metals have long been an investor's hedge against inflation, because they become more valuable as the value of other assets decline. But inflation has been so low for so long that that adage hasn't been tested lately, and the price of gold slept near $280 for five years during the bull stock market of the late 1990s.
When the stock bubble burst, gold began to rise, but stock pessimism doesn't account for all the increase. The dollar has been weakening worldwide, and because gold and other metals are denominated in dollars, their prices have been rising as the dollar declined.
The biggest users of gold are jewelers, and the impact of higher prices is beginning to put pressure on them to raise retail prices, said John Youkilis, CEO of Victor Corp., a Cincinnati jewelry manufacturer and wholesaler. Older inventory isn't affected, but as that is sold off, the jeweler must replace it with gold at the current, higher prices.
Do they raise prices to consumers? That's tough to do, he said. "You have to be very astute in your pricing so you don't hurt the marketability of your items and the volume of your business - especially when the economy is just beginning to recover," Youkilis said.
The nation's largest specialty jeweler, Zale Corp. of Irving, Texas, so far hasn't had to raise prices, said spokesman David Sternblitz. Gold is just 30 percent of the company's inventory - behind diamonds - and last year, the company bought long-term contracts to lock in the price of gold and hedge against a sharp increase, he said. Zale owns 2,300 stores nationwide, including 10 in Greater Cincinnati.
For investors, the rise in metals prices could be tempting. Gold has a legitimate place in many portfolios, particularly for conservative investors concerned about inflation or an imminent drop in the markets, said Peng Chen, director of research for Ibbotson Corp. in Chicago, which studies historic investment returns.
No investor, however, should make it a "cornerstone" in a portfolio, Chen said, because the long-term gains haven't been large enough. Since 1968, metals have risen about 7 percent a year, Ibbotson reports. By comparison, stocks are up nearly 11 percent a year over that time, and long-term government bonds have grown 8.5 percent a year.
"For an average investor, 5 percent is as high as you want to go," Chen said.
Many gold investors buy gold coins - mainly American Eagles and Canadian Maple Leafs. Many buyers prefer the Eagle because it's American, though it also contains small amounts of silver and copper, to make the coin more rigid and durable The Maple Leaf is essentially all gold, so it's favored by purists. Both are produced by government mints, although their face value is much lower than the value of the gold they contain. The U.S. and Canadian mints also produce silver Eagle and Maple Leaf coins, which also carry face values lower than their metal value.
Another way to own metals is in mining stocks and mutual funds. Mining company costs are essentially fixed, so almost every dollar increase in the price of gold falls right to the bottom line. Investors attach a multiple to that, so the stocks tend to rise more than the metal, said Lynn Russell, a metals fund analyst for Morningstar Corp. in Chicago.
The stock in Taseko Mines Ltd. of Canada, for instance, was 25 cents a share in July, and finished 2003 at $2.15 - a 760 percent rise in five months.
The caveat on metals stocks and funds, however, is they tend to fall as sharply as they rise. "The equities in the gold producers tend to be far more volatile than the bullion itself," Russell said.
The $400-an-ounce question is: Where does gold go from here? That depends largely on what happens to the U.S. dollar against other currencies worldwide.
The problem is the U.S. trade deficit, near $500 billion and rising. That's funded entirely by foreign investors, and if they begin to shift their money elsewhere, the dollar would continue to drift downward.
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