Gold prices tumbled 6 percent after hitting a new record in late
April. Investors who sense trouble ahead expect gold prices to surge
higher. But other precious metals are poised to rise if the recovery
Gold has been one of the shiniest of investments in the past
year. Up more than 30 percent, the precious metal reached a record
$1,565.60 an ounce. Then last week, gold prices tumbled 6 percent,
before stabilizing around $1,500 an ounce.
So is it time to buy gold before it starts another climb? That
depends on what your outlook is.
If you believe that America's easy money policy will lead
inevitably to high inflation - and that the Federal Reserve can do
nothing to control it - then gold is a good hedge against inflation.
If you think that Congress and the White House won't control
spending and that US debt will continue to spiral out of control,
then gold is a good way to protect against long-term decline in the
value of the dollar.
"Investors are concerned about the long-term purchasing power of
the US dollar," says Axel Merk, president of Merk Investments, which
owns some gold and manages $650 million from Palo Alto, Calif. "The
fear is the US budget is not on a sustainable path and our
policymakers are not taking it seriously enough."
Of course, too much pessimism can create its own market bubbles.
Some analysts believe gold itself has become overvalued, driven by
too much fear. Last week's sell-off could be evidence that many
investors agree. Is it time to move into more optimistic
investments, such as stocks or even other precious metals?
The fundamentals "justify the high price of gold," wrote Scott
Anderson, senior economist at Wells Fargo Securities, in a report in
late April before the latest decline. The headline to his research:
"Gold not in bubble territory ... yet." Although inflation is not a
major economic worry yet, Mr. Anderson thinks it's "creeping higher
and higher." In addition, he's concerned that reducing the soaring
US government debt and deficit may entail "significant sacrifices
that many Americans may be loath to endure."
Although many mainstream economists and investment professionals
have long been doubtful about gold as an investment, the 2-1/2 year
rise in gold prices, combined with concerns about inflation, are
prompting some nontraditional buyers to invest. For example, John
Paulson, a hedge fund manager who made billions in the collapse of
the financial markets, decided to buy gold last year, writes Gregory
Zuckerman, author of "The Greatest Trade Ever," a description of Mr.
Paulson's winning strategy during the housing crisis.
Paulson has decided his next moneymaking enterprise is to bet
against the US dollar, according to Mr. Zuckerman's book. Paulson
calculated the supply of dollars had expanded by 120 percent over
several months following efforts to prevent an economic depression,
a move that he argues will lead to massive inflation and makes
gold's prospects exciting.
Some mutual funds are also starting to add gold to their
investments. And so are individual investors, especially as it has
become easier to buy gold-related products with new financial
products. Exchange traded funds (ETFs), for example, are traded on
the exchanges but buy gold bars and let investors own a share
without worrying about vaults and insurance. …