Gold regains luster as price rises toward $800
By David A. Sylvester SAN JOSE MERCURY NEWS

Vince Grimaldi remembers Jan. 21, 1980, the final day of the last big gold bubble.

"It was like a Broadway opening," said Grimaldi, a salesman at the Valley Gold & Silver Exchange in San Jose. "People were lined up outside the building and around the corner. People were taking $1,000, $2,000 out of their bank accounts and running in to get some gold coins, silver, whatever. They'd buy whatever we had on hand."

In that uncertain environment of inflation and high interest rates, investors abandoned stocks and bonds and turned to gold as it rose to a record $850 an ounce.

The current environment would seem to be the exact opposite, except for one item: Gold prices have risen sharply this past year. The spot price of gold is near the widely watched threshold of $700.

"It's a trend in motion," said Robert Mish, president of Mish International Monetary in Menlo Park. "It will make new highs until the reasons why the dollar is falling and gold is rising cease to be."

Many investors have heard predictions of an imminent bull market in gold for the past two decades from a devoted core of "gold bugs," even though the price of gold sank sharply and languished during the stock bubble at the end of the 1990s.

The difference now is that some of the most astute international financial managers are turning to gold, as well as other currencies and commodities, as top investments while inflation picks up and the dollar deteriorates in value. Marc Faber, author of "Tomorrow's Gold" and editor of the Gloom, Boom and Doom Report, foresees a bull market for many commodities. His prediction: Gold could hit $1,000 an ounce.

His logic is simple: Of all the currencies, gold is the only one whose supply is relatively fixed. Many central banks, especially the Federal Reserve Board in the United States, have fought the post-bubble threat of deflation by printing paper money. One broad measurement of the supply of dollars is up 16 percent in the past two years.

The market for paper money is becoming glutted, and by the laws of supply and demand, its price should decline compared to the more fixed supply of gold, he said.

"Gold is a currency, and it's an alternative to the dollar," said John Mauldin, president of Millennium Wave investments and author of a widely followed newsletter.

Other basic economic forces are favoring gold as well. It is rising in price, not only as a by-product of the Fed's fight against deflation by printing money, but as the result of the record twin deficits in trade and the federal government's budget.

"All the currencies are being diluted and will fall against commodities," Mish said. "The dollar will just fall faster."

Gold prices are also rising because demand is expanding for gold jewelry. Last year, China liberalized its laws on gold ownership. It eliminated a tax on owning gold and opened the Shanghai Gold Exchange, allowing its citizens to trade in gold more freely.

Elsewhere, gold is more than just an investment but is also used for gifts given at births, birthdays and weddings. Display cases at Bhindi's Jewellers in Fremont show a beautiful array of rings, bangles and necklaces that his customers, largely Indian, buy for formal occasions.

"When a baby is born, it is traditional in India to give gold as a present," said Vinod Rai, Bhindi's manager. "It's an investment that keeps multiplying. If you buy clothes or a $100 bottle of wine, you use it and it's gone."

In India, the goddess of wealth, LaxmiJi, is highly respected. "Anything that you respect will multiply," Rai said.

Gold occupies a special place in the history of California, a state shaped by the gold rush of the '49ers. Now most of the gold-panning is among tourists in the streams along the Sierra.

"Along Highway 49, we have one of the great gold belts in the world, and we haven't done any real exploration in 100 years," said Paul Zweng, chief operating officer of Canadian-based QGX, which has an office in Danville. "Mongolia is the big frontier right now."

In the United States, investors can buy gold coins such as the American Eagle, the Canadian Maple Leaf or the South African Kruggerand. They can also purchase stock in leading gold-mining companies such as Newmont Mining (up 52 percent this year), South Africa's Anglogold (up 44.5 percent this year) and Canada's Barrick Gold (up 37.7 percent this year). Or they can purchase mutual funds that focus on gold and other precious metals.

For instance, the Gold Shares Fund of U.S. Global Investors has risen 53 percent this year. A second fund, called the World Precious Minerals Fund, has risen 77 percent. This rise is because it invests in companies that do not attempt to protect themselves against changes in gold prices and so have benefited during this year's gold bull market.

Frank Holmes, chief investment officer of U.S. Global Investors, believes an investor should keep 10 percent of a portfolio in gold funds or coins to diversify against financial risk. As the price of gold changes, an investor should buy or sell to keep the same percentage in the portfolio.

More simply, he thinks investors should buy one gold coin a year. At retirement, no matter what the value of other assets are, a collection of gold coins will stand as a form of insurance.

"You don't buy insurance expecting to use it," he said.

So far, the Bay Area public hasn't started a stampede to buy gold. At Valley Gold & Silver, Grimaldi said a few customers buy gold coins every so often. "I know all the big dealers, and no one is doing big business," he said.

At least right now, gold remains the focus of the international investors and more of a gift item locally.

"Everybody should buy gold for Christmas, because next year, it will be more expensive," Holmes said.

By David A. Sylvester SAN JOSE MERCURY NEWS

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