Steve Quayle News Alerts

March 4, 2003
By John A. Torres, FLORIDA TODAY

With threats of war with Iraq looming and investor confidence weak, many are turning to what they see as the next sure thing -- gold.

The price of gold closed Monday at $349.20 a troy ounce -- up more than 17 percent from a year ago. The price has been volatile in recent months, hitting a seven-year high of $382.10 in February, and some experts think the start of war in Iraq could again temporarily push gold prices close to $400 an ounce.

Rising gold prices have boosted the value of investments in gold stocks, mutual funds and coins. But it also will increase the cost of gold chains and rings, as jewelers pass along their higher costs to their customers.

Local jewelers are watching the situation with Iraq closely, though they say gold-jewelry sales have not suffered yet, partly because retail prices haven't been significantly affected -- for now.

Michael Herbst, owner of Palm Bay Jewelers, explained jewelers buy gold in advance, so that current price fluctuations have yet to hit customers too much. He now is selling gold that he purchased in January or that was left over from last year.

"It really has to go up considerably for it to have a big impact on the consumer," he said, explaining 14-karat gold really is only about 58 percent gold, so that cuts the effect of rising gold prices on jewelry. He said a 1-ounce, 14-karat gold chain that previously cost customers $175 now would cost about $204.

"We thought there would be a huge impact in December," said Arlene Durrance, manager of Sullivan's S&S Jewelers in Melbourne. "But we had a real good December. People have not been afraid of buying. It hasn't affected us much."

Mike Haugh, manager of Brevard Gold & Silver/The Coin Shop in Indialantic, said he has seen a large number of clients doing both buying and selling in recent weeks. The popular items were gold coins with the American eagle or the Canadian maple leaf on it.

He said it's not good for business when the price stays stagnant -- either high or low -- for too long.

"It's better when it's moving up and down," he said. "Then there's always activity."

Pawnshop owners said the rise in gold prices hasn't hurt their business, thought the weak economy has increased their buying lately.

"When times are tough in a soft economy, people tend to get a little more thrifty," said John Massa, president of three Brevard pawnshops, including Best Pawn Shoppe in West Melbourne. "We've been purchasing a little more, not just of jewelry, but of everything."

In addition to higher jewelry-store prices, the surging gold market has started causing investors to shy away from the stock market and put money into the precious metal. Gold traditionally has been seen as a reliable store of value during times of unsettled economic and political climates.

"In a world of uncertainty, people flock to gold," said Jay Bryson, a global economist with Wachovia Bank. "It tends to hold its value. If you're not sure about equity markets and with the bond market not doing so well, gold seems like a safe bet."

The equity -- or stock -- market has continued to slump this year. Dow Jones industrial average of 30 blue-chip stocks is down 6.0 percent so far in 2003, while the broader-based Standard & Poor's 500 index is down 5.1 percent.

Steven Wilmarth, associate vice president of investments for Raymond James & Associates in Melbourne, said buying gold during this time is not a bad idea, but he wouldn't suggest it as a long-term investment.

"Personally, I would recommend it as a defensive mechanism with respect to geopolitical risks people have," he said, "but it hasn't been one of the assets to buy over the long term."

He added that there are many other long-term options that investors would be better off buying.

One successful investment has been gold mutual funds, which averaged more than a 60 percent gain in 2002. Precious-metal funds invest primarily in gold, as well as mining companies, coins and bullion.

There have been other periods of history where gold prices have fluctuated radically. Gold prices rose as high as $870 an ounce in January 1980. Then, during more-favorable economic conditions of the 1990s, gold fell to $260.

Bryson cautioned, however, that Iraq may not be the only reason gold prices are on the rise.

"People tend to hold onto gold to hedge against possible inflation," Bryson said, careful to stress that an inflation problem does not seem imminent. "But it could be telling us about people's expectations about inflation."

But, Wilmarth said, with interest rates at a 40-year low, "there is no evidence of an inflation problem at all."

Some experts have said that the price of gold could come crashing down if war with Iraq is over quickly.

But Bryson thinks the strong gold market is here for good.

"Prices could certainly come down, but it would be difficult to envision them coming down a lot," he said. "Some of the safe haven may go away, but I don't see it falling back down to the $260-an-ounce range."

Kelvin Williams, executive director of AngloGold Ltd. of South Africa, said he wouldn't be surprised to see gold prices top out at $400 a troy ounce.

"We wouldn't see gold crashing all the way down to $300," Williams said. "I would be very surprised if it didn't hold between $320 and $330."

http://www.floridatoday.com/!NEWSROOM/moneystoryA45557A.htm