Austin Business Journal
May 29, 2005
By Robin Ewing

For Ryan Denby, sales manager of Austin Rare Coins and Bullion in North Austin, business has never been better. Sales of gold, platinum and silver have increased 45 percent to 50 percent in the last year, he says.

“People who have money are more concerned with hanging on to it. We’ve never been so busy,” he says.

For a little more than a year, gold has glittered at around $400 an ounce for the first time since March 1996. As the economy flirts with higher inflation, the dollar weakens and oil prices surge, gold is becoming attractive to those with investment portfolios in need of diversification.

In 2004, a record $2.22 billion flowed into gold and natural resources mutual funds, according to AMG Data Services, a firm that tracks investments among mutual funds nationwide. ScotiaMocatta, a Canadian precious metals dealer, reported an increase of more than 3 million contracts in the gold futures market for 2004. Companies such as Austin Rare Coins and Bullion are seeing their businesses grow at record rates.

In the early 1980s, hyperinflation pushed gold to an all-time high of $850 an ounce. As inflation decreased, gold eventually bottomed out at $252 an ounce in July 1999. Since then, gold has crept up to the $400 mark.

So, what’s driving gold now?

“Obviously, the dollar, paired over the last two years with the Fed raising interest rates,” says Ralph Aldis at U.S. Global Investors Inc., a mutual fund company in San Antonio. Aldis is a senior mining analyst and member of the portfolio team managing the Gold Shares Fund, World Precious Minerals Fund and the Global Resources Fund.

“It harkens back to the late ’70s, the last sustained bout of inflation,” says Carl Stuart, owner of Austin-based Carl Stuart Investment Advisor Inc. and host of the KLBJ-AM show “Money Talk with Carl Stuart.”

He says that although there are differing views nationwide, many — such as Bill Gross, manager of the world’s largest bond fund — say there are strong signs that the U.S. economy is headed toward inflation.

Recently, the Federal Reserve Board raised interest rates for the eighth time since last June, noting in a news release that “pricing power is more evident,” meaning the Fed is worried about inflation.

The dollar responded positively to the Fed’s announcement, but overall the dollar has been losing ground in the international market. Because gold is traded globally in dollars, a weak dollar usually means an increase in gold’s price.

The weak dollar also has affected stock choices for gold mutual funds. The Gold Shares Fund, the oldest no-load gold fund in the country, was established to invest in South Africa, the largest gold-producing country in the world. But, in the last two years, the fund has gone from 30 percent South African holdings down to 2 percent, Aldis says.

“In South Africa, the rand has gone up 100 percent, and the gold price has not gone up 100 percent,” Aldis says. “South Africa in the last two years has not been the place to be.”

Instead, Aldis has switched portfolio concentration to companies with production costs based in dollars, because the weak dollar makes them more attractive.

High oil and energy prices also can fuel fears of inflation. CIBC World Markets Inc., the investment bank for the Canadian Imperial Bank of Commerce, predicted a rise in oil prices to more than $60 a barrel. Oil has been near $50 since February.

People generally buy gold as a hedge against inflation because gold and stocks usually move inversely. In a diversified portfolio, this can protect against downturns in the market.

“If your gold has done well, then your other assets have probably gone down. It’s portfolio insurance, but we don’t like to say insurance, because it’s not really insured,” Aldis says.

Aldis, a chartered financial analyst, recommends that no more than 5 percent of a portfolio be invested in gold; however, Denby says his bullion customers are more likely to go between 10 percent and 20 percent.

“People invest in gold with a long-term outlook in mind. They’re looking for a permanent part of their portfolios,” Denby says.

Stuart discourages owning only gold.

“It’s good not to own one type of commodity. Commodities should be diversified; otherwise, you’re betting,” he says.

If investing in commodities, Stuart says one strategy is to buy shares in a mutual fund that tracks a broad range of commodities, including gold and energy.

Gold investment vehicles come in varied forms. Intangible investments include futures and mutual funds. Gold futures are an agreement to buy or sell a specific amount of gold at a set price in the future. Because they are risky, futures are typically for advanced, wealthy investors. Gold mutual funds tend to hold stock in gold-mining companies, with only a small percentage of the portfolio in futures or actual bullion.

Tangible investments, such as coins, bars and jewelry, are tied directly to the price of gold. Rare coins, those minted up to 1933, are on a different pricing system. A 1933 double-eagle gold coin sold for $7.59 million in 2002 at a Sotheby’s auction.

Denby says that most of his customers are investors, not collectors. An average sale runs at about $1,000.

“Our investors are looking for a hedge or profits. Gold is about safety and security,” he says.

Historically, inflation — and fear of inflation — drives gold prices. However, if higher interest rates do their job, the dollar will strengthen and gold could drop back down. Because the market has proved volatile, no one is confident in a prediction.

“In the past six months in gold and oil sectors, prices ran up, and then they backed off,” Aldis says. “I think gold is more likely to go sideways to up.”