How $800 gold hits consumers, investors

By MADLEN READ 11.01.07, 3:49 PM ET
Associated Press

NEW YORK – An ounce of gold has reached $800 for the first time since 1980. Here are some questions and answers about what the 27-year high in gold prices means for consumers and investors.

Q: How will rising gold prices affect the average consumer?

A: Not a whole lot. Some jewelry retailers, especially small ones, might have to pass along some of the higher costs to consumers in order to make a profit. It’s important to note, though, that craftsmanship accounts for jewelry pricing more than raw materials do. Gold is used in small amounts in electronics, too, but not enough to affect price tags noticeably.

Growing demand for gold jewelry in India and China is one reason gold prices have increased over the past several years. Other reasons include the falling dollar and the fact that the commodities markets have become very popular for speculators.

What affects people more than surging gold prices is the rise in prices of everyday commodities, like oil, corn and industrial metals. The weakening dollar is also a concern for Americans, because it makes international travel more expensive and could start making imported goods pricier.

Q: So it looks like gold is on the upswing. Should I invest in it?

A: Many experts will tell you that precious metals are a good way to diversify for your portfolio, particularly as a hedge against inflation. But as with any investment, they advise against putting too much money in one basket.

Over the long term gold is apt to hold its value – it’s one of the oldest forms of currency, after all – but in the short-term, it can be very volatile.

“To a certain extent the nature of gold has changed from a safe-haven asset to a trader’s asset,” said Matthew Hougan, editor of, a Web site that collects and analyzes information on financial market indexes. “You see gold now rise when the market rises and drop when the market drops. A lot of fast money has gone into gold.”

In August, gold sold off temporarily when tightness in the credit markets scared people out of commodities and into safer securities like Treasury bonds. The financial markets are about as jittery now as they were then, despite a half-point rate cut by the Fed in September and a quarter-point cut on Wednesday.

“The metal remains quite vulnerable to a correction of about half of the more than $100 move it traced since the initial Fed cut,” wrote Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal, in a note.

Q: What kinds of gold-related investments are there?

A: There are a few choices.

One is a gold bullion exchange-traded fund, or ETF, which tracks the price of physical gold in the commodities market. However, Hougan said, income on these investments is taxed at a rate of 28 percent, because the government treats them the same way they would if you owned actual gold.

A second option is a gold futures ETF, which essentially tracks what traders expect the price of gold to be at a later date. These investments are taxed at a maximum rate of 23 percent, depending on your income, but also earn 5 percent annual interest, Hougan said.

Another choice is investing in mining companies, either through an index fund that tracks mining companies or by buying individual company stock. These investments have lower tax rates than gold ETFs and can provide better returns if the companies hedge their bets properly. But as with any company stock, investors are at the mercy of labor or management problems that might arise.

What’s probably most prudent for inexperienced investors is to buy into a mutual fund that has some exposure to gold. That way, you benefit from any jumps in gold prices but don’t lose your shirt if the market turns south.

Q: What about those gold coins they advertise on TV and the Internet?

A: There’s nothing wrong with buying physical gold, but once you have it, you need a place to put it. You may end up spending more insuring and locking up your gold than you make on its rise in value.

Leave a comment:

Previous post:

Next post: