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Heavy Metal

In times of crisis, gold takes on a special shine. How do we know when the market has reached its peak?

Author Douglas Rushkoff Illustration Gary Taxali

WHEN TIMES GET TOUGH, investors traditionally look to gold as a safe haven for their capital. That’s the simplest explanation for the surge in gold prices during the economic crisis to an all-time high of $1,225 an ounce this past December. Of course, in real terms this was less than the $599 it hit in 1981, when Russia was in Afghanistan and America’s global dominance was in question. But it does prove that the metal retains its glittery allure for investors and national treasuries alike—especially when they don’t know where else to turn.

Gold’s critics believe the recent pullback from these all-time highs signals the end of a bull market for gold and, therefore, (good news!) the end of speculation over a full-scale economic meltdown. Fans counter that we’re merely seeing a temporary retreat before even greater demand sets in. After all, many governments are still in trouble, and while they can print more paper money, they can’t pull more gold out of thin air. Research firm McKinsey & Company’s new report on the global economic outlook, considered optimistic in most investing circles, paints a best-case scenario that calls for a six-year horizon for the unwinding of the debt crisis. That’s six years of nervous investors. And whenever investors get nervous, gold stands to gain.

In the long term—since 1800, to be exact—the stock market has generally outperformed gold. That’s because most of the time, businesses can actually generate revenue, while gold can only ever store value. (Your gold bricks can’t make chips, for instance— computer, potato or otherwise.) When the economy or geopolitical climate destabilizes, gold tends to shoot up as investors stop risking their money for the sake of growth and start looking instead for a means of capital preservation. “Unlike paper assets, stocks and bonds, gold cannot go to zero,” explains Charles Hugh Smith, author of Survial+: Structuring Prosperity for Yourself and the Nation.

Even so, “gold bugs,” as enthusiasts of the metal are called, sometimes find themselves in a peculiar position when it comes to the fate of the world. While owning a bit of gold has traditionally served as a hedge, the notion of aggressively investing in gold can seem a little like rooting for Armageddon.

Whatever one’s predictions about the fate of the U.S. treasury and/or civilization as we know it, sophisticated investors looking to make gold a part of their portfolio owe it to themselves to distinguish between the monetary and psychological factors influencing gold’s price and to make decisions accordingly. Perhaps the most fascinating thing about gold is its reputation as the ultimate commodity: a real asset because it is actually worth something. The irony is that intrinsically, gold isn’t particularly valuable. It’s just rare. There’s a difference. In antiquity, gold became a great symbol of value because of its scarcity. Aside from being easy to sculpt, gold did not have any particular purpose for the ancients trading it. Instead, its scarcity guaranteed that coinage made with it could not be churned out infinitely. Even paper money was backed by real gold reserves until the World Wars, when nations no longer had enough gold to back all the cash needed to fund their militaries. That’s when “In God We Trust” became the only thing differentiating paper money from, well, paper.

Ever since money and gold were decoupled, they have tended to move in opposite directions. When people see their governments and treasuries as stable, they also maintain faith in their currencies and have little need for an alternative asset class. But during wars and other inflation-inducing crises that cause currencies to lose value, gold tends to sparkle all the brighter.

And of course, when the dollar goes down, everything from oil to ice cream goes up, because it takes more cash to buy anything. Even without the higher demand for gold, then, its price rises when the dollar falls. Stocks also tend to go up when the dollar is down, because most investors would rather own a portion of a thriving company than a stack of depreciating cash.

But in the long term, a financial crisis inevitably impacts the profitability of businesses, and stocks too become dangerous places to be. Investors look for something real. The difference between gold and other commodities, however, is that while things such as oil and copper rarely do well in economic downturns—because a business slowdown usually means less immediate need for real resources— gold has very little real use beyond its function as a financial instrument. Notes Kamal Naqvi, head of Fund Coverage for Commodities at Credit Suisse, “Gold’s value is supported largely by the fact that national banks buy gold and keep it as reserves.” It’s more valuable as a poker chip than as a commodity in its own right, which explains why in challenging times gold starts to look so appealing. The more fretful you are about the fate of the world (or the more fretful you think everyone else is), the more you want to be in gold. Though, as Naqvi cautions, “Gold is better as a nonspecific hedge than the entirety of one’s investment strategy.” Smith agrees: “It’s as easy to lose money speculating in gold as in anything else.”

Then again, if after the turmoil of the past few years you’ve actually got some capital left to invest, chances are you’ve been making the right decisions all along. Listen to your gut.

DOUGLAS RUSHKOFF, author of Life, Inc.: How the World Became a Corporation and How to Take It Back, appreciates gold for being so flexible.

GOING FOR THE GOLD

THE MAIN GOLD INVESTING STRATEGIES AND HOW TO PLAY THEM

GOLD MINING COMPANIES

One of the the easiest ways to get some gold exposure in a portfolio is to buy stock in the companies that mine it, such as Newmont Mining (NEM) and Goldcorp (GG). But a host of factors—such as low reserves, rising production costs and even politics—can negatively impact the stock price even when gold itself is going up.

GOLD BULLION

A number of companies, such as Bullion Vault and Gold Money, offer the ability to buy gold directly, which is then stored in vaults. While Bullion Vault has facilities in the U.S., both companies also maintain vaults in Zurich and England, catering to investors who fear that the U.S. government will one day confiscate gold, as it did in 1933.

GOLD COINS

What good is a piece of a gold brick in a Zurich basement going to do for you in the apocalypse? In the event of economic collapse, some believe that gold coins, such as the South African Krugerrand or Canadian Maple Leaf, would be the only viable currency. Then again, if the worst came to pass, you might have better luck trading batteries or cans of tuna.

GOLD ETFS

Investors can also buy a stake in real gold through an “exchange-traded fund,” which, as the name implies, trades on the stock exchange throughout the day just like a regular stock. The ETF mirrors the spot price of gold and is backed by real gold that the fund buys at the end of each day.

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