posted 01-25-2003 12:01 PM            

Page 3B

Gold hits 5-year high, but glittering prices may tarnish quickly

By John Waggoner

War. Crazed dictators. Smallpox. War with crazed dictators who may have smallpox. What more could a gold investor ask for?

Gold prices soared to a five-year high of $365 Thursday, propelled by fears of war with Iraq. But gold has been rising since mid-2001. Is this gold rally the real deal, or just war jitters?

Quite possibly, a mixture of both. Fear has accelerated the rise in gold prices recently. Basic supply and demand imbalances may push gold higher in the long term.

If you're thinking of gold-digging, wait until the Iraqi crisis plays out. If peace breaks out, you'll get the chance to buy at lower prices.

Fearfest

Gold is the currency of last resort. Investors buy gold when faith in the government falters. You can generally trade gold for food or shelter even when the government has collapsed.

Gold also rises when governments print too much money, and inflation rises. But inflation is deader than a dinosaur: The consumer price index rose just 2.4% last year. What is pushing up gold prices?

Let's start with the stock market. The Standard & Poor's 500-stock index has tumbled 42% since its March 2000 peak, and some investors don't trust paper profits any more. ''Gold is something you can hold in your hand and peg its value,'' says Gary Adkins, a gold dealer in Edina, Minn.

Then there's global unrest. Nothing makes investors quite as skittish as war, particularly when nuclear or biological weapons could be used. They buy gold as a hedge against disaster. Some estimates put gold's ''war premium'' at $24 to $30 an ounce.

If war no longer is a factor -- either through peace talks or a quick victory in Iraq -- that premium could vanish, and gold prices could fall. ''Gold peaked the day the bombing started in the first Gulf War,'' says Mark Johnson, manager of USAA Precious Metals & Minerals fund.

The dollar's decline on foreign exchange markets, sparked by the anemic U.S. economy, helps gold, too. Gold is priced in U.S. dollars, so gold has become cheaper for foreign investors to buy.

The euro, the pan-European currency, rose to $1.08 Thursday, its highest since 1999. When a euro is worth 90 cents and gold sells for $365 an ounce, Europeans can buy gold for 406 euros. When the euro is at $1.08, the same ounce of gold costs 16.6% less at 338 euros.

But gold's rise isn't just fear. The long slump in gold prices before the spike the past year has hurt gold production. It fell 2% last year, to 2,543 tons, according to Gold Fields Mineral Services.

Production probably won't rise soon. ''The industry has cut back on new mines and exploration, and in this business, it takes three to five years from discovery to put a new mine into production,'' says Bruce Hansen, chief operating officer at Newmont Mining.

Demand had been weak, too, because of the poor economy here and elsewhere. If the economy picks up, however, gold prices should rise. ''The long-term outlook is good,'' USAA's Johnson says.

Test your metal

Gold dealer Adkins estimates his business is up 50% the past 12 months. ''We're getting a lot of new customers,'' he says.

If you're thinking of becoming a new gold investor, you have several choices. But be cautious.

* Gold mutual funds. Few gold funds own any gold. Instead, they buy stocks of gold-mining companies, whose earnings soar when gold prices rise. Suppose gold sells for $275 an ounce, and your company produces gold for $250 an ounce. If gold rises 9% to $300, your company's profit would double to $50 an ounce from $25 an ounce. ''For every 1% rise in gold prices, the stocks rise 3% to 4%,'' USAA's Johnson says.

Gold funds have sparkled the past 12 months, but their long-term performance stinks (see chart). Most of their five-year gains occurred in the past 12 months. If you buy a gold fund, don't invest more than 5% of your portfolio.

If you want to buy the actual metal, be aware that it's risky, too. ''It's not an investment, it's a speculation,'' Adkins says. So how do you buy gold?

* Check out the dealer first. Don't buy from an unknown dealer through the mail or the Internet.

* If you just want gold, buy bullion coins, particularly U.S. Eagles. These have no extra price for collector's value. And coins are harder to counterfeit than gold bars. ''I've seen people cut bars in half and fill them with lead,'' Adkins says.

Once you've bought gold, you have to figure out where to store it. Your best bet: a bank safety deposit box. Otherwise, you'll have to find a place to hide it around the house -- which could lead to catastrophe if you're forgetful or in a high-crime area.

Be extremely cautious of dealers who offer to sell you gold and store it for you. Too many investors have discovered, too late, that their gold never existed in the first place.

posted 01-26-2003 02:08 AM            

Be extremely cautious of dealers who offer to sell you gold and store it for you. Too many investors have discovered, too late, that their gold never existed in the first place.

peace is not going to break out all over the world...iraq,n/korea,india / pakistan,al-quaida,israel / PLO,south america...gold is an excellent play and will be for atleast another year...maybe more...I've heard 600.00 an ounce is not out of the question...gold mining co's have cut back on mining and will do what OPEC does to maintain stability and even increase in gold value...

world stability has to occur and the U.S economy has to start booming again...before gold will start receeding in value...

10% gold in your nest egg has always been the rule of thumb...and right now a extra 15% in a short term play with solid and gold funds is extremely logical....