Sold on Gold

Investors seek high returns with gold but its volatility makes it a rocky ride.

February 27, 2003
By KRIS HUNDLEY, Times Staff Writer
© St. Petersburg Times

TAMPA -- The Web site of Goldcorp Inc., a Canadian gold mining company, pitches its precious metal in no uncertain terms: "106 Years of History is Screaming 'BUY GOLD NOW!' "

For those who have not heard the cry, Goldcorp.'s Chris Bradbrook, vice president of corporate development, suggests gold is nothing less than portfolio insurance.

"It's insurance against a lack of confidence in financial markets," Bradbrook said during an industry conference this week in Tampa. "You insure everything else in your life. Gold and gold shares have a powerful role to play in portfolio diversification."

As the stock market slides and fears of war rise, gold once again glitters for wary investors. But history suggests gold is a gilded roller-coaster that's not for the faint of heart:

-- After spiking in 1980 at more than $800 an ounce, gold prices plunged to $290 in the early 1980s, then began a slow recovery.

-- When Iraq invaded Kuwait in August 1990, gold jumped to more than $400 an ounce, but the price dropped immediately after the Gulf War began in January 1991 and was $365 an ounce by the time the war ended.

-- After stagnating in price through the mid-1990s, gold fell out of favor during the stock market boom of the 1990s. With the equity market boom gone bust, gold prices are heating up.

The price of the metal, which was less than $280 an ounce at the start of 2002, hit a high of more than $381 earlier this month before settling back around $354.

Shares of Goldcorp, which trade on the Toronto and New York Stock Exchanges and split two-for-one in May, closed Wednesday at $11.25, up 45 cents.

Mutual funds of gold mining companies outperformed every other fund category last year, with gains of more than 63 percent. That compared to a loss of 22.4 percent of the average diversified U.S. stock fund and a drop of 22.1 percent for the Standard & Poor's 500-stock index. Such outstanding performance has been noticed: Last year investors added $829-million in new money to gold funds, according to Lipper Inc.

Andrew Clark, a senior research analyst with Lipper, said he thinks $325 to $350 an ounce is a sustainable price for gold for the near term, but he warns that the market is fairly volatile.

"Gold funds rank up there with high-yield debt," he said. "They can rocket upwards and downwards. And with geopolitical uncertainty, gold funds can take one hell of a ride."

From Egyptian times, when gold jewelry and ornaments were buried with the Pharoahs, gold has been a refuge when people head into the great unknown. Though its connection to the worldwide monetary system is negligible -- the United States abandoned the gold standard in 1971 -- gold bullion, or more easily negotiable shares in mining companies and gold mutual funds, continue to shine in times of uncertainty.

"People are starved for a financial winner, and gold did well in 2002," said Robert Doyle, a CPA and financial planner in St. Petersburg who finds himself trying to restrain investors who've been bitten by the gold bug. "What I see right now are people investing on the basis of their emotions. And I always say if you want to be a loser, chase last year's winner."

Doyle, who advises clients to have three to 10 percent of their portfolios invested in commodities, including gold, said he's been urging people to take some of last year's gold gains and reinvest elsewhere. "Now is the time to take some chips off the table and allocate money to losers," he said. "Since nobody knows if we're going to attack Iraq or what's going to happen next, our approach is to be unemotional and just stick with a strategy."

Rod Smyth, chief investment strategist for Wachovia Securities, thinks more than war jitters are behind gold's recent popularity. Excess money supply seeking a safe home, a weak dollar, and short-term interest rates below the inflation rate all have conspired to make gold more attractive, he said.

"The political situation will tend to drive investors to something that's conservative," Smyth said. "The reason it's driving people to gold and not cash is because investors aren't being paid to hold cash."

Smyth said the the late 1970s bull market in gold ended in 1980 when Federal Reserve chief Paul Volcker restored confidence in paper money by raising interest rates. Gold prices will continue to rise, he said, as long as the Fed keeps interest rates low.

"This period of fighting deflation is going to go on for quite a while," Smyth said. "But at some point, the Fed will succeed and start to create inflation. When the Fed starts to raise rates relative to inflation, then it's time to exit gold."

Goldcorp's Bradbrook thinks gold prices have several years of escalation ahead. His company is so sure prices will continue to rise that it is holding back from the market 6.1 tons of gold, valued at about $70-million. Bradbrook said Goldcorp's stockpile is larger than that held by 42 of the 112 countries that own gold.

"Essentially we believe gold is money," he said. "And since we believe the price of gold is going up, putting all our money in dollars is not the smart thing to do. What we're doing is the opposite of hedging."

Bradbrook urges investors to ignore possible fluctations in gold prices as the world prepares for war.

"You'll find that wars and political tensions give gold prices a short-term run, then they fall to their long-term trend line," he said. "The war is really a side show. What's really driving gold prices is the U.S. dollar declining in value. When you leave money in the bank, it's essentially a degrading asset."

Bradbrook, who said all his assets are in cash, gold and Goldcorp stock, said he knows gold fanatics are sometimes written off as doomsayers because of their contrarian views.

"I remember a fund manager in Zurich who told customers to put 10 percent in gold saying, 'If I'm right, you'll be glad you listened to me. And if I'm wrong, you'll be glad because the rest of your portfolio will be doing so well you won't be worrying about your (gold as) insurance.' "

-- Kris Hundley can be reached at hundley@sptimes.com or (727)892-2996.
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