Bulls, bears debate value of gold investing

Americans are beginning to wake up to grandma's valued asset

By DIAN VUJOVICH
Special to the Palm Beach Daily News

October 24, 2009

You can hardly open a newspaper or turn on the television today and not see an advertisement for places to sell your gold jewelry or suggestions how to invest in this precious metal the entire world seems to love. And why not? It's trading at all-time highs.

Adored by kings and queens, rulers and peasants, gold makes a statement whether in ring, broach, necklace, bracelet, crown, certificate, bullion, nugget or bar form. Even pooches have a statelier stride when a little golden bone dangles from their collars.

The value of gold goes up or down depending upon economic, personal or geopolitical circumstances. Right now its value is flying high; the price of gold recently traded at more than $1,058 an ounce. A decade ago, on Oct. 1, 1999, it traded at a fraction of that: $291.35 an ounce.

With debt in the United States rising and the value of the dollar diminishing, is now a good time to buy or sell gold? The answer depends upon with whom you speak.

Golden baubles

"If you believe that gold is going to go to $2,000 an ounce or even more and it's $1,000 an ounce as we speak, then yes it's a good idea to buy gold," says Tobina Kahn, vice president of House of Kahn Estate Jewelers in Chicago. "If you believe in the U.S. dollar and think that the dollar is going to rise, then no, don't buy gold."

Kahn has been in the estate jewelry business more than 15 years. Her family has been in it more than 50 years. Her parents, Edward and Adele Kahn, own the Chicago shop and the House of Kahn Estate Jewelers on Peruvian Avenue.

Selling gold jewelry through an estate jeweler is different that plopping your old rings and bracelets into an envelope and shipping them off or visiting a "we-buy-gold" store and getting a check or cash.

Estate jewelers buy jewelry to resell it. They are a part of what's considered the secondary market for gems and jewels. Companies that advertise bringing your gold jewelry directly to them typically melt it.

"I can't get this point across enough," Tobina Kahn said. "A lot of places are buying it for melting purposes. We do not melt anything down because if we were to melt it down, you'd be getting much less (for the piece). We try to keep it in its intact form because we're going to resell it."

Purchasing jewels at estate jewelers also is different than, say, shopping at fine retail jewelers. Because they are a part of the secondary market, estate jewelers offer a unique selection of jewels, often at value prices. That said, if the price of gold rises too high, even well-priced bobbles at the best estate jewelers could lose their luster.

Adele Kahn said she has concerns if the price of gold rises too high. "It could make jewelry too expensive, and we do want the consumer to be able to buy."

Golden returns

Then again, gold has always been an international currency of sorts. Just ask your grandma. If she, or any of your relatives, came to the United States from anywhere around the globe in the early to mid-20th century, she probably carried with her some gold coins or jewelry, and stashed them away for safekeeping.

"Europeans have always believed in gold," Adele Kahn said. "Gold is really an international currency and now Americans are waking up and realizing that. They have always thought it was something of a luxury, but now it's rising above housing or stocks."

Indeed, it has. The average gold-oriented mutual fund, for example, was up more than 19 percent during the third quarter of this year. Year-to-date, through Sept. 30, it is ahead 40.71 percent. The average S&P 500 index fund was up 15.42 during the third quarter of this year and 18.8 percent year-to-date, according to Lipper Inc. That's quite a spread.

Even looking back three and five years, the value of this precious metal still shines. The average gold-oriented fund had an average annual total return of 11.46 percent for the past three years, and 15.38 percent for the past five years, again ending Sept. 30. On the other hand, the average S&P 500 index fund was down 5.9 percent for the last three years and only up one-half of one percent over the past five years.

"Don't tell me that jewelry doesn't earn interest," Adele Kahn said. "When things get rough what do men do? They sell their wives' jewelry."

Gold, inflation and the dollar

"As much as people talk about gold being an inflation hedge, I think that there are a lot of choices out there that work better," says Jeff Tjornehoj, research manager for the United States and Canada at Lipper. "TIPS, for instance, would be a much better choice."

Research he's seen doesn't always show gold acting as a hedge against inflation, Tjornehoj said. And TIPS, Treasury Inflation-Protected Securities, are designed to protect against inflation because their values increase with inflation and decrease with deflation.

That said, Tjornehoj says there is merit in the theory that gold is responding to a lack of optimism and faith in U.S. currency.

Pierre Duga, a financial correspondent for Radio France and Le Figaro newspaper, says that because of America's huge debt and massive printing of money, he expects the value of the U.S. dollar to become weaker in the future when measured against currencies such as the Chinese yuan and Japanese yen.

"The American economy was the big engine of growth for the world," Duga said. "The American consumer was the consumer of last resort. That has collapsed. What's happening is a rebalancing of the world's economies."

Duga said he is still a fan of gold as a hedge against inflation, preferring ETFs to holding gold bullion. He also likes currency plays. "The idea is to buy something that holds its value. When you start not trusting the dollar any more, buy hard assets (such as gold)," he said.

"We keep measuring things as if the dollar was the single currency to value things by and is defined by its weight in gold. We're no longer in 1971," he said.

Golden opportunity, or not?

So where does that leave us? Right where we started: Having to make hard investment decisions regarding what we think will happen to the value of our currency, interest rates -- and gold -- given current economic conditions.

Then we should consider how our answers play into what's going on in the world and what the future could bring -- understanding there's no such thing as a sure bet.

As for bangles, baubles and rings made of gold, why not buy them? They wear well no matter what's going on in the world.

GOLD'S UPS & DOWNS

Since President Richard Nixon took the U.S. dollar off the gold standard in 1971, its value has fluctuated.

A few examples:

• August 1971, one Troy ounce of gold was valued at $35 an ounce. A year later it was $38 an ounce. In May 1972, the U.S. devalues the dollar to $42.22 a Troy ounce.

• January 1980, gold hits a new high of $850 per ounce.

• August 1999, gold is trading at $251.70 an ounce.

• November 2005, it's $500 per ounce.

• May 2006, the price hits a high of $730. One month later, it's fallen 26 percent to $543 an ounce.

• March 2008, gold hits a high of $1,030.80.

• January 2009, gold closed the month at $919.50.

• October 2009, gold hits an all-time high of $1,058 an ounce.