When hoi polloi start lining up to buy or sell gold, you have to wonder if it's a price bubble. In January, 1980, crowds huddled outside currency and precious-metals dealers as bullion peaked at $850 (all currency in U.S. dollars) an ounce. Now that gold has surged beyond $1,000, hyper TV gold pitchmen are inciting the same type of traffic at their shops. Is another crash coming?
John Embry, chief investment strategist of Sprott Asset Management, says the run-up will endure this time around. Double-digit inflation drove fearful investors to gold in the 1970s; this time, the impetus is broader and deeper-and it's just getting started. Central banks are being "extremely aggressive in money creation," he says, because they're trying to keep interest rates low and fund gargantuan government deficits.
Even without that stimulus, just think of the mountains of paper money and assets that have been created worldwide since the seventies, generating vast potential demand relative to a much smaller increase in the supply of physical gold. "What people don't realize is that it's still cheap!" says Embry, his voice rising more than an octave.
Why don't they realize it? Embry says the first instinct in an economic crisis is often to horde cash and other paper assets. The most dramatic example, he says, is the hyperinflation in Weimar Germany in the early twenties. Paper soon became worthless, and the savings of Germans who hadn't invested in gold, sound foreign currencies or other solid assets were wiped out.
Embry figures gold prices should hit $1,500 within the next six to 12 months, so it's still a good time to buy. So, is bullion the best bet, or gold companies? That takes some number-crunching (see below), but here's Embry's basic take: "Stocks, particularly the more junior stocks, are behind the metal. So in a pure appreciation sense, if you're looking to make money, there's more leverage in gold shares at this point." That said, Embry suggests getting a bit of both, but he clearly prefers the metal itself. "Oh, I love krugerrands, Maple Leafs, Austrian ducats," he says. "They're beautiful!"
BULLION OR GOLD STOCKS
In theory, if gold prices climb, you should get more bang for your buck by investing in the shares of a gold producer, rather than bullion itself. The mathematical logic is simple: Say it costs $250 (all currency in U.S. dollars) for a mine to produce an ounce of gold, and suppose the price of gold rises from $400 an ounce to $500. The price of the metal has increased by 25%, but the mine's profit has increased 67%.
Does reality conform to the theory? The answer depends a lot on when you buy, and which gold company you invest in. Let's give bullion aficionados the maximum possible advantage on timing, and assume you bought an ounce not at the $850 peak price in 1980, but at the low point two decades later: $252.80, on July 20, 1999. It would now be worth about $1,004.
What about stocks? Using the S&P/TSX Global Gold index as a comparator, you would have been better off buying bullion. The index has roughly tripled since that day in 1999, so if you'd invested $252.80 in index companies, it would be worth about $745 today.
But suppose you'd been savvy enough to invest in Goldcorp Inc., the group of small companies that Robert McEwen took over in 1990, then started restructuring in 1993.
He built it into a powerhouse before stepping down as CEO and chairman in 2005. If you'd invested $252.80 in July, 1999, it would now be worth about $3,331.
John Daly