In nervous economic times, Americans have gold fever

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Gold coins. Gold bars. Gold stocks. Gold funds.

Americans have gold fever.

They caught it big time last fall, when the financial system teetered and the recession seemed to flirt with tipping into depression.

The fever drove the price of the hot metal above $900 an ounce, double what it was in 2005.

This summer, with fears of big government and worries about inflation, the gold market showed no signs of cooling.

Even the unknown drives our desire for gold.

Paul Munyan likes to speculate in gold mining stocks. But he bought South African gold coins called Krugerrands some time ago and stashed them away.

“The coins really are just a hedge against the unthinkable, which is something really, really, really bad,” said Munyan, a lawyer in the Kansas City, Mo., area. “Gold is one of the ultimate safety hedges for your money.”

The U.S. Mint reports that sales this year of American Eagle gold coins topped three-quarters of a million through July, almost as many as all of last year. The mint twice suspended American Eagle sales last fall when it couldn’t keep up with surging demand and soaring prices.

Investors are throwing money at exchange-traded gold funds, too.

The biggest of these relatively young investment vehicles has taken in $10.4 billion worldwide this year, compared with $4.3 billion during all of 2008.

Within the United States, investment demand for gold jumped nearly five-fold, reaching 97.6 metric tons during the 12 months that ended March 31, which is about the time the stock market hit bottom.

But even as Americans feverishly buy gold, they’re selling it, too, mainly to raise some extra cash.

Consumers’ penchant for cashing in unwanted jewelry helped Jeremy Holley save his house.

Holley said he was on the verge of foreclosure last year when he got into the cash-for-gold business with a partner to form Kansas City-based Augustus Gold and Silver. The company joined a sea of others asking consumers to mail in their old jewelry for scrap-gold payouts.

Local gold dealers said recent and longtime buyers of coins and bars were not necessarily hoping gold prices would go up. They see the yellow metal as a hedge against economic disaster and even social breakdown.

Gold’s broader appeal certainly stems?at least partly?from its spectacular price climb. Prices in the spot market are roughly 270 percent higher than a decade ago, with about half of that coming since the start of 2005.

Contrast that with an equal investment in the Dow Jones industrial average back in August 1999.

Without dividends from their 30 blue-chip stocks, Dow investors would have lost money. Even with dividends, something gold doesn’t pay, the Dow has returned only a 9.3 percent gain, which amounts to less than 1 percent per year over a decade.

Stocks of gold mining companies have done better than other companies’ shares, buoyed by the value of their precious product.

But the biggest lure for investors remains the metal itself.

Investors worldwide have flocked to SPDR Gold Shares, an exchange-traded gold bullion fund. It opened for business in late 2004 and now holds more than 1,000 metric tons of gold stored in vaults in London.

Buyers of the shares own a piece of the trust controlling the gold. They can see online photos of gold bars stacked on pallets. They just can’t touch the metal.

The chief advantage of the fund is that an investor can buy and sell easily, avoiding the price markups involved with buying gold coins and bars at the retail level. The fund, however, charges investors a 0.4 percent fee annually that covers storage, security and other costs.

That’s fine with money manager Geoff Friedman and his clients.

“We like gold,” said Friedman of Investors Advisory Services Inc. in Overland Park. Kan. “Because of the amount of money that has been flooded into the system, there is going to be inflationary pressures probably within 12 months.”

Friedman likes oil, copper and other commodities for the same reason. He expects all to see higher prices as inflation heats up in the coming years.

So far, however, gold’s ascent hasn’t gotten much help from current inflation. Consumer prices fell about 2 percent in the last 12 months, the most since 1950.

Friedman sees nothing special about owning gold and doubts it would help investors in a deflationary spiral in which prices of everything would fall persistently.

Gold also has something of a following in some investment circles. Advocates urge investors to own lots of gold always.

An investor question and answer at www.usagold.com suggests investors put 10 percent to 30 percent of their assets in gold as “a general rule of thumb.”

That is a lot of exposure to an asset whose price can be quite volatile.

For example, gold prices soared to over $1,000 early last year only to tumble to nearly $700 late in the year. Gold made another run at $1,000 and is bouncing between that and $900.

Then there was gold’s long, long slumber.

Prices soared to $800 in early 1980 as inflation shot through the roof. But gold tumbled to about $300 by mid-1982 and did not revisit $700 until 2006.

And in all that time, gold paid no interest and no dividends.

Investment adviser Bill Koehler thinks investors can make do with 2 percent to 4 percent of their money in gold.

“That can give you some real good protection,” said Koehler, chief investment officer of ETF Portfolio Solutions Inc. in Leawood.

The company helps investors allocate their money among multiple classes of investments, including a gold exchange traded funds.

He is thinking, however, of raising that gold recommendation a bit. He’s worried about inflation.

“I don’t think we’ve fully digested the magnitude of the borrowing and spending we have just incurred as a nation in the last six to nine months,” Koehler said.

(c) 2009, The Kansas City Star.Source: McClatchy-Tribune Information Services.