If you follow the markets, you know that America's biggest obsession these days is with a shiny old friend. Gold's price, though it's tapered lately, has flirted with near-record highs, prompting everyone from hedge fund managers to barbers to talk about the yellow stuff. It's not just talk, either. Americans increasingly want their own personal hoard, and they're buying up coins, bars and bullion at a breakneck pace and storing it in bank vaults, hidden safes or other places perceived as safer than a shoe box. Over the past year, Americans have bought more than 100 tons of gold, spending an average of $81 million a week on the stuff. That doesn't include the billions more spent on exchange-traded funds that track the price of gold.
Gold is intriguing behavioral-finance experts and infuriating investing pros. Those who are buying believe the nation's rising debt and the crises abroad could send the price even higher. At the same time, investors who have been bitten by two stock market crashes and a real estate bubble worry that gold could lose its luster just as fast. It all leaves gold with a unique status in the public imagination—equally fascinating and repulsive.
The U.S. government's continuously growing deficit, however, has persuaded many investors to look beyond the goldbug stigma and see gold as a hedge against deficits and surging inflation.
When all is said and done, is gold really a glittering investment? The recent price rise seems stratospheric, and gold's current price is close to the highest anyone under the age of 30 has ever seen, but it was higher, on an inflation-adjusted basis, in 1980. For gold to reach an all-time, never-before-seen-in-human-history value, the price would have to top $2,000 an ounce. Such a prospect probably would have been dismissed as lunacy a decade ago, but these days predictions as high as $10,000 an ounce are getting at least a bit of respect from professional investors. Gold tends to do well during major geopolitical crises: Its value soared after the Sept. 11, 2001, attacks and has seen smaller spikes after particularly bleak news from Iraq, the Middle East and North Korea.
Gold's value also is tied to the U.S. dollar: The weaker the greenback is, the higher gold's price will be. Gold's proponents feel the nation's huge deficit (expected to reach $1.5 trillion this year), combined with the Federal Reserve's policy of keeping interest rates extremely low, will cause the dollar to plummet over time.Demand for gold has continued to surge in Asia, particularly India, China and even Thailand. Last summer, Thai citizens bought nearly as much gold for investment as Americans did.
The metal has some practical value (about 400 tons a year is used in electronics, dental work and other manufacturing). But many experts say its price really moves based on people's perception of world events, inflation and currencies, not because of its beauty or even its scarcity. It doesn't pay interest or a dividend. And for all the talk that it's the only "real" currency, there aren't many convenience stores that will let anyone pay for a gallon of milk with a gold bar.
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