Time for Gold Digging?
Rising rates and global strife are great for gold.
But what a lousy world that would be.

May 27, 2002
By Andy Serwer, FORTUNE

In John Updike's novel, Rabbit Is Rich, the book's protagonist, Harry "Rabbit" Angstrom, is mired in a world of gas lines, inflation, and falling consumer confidence. So what does Rabbit do? He capitalizes on the craziness by buying a mess of gold coins, which appreciate like mad and make him rich. Hence the book's title. (If that part of the plot seems dated, wait until the spouse-swapping bit!) Yup, those were the days, at least if you were a gold bug. With all that uncertainty, the price of gold just kept climbing, eventually peaking at around $850 an ounce in 1980. Of course, it was all downhill for the yellow metal after that. Over the next 20 years gold endured a horrendous bear market.

Until now. Not surprisingly, given the way the world has been turning, the price of gold has been up briskly. Since bottoming out at around $250 an ounce in March 2001, gold has climbed all the way to $312 (which, for all of you still in QQQ-land, is a 24% return). The question now is, After all those years of miserable underperformance, is it time for gold to shine again?

Before we get to that, you should know that to a large degree what prompted gold's run in the 1970s was inflation. As interest rates climbed to the high teens, Nervous Nellies clamored for gold coins--Krugerrands mostly, and later Canadian Maple Leafs and Australian Nuggets. Why gold? It's seen as holding its value when prices rise. Which is also why after 1980, as inflation and interest rates began their long decline, the price of gold dropped (while stocks and bonds climbed vigorously). Now many think the next move for rates is up. That could be a huge positive for gold.

More than that, wags have always said that the only way gold will really enter another bull market is if we have World War III--the implication being that would never happen. But what if, some on Wall Street wonder, we're actually in some kind of World War III and just don't realize it? What if the next big one isn't about tanks and trenches but a protracted global war on terrorism? Couple that with dismal financial markets--as in recession, a tech collapse, plus Enronitis, and all in all, metal fans say, you have a picture-perfect environment for gold.

Some, however, like Peter Cohan, who runs an eponymous consulting firm, think investors should hang on to their wallets. The stocks of gold-mining companies are up some 90% over the past year, and the fundamentals, he says, don't support the run-up. Central banks, for one, have been unloading gold for years and are likely to continue to do so.

Four years ago in "Burned by Gold" I wrote about the terrible shape the gold business was then in. I ended by noting that "...it's hard to imagine that at some point gold won't rise again." We may be at that point now. If so, it's a sad day.

Loose Change
Had a lot of interest in the story I did on 529 plans a few issues back. Readers point out that the tax-favorable treatment those college-savings plans get will expire in 2010. But experts say it's very likely the benefit will be extended or even made permanent after that.

http://www.fortune.com/indexw.jhtml?doc_id=207999&channel=artcol.jhtml