Investors’ fervor making gold an ever more precious metal

Gold cracked the $1,000-an-ounce level for just the second time last month, and it’s making its first sustained $1,000-plus run since briefly eclipsing that mark a year-and-a-half ago. Gold cracked the $1,000-an-ounce level for just the second time last month, and it’s making its first sustained $1,000-plus run since briefly eclipsing that mark a year-and-a-half ago. (Karl Mathis/ Keystone/ Associated Press/ File)
By Dave Carpenter
Associated Press / November 12, 2009

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CHICAGO - The new gold rush is on.

The price of the precious metal is soaring, hitting a record $1,119 an ounce yesterday - confounding market analysts who thought there was no way gold would remain so expensive when it first cracked the unheard of $1,000 mark last year.

The remarkable run has implications far beyond savvy investors. In New York’s diamond district, more people started showing up late last year to sell their gold, and the crush hasn’t let up, said Anthony Iannelli, owner of Iannelli Diamonds.

“They’re bringing in jewelry from the ’70s and ’80s they don’t wear anymore,’’ he said. “They’re following the news and see prices are high. They realize they have a little cache, and want to take it out of the vault.’’

Typically, gold is a safe place for investors to park money, not something they buy to make money. It doesn’t earn interest, and because it’s always sought, its value tends to be fairly stable.

For example, when gold first reached $1,000 it was March 2008, shortly after the collapse of Bear Stearns. Investors bought it then because they feared for the financial system’s stability.

Investors this time are buying gold to protect themselves against the falling dollar.

Currencies are weak investments because of record-low interest rates. Foreign banks that hold substantial amounts of US debt, such as China’s, want to diversify holdings.

News earlier this month that India’s central bank bought nearly $7 billion worth of gold from the International Monetary Fund triggered a gold buying frenzy.

The surge has been remarkable. Gold is up 7 percent this month, and 26 percent for the year. Some forecasters see it going to $1,200, $1,500, or beyond - unless the frenzy halts.

More than 100 people a day now come to sell their gold at Ernest Perry’s antique and estate jewelry store in Charlotte, N.C., up significantly in recent weeks.

But the rising price of gold has put a dramatic dent in jewelry sales, already suffering from the recession. Far fewer customers are looking to buy gold jewelry because of the soaring price, Perry said. “I think it will just about kill the gold jewelry business’’ if the price rises and remains above $1,500 an ounce, he said.

For the most part, though, demand for gold is coming from investors and speculators, not from people who use it.

Gold prices could fall when optimism about the economy takes hold again, as happened briefly the first time gold reached $1,000. If that happens, the damage could be long lasting: Gold reached $850 an ounce in 1980, and then took 28 years to return to that level. (Gold’s peak in 1980 is about $2,300 in 2009 dollars.)

It is hard to forget what happened with oil prices, which shed more than half their value in less than a year after peaking at $147 a barrel in July 2008. No one knows when a seemingly unstoppable rally will end badly.