Is it Time to Buy Gold?


Is it Time to Buy Gold?

Market forces could push gold, already at a 27-year high, toward $1,000 an ounce. But expect a breather first.

When you hear the term gold bug, chances are you imagine a doom-and-gloomer frantically warning of financial disaster. Think again, because recently the term might as well be a synonym for savvy investor. Gold has been on a long-term upswing, tripling in value since 2001 to a recent $760 an ounce -- not far from its all-time high of $850 an ounce, set in 1980. The surge has ignited a rally in mining stocks as well, with many of them near yearly highs.

Is there much left of this gold rush? A pullback could come at any time, given the explosive rally in gold prices in recent months. Longer term, it comes down to a call on economic trends. Gold prices will fall if we enter a global recession, depressing personal incomes and industrial uses of gold, or if the dollar rebounds and inflation doesn't. Such trends, singly or together, could put the brakes on gold.

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But if the global boom continues, and if inflation ticks up and the dollar ticks down, the long-term rally could keep going. One telling statistic: Consumption of gold has been growing almost twice as fast as its production. Another stock-market crisis could turn more investors into gold bugs because the metal is often considered the ultimate safe harbor.

For now, a test of the $850-an-ounce historic high seems inevitable. Even predictions of $1,000 or more don't seem terribly outlandish, when you consider that in inflation-adjusted terms, gold's 1980 peak translates to $1,700 today. But even believers should beware the metal's volatility and keep holdings of gold funds or stocks to 5% of assets.


You shouldn't own the metal directly. The best proxy is an exchange-traded fund, such as iShares Comex Gold Trust (IAU) or streetTracks Gold Trust (GLD).

Stocks provide greater opportunity but come with greater risks. Because of operating leverage -- if production costs stay roughly even, any increase in the price of gold flows right to the bottom line -- corporate profits can multiply disproportionately to a rise in gold prices. But embedded within the stocks are a host of worries beyond the price of gold -- operating risk, geologic risk, financial-market risk and, in some cases, geopolitical risk. Worth a look: Barrick Gold (ABX), Agnico-Eagle Mines (AEM) and Goldcorp (GG).

If you prefer a professional at the helm in this dicey sector, consider Tocqueville Gold fund (TGLDX), Midas fund (MIDSX) or USAA Precious Metals and Minerals fund (USAGX).