Market madness drives some to the glitter of gold

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By Todd Wallack
Globe Staff / August 13, 2011

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BURLINGTON - On Tuesday, the day gold prices soared to a new record, Bob Dumont strode into a former bank building here, paid a precious metals dealer $9,100 and walked out with five shiny gold coins. After gold broke another record Wednesday, Dumont was back again, this time buying $3,600 more.

“I just keep seeing it going up, and all the speculators keep saying it’s going to go up to $5,000 and probably even more,’’ said Dumont, 50, of Hudson, N.H. “I missed the boat when Microsoft’s stock was low. I missed the boat when Apple’s stock was low. I’m not going to miss the boat for gold.’’

Dumont is among the growing number of investors turning toward one of the oldest and most trusted hard currencies - gold - in the face of plunging stock markets, government debt crises, and economic uncertainty. Gold has gained more than $200 an ounce over the past month alone, and at one point this week topped $1,800 an ounce. It closed at $1,747 yesterday, but has climbed 23 percent this year and doubled since late 2008.

How much higher gold can go is unclear. Some analysts say gold prices could plunge if the economy rebounds and confidence grows, just as they lost half their value between 1980 and 1981 after rampant inflation and international tensions eased.

In the last decade, the value of gold has risen much faster than the stock market. But stocks have been a better investment over the longer term; $100 invested in gold in 1980 would have grown to more than $300, compared to $2,500 from the same investment in Standard & Poor’s 500 index, including reinvestment.

Still, over the past decade, investors would have done much better investing in gold. Gold has increased six-fold during that span, while an investment in the S&P 500 has risen by closer to one-fourth.

But James DiGeorgia, who edits the Gold and Energy Advisor newsletter, predicted gold could climb to at least $2,500 in the next two years, and hit $5,000 if there’s a catastrophic economic event, such as the collapse of the euro currency.

William Kohli, who co-leads fixed income investing at Putnam Investments in Boston, said gold has long been considered a safe haven in troubled times. “In a crisis like this,’’ he said, “the one thing that investors look for is high-quality currencies, and those are very difficult to find right now.’’

Here in Burlington, the owners of Boston Bullion are getting a close-up view of this latest gold rush. Just this week, a customer bought 300 1-ounce gold American Eagle coins for half a million dollars, said company president Ken Murphy.

Murphy, a former computer programmer who started the business six years ago, said demand for gold and silver is so strong that he hired his brother, Rich, as a partner in April, and still can’t keep up with inquires. Since January, call volumes have jumped 50 percent, and he’s considering a third employee to help with sales.

“We’re getting swamped,’’ said Rich Murphy.

The business operates out of a former Citizens Bank branch, a two-story brick building with white columns near the Burlington police station. The bank left behind teller windows and a large vault, complete with a 5-ton steel door, where Boston Bullion keeps its coins, bars, and rounds of precious metals.

The business operates by appointment only. After customers step into the front entrance, they must be buzzed into the lobby, where they wait until one of the Murphy brothers leads them into nondescript offices to trade gold, silver, and other precious metals. Security cameras monitor the building; the Murphys say they carry concealed handguns.

Though countries haven’t minted gold and silver coins as conventional currency for decades, many churn out gold and silver pieces to meet demand from investors and collectors. The US Mint sold 35.8 million ounces of gold and silver coins last fiscal year, up nearly 30 percent from the year before.

Like many dealers, Boston Bullion also sells gold and silver bars, as well as rounds - similar in size to coins, but not produced by an official mint. Boston Bullion produces its own silver rounds stamped with its name and logo - a Leprechaun guarding a pot of gold with a machine gun.

There are other ways to invest in gold, through stocks in gold mining firms, mutual funds that invest in gold-related companies, or funds that buy gold bullion. For instance, State’s Street Corp.’s gold bullion fund has more than $73 billion in assets, up from about $8 billion five years ago.

But many people feel more comfortable being able to see and touch their holdings. Dumont, for instance, bought two Canadian Maples and three South African Krugerrands on Tuesday, then a 1-ounce American Eagle coin and a Pamp Suisse gold bar from Switzerland on Thursday.

“You dole out that kind of money, you want something in hand,’’ said Dumont, who keeps the coins in a safe inside a larger safe, where he also keeps his guns.

With several nations buried in debt, many of Boston Bullion’s customers are buying gold because they worry paper currencies will only lose their value.

Elliot Posada of Winthrop started buying gold and silver last year after becoming concerned about the dollar as the federal government continued to run $1 trillion-plus deficits.

Even after paying commissions and fees, Posada says the coins and bars he began buying last year are now worth more than he paid. And Posada, 40, thinks the value can only go up.

“I think silver is going to hit $100 [up from nearly $40 today] and gold will hit $5,000 to $10,000 an ounce,’’ Posada said. “It’s inevitable. It’s the law of physics.’’

Still, many financial advisers warn prices could crash once fear in financial markets subsides. In 1980, for example, after years of runaway inflation, oil shocks, and the Soviet invasion of Afghanistan, gold peaked at $850 an ounce. But by the end of 1981, the price had slipped under $400 as international relations stabilized and inflation slowed.

“Once the economy starts coming back,’’ warned Bob Ryan, a financial planner from Wakefield. “the market [for gold] is going to go down as fast as it went up.’’

Financial advisers also warn that small investors typically face steep commissions and transaction fees when they buy or sell gold directly. Dumont, for instance, said he paid a 2 percent commission. So gold would have to appreciate at least $35 an ounce just for him to cover his buying costs.

And then there’s the risk the goods could be lost or stolen. “If you walk down the street with a bag of gold,’’ Ryan said, “you might not have that bag very long,’’

Some of Boston Bullion’s customers, meanwhile, are taking advantage of the surge in gold prices to cash in.

Jesse Cargill, a silver trader, stopped by Boston Bullion to sell some gold pieces, trading them for cash and silver coins. Silver has also more than doubled in the past year to nearly $39 per ounce, but remains below its recent high of $49 in April.

“I’m selling some gold pieces because gold has been skyrocketing and silver has been tepid,’’ said Cargill, 29, of Melrose. “I want to take my profits out of gold and put them back into silver.’’

Todd Wallack can be reached at