Jump in gold prices evokes memories of the 1970s

Right now, gold is starring in its own version of "That '70s Show," trading at prices not seen since investors flocked to it as a protection against the rampant inflation and soaring interest rates of the Ford and Carter presidencies.

An ounce of gold recently was trading for about $550, up from roughly $450 a year earlier, and up from about $280 five years ago. Early this year, gold reached nearly $575 an ounce, the highest figure since 1981.

What's different this time, though, is why -- and how -- investors are buying gold. Even with prices going up, it's easier and cheaper than it was in the 1970s for a physician or any investor to purchase gold. That said, it's also just as easy as ever for a physician or any other investor to lose money on the deal. That gold price in 1981 was about $300 below what an ounce traded for just a year earlier.

Gold prices tend to rise when inflation and interest rates appear to be creeping up, as is happening now, because investors use gold as a hard-currency hedge against fluctuating stocks and other investments. But inflation and interest rates are nowhere near the double-digit 1970s levels that fueled similar price growth.

Analysts say increasing worldwide demand for gold in jewelry and industrial applications are two factors driving up prices. According to the London-based World Gold Council, 2005 purchases of gold for jewelry increased 5%, to 2,736 tons, and gold for industrial applications was up 5%, to 419 tons.

The fastest growth, though, is in gold as an investment -- up 26%, to 600 tons in 2005, according to the World Gold Council. (Overall, $53.6 billion worth of gold was bought in 2005.)

Demand is being pushed in large part because of what are called gold exchange traded funds, which debuted in the U.S. two years ago. The funds, traded on the New York Stock Exchange and American Stock Exchange, can be bought and sold like stocks.

Their prices are tied to the actual trading price of gold. The holder owns the share, not real gold, although buying a share results in bullion being purchased by the fund.

So an investor who wants an interest in gold doesn't have to find a commodities trader or a coin shop, then plop down $550 for an ounce. Instead, an investor could purchase shares -- good for the equivalent of one-tenth of an ounce of gold -- for, say, $40 to $50, depending on the underlying price of gold and trading of funds.

To get an idea of how quickly these funds are growing, the largest, State Street Corp.'s Streettracks, at the end of February reported that it had sold $6 billion in just two years.

Analysts say the advantage of gold exchange traded funds over, say, a mutual fund including such gold assets as mining companies is its lower investment fees. But the exchange traded funds carry a higher capital gains tax level, 28%, compared with mutual funds, which often are at around 15%. That's because a gold exchange traded fund is, for tax purposes, treated as a collectible -- as if you yourself owned gold.

Where is the market heading?

Given the past -- and current -- volatility of gold prices, the question for many physician investors might be more about whether to buy than what to buy.

Financial experts aren't exactly sending clear signals. In mid-February, Goldman Sachs analysts recommended that investors sell and lock in gains on the expectation that gold prices would fall. Before the month was out, they changed course and increased their year-end gold-price estimates by about 30%, figuring that gold would end 2006 at $550 per ounce, and 2007 at $575 per ounce before falling back to below $400 in 2008.

Some investment newsletters predict gold going as high as $700 per ounce soon; other financial analysts, such as Barclays Bank, see gold dropping below $400 in a short time.

If physicians want to buy into gold, they need to do so thinking about long-term investment strategy rather than trying to time the market, said Les Satlow, a portfolio manager with Cabot Money Management, a Salem, Mass.-based company.

"Investors who are more concerned with having a globally diversified portfolio that ranges across asset classes will benefit most from the addition of gold because it is a viable asset class," Satlow said.

"This is a long-term asset allocation strategy," he said. "This is not a trading play. Most individual investors are probably not equipped to make trading calls on commodities, and gold would probably be included in that."

Anyone who bought gold at its peak price -- $873 an ounce in 1980 -- only to watch it drop precipitously in the 1980s and 1990s can attest to the wisdom of not making a short-term play.

"Do not purchase gold on the basis of making money. Buy it as insurance," said Roland Manarin, an Omaha, Neb.-based money manager.