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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.

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).