YES, THE GOLD RUSH IS STILL ON.... BUT HOW LONG ? / THE WALL STREET JOURNAL ( VERY HIGHLY RECOMMENDED READING )

INVESTING

FEBRUARY 13, 2011

Yes, the Gold Rush Is Still On…but How Long?

By RUSSELL PEARLMAN

Gene Allen knows his way around gold...as a color. He co-owns an industrial paint company, and a bright golden yellow is particularly popular with some of his clients. As an investor, however, Mr. Allen didn't touch gold for decades. And for good reason: The 56-year-old remembers the metal's 20-year losing streak."I didn't know how to invest in gold, and none of the bankers I dealt with knew either," he says.

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His financial adviser was just as shy -- until earlier this year, when he changed his mind and encouraged Mr. Allen to start buying. So he reluctantly put $150,000 of his portfolio in new American Eagle gold coins. He has already made a decent profit on the investment, but he's not exactly happy with it. Gold's value will probably go up, but it's "more just a hedge," he says.

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Yes, people are buying gold in record amounts, but in many cases they don't feel good about it.

.Forget Ugg boots, Glee and Sarah Palin. If you follow the markets, you know that America's biggest obsession these days is with a shiny old friend. Though gold's price has tapered off lately, as recently as January it was hitting record highs, prompting everyone from hedge-fund managers to barbers to talk about the yellow stuff.

It's not just talk, either. Americans increasingly want their own personal hoard, and they're buying up coins, bars and bullion at a breakneck pace and storing it in bank vaults, hidden safes or other places perceived as safer than a shoebox. Over the past year, Americans have bought more than 100 tons of gold, spending an average of $81 million a week on the stuff. That doesn't include the billions more spent on exchange-traded funds that track the price of gold.

But this isn't a stereotypical gold rush or even a typical investment mania. Yes, people are buying gold in record amounts, but in many cases they don't feel good about it.

Some are upset about having missed gold's massive price surge over the past decade and are worried about buying too late. Others fear they'll be targets for robberies or scams, or be branded as crackpots by friends and neighbors.

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Some financial advisers are embarrassed to even talk about gold. "I didn't believe gold would be a good investment, and it turned out to be a great investment," says Dennis R. Marvin, a financial planner outside Cleveland who only grudgingly started recommending gold in 2009.

Here, a look at the factors that turned gold from good to great -- and at others that could send it falling again.

On Aug. 25, 1999, gold cost $252.55 an ounce, its lowest price in 20 years; today it trades at more than five times that price. Nevertheless, it has taken a long time for the public to get into a gold frenzy. As recently as 2007, Americans bought 17 tons of gold for investing, about $370 million worth -- only slightly more money than they spent that year on tickets to Spider-Man 3.

What changed? First and foremost, many Americans lost confidence in other assets in the aftermath of the 2008 financial crisis. Gold tends to do well in geopolitical crises as well: Its value soared after the Sept. 11, 2001, attacks and has seen spikes after particularly bleak news from Iraq, the Middle East and North Korea.

Gold's value also is tied to the U.S. dollar: The weaker the greenback is, the higher gold's price will be. And gold's proponents feel that the government's huge deficits (expected to reach $1.5 trillion this year), combined with the Federal Reserve's policy of keeping interest rates extremely low, will cause the dollar to plummet, spurring inflation. "Gold is a bet against Ben Bernanke. It's a bet against the feds," says Bill Bonner, founder of the financial newsletter The Daily Reckoning.

Perhaps just as important, it's now simpler to invest in gold, thanks to exchange-traded funds that let investors trade the metal like a stock. Gold ETFs didn't even exist in this country as recently as 2004 but now have more than $50 billion in assets.

Investors who buy shares in a gold ETF don't ever see the metal; much of it is stored in vaults scattered around England and Switzerland. Advisers around the country have embraced the ETFs; they're one of the easiest ways to get clients into the metal, says Greg Gilbert, an Atlanta-based financial planner for Ronald Blue & Co.

Still, gold isn't expensive, on a historical basis, when compared with stocks, according to research firm Leuthold Group. Some well-heeled investors have built huge positions in gold. Paulson & Co., a hedge fund made famous by betting correctly that the U.S. housing market would crash, now holds more than $4 billion in the SPDR Gold Trust ETF (GLD).

Gold's current price is the highest anyone under the age of 30 has ever seen, but it was higher, on an inflation-adjusted basis, in 1980. For gold to reach an all-time, never-before-seen-in-human-history value, it would have to top $2,000 an ounce.

Of course, a further price surge isn't inevitable or even, in the eyes of some professional investors, probable. Billions of dollars have been spent building gold mines over the past few years, so it's not inconceivable that gold's supply could outstrip demand, driving down prices.

Other investors go so far as to say there's a gold bubble, inflated by the biggest wave of economic anxiety since the Great Depression. Jason Apollo Voss, a former mutual-fund manager and the author of "The Intuitive Investor: A Radical Guide for Manifesting Wealth," predicts a big selloff in gold -- its price falling by nearly half -- some time in the next two years.

"I don't like to invest in things that depend on people's nervousness," Mr. Voss says.

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