Ounce by ounce, gold market soars

NEW YORK -- For what is normally a sleepy month, there are so many customers at the Gold Standard, a New York company that buys jewelry, that it feels like Christmas in August. Uncle Ben's Pawn Shop in Cleveland has never seen a rush like this.

Welcome to the new American gold rush. The price of gold is on a remarkable run, setting a record seemingly every other day. Volatility in the stock market this month has only made investors covet gold more.

Some want it as a safe investment for turbulent times. What worries some investors is that many others are buying simply because the price is rising and they want to make money fast.

"Is gold the next bubble?" asks Bill DiRocco, a golf company manager in Overland Park, Kan., who shifted 10 percent of his portfolio earlier this year into an investment fund that tracks the price of gold. He stopped buying because the price kept rising.

In October 2007, it sold for about $740 an ounce. A little more than a year later, it rose above $1,000 for the first time. This past March, it began rocketing up. On Wednesday, it traded at $1,795 an ounce, just shy of last week's record of $1,801.

Meanwhile, stocks, despite rising sharply in the last two and a half years, are only slightly higher in price than they were a decade ago. Since hitting a record high in October 2007, the Standard & Poor's 500 index is down 23 percent.

Gold hits a sweet spot among the elements: It's rare, but not too rare. It's chemically stable; all the gold ever mined is still around. And it can be divided into small amounts without losing its properties.

Ultimately, though, gold is valuable because people agree it is. It was used around the world as a currency for thousands of years, and then it gave value to paper currencies for a couple of hundred more.

Investors are dazzled

Now, in a time of turmoil, from the credit downgrade and debate over raising the debt limit in the U.S. to the growing financial crisis in Europe to worries of slow growth across the globe, gold is dazzling investors.

Since the financial crisis in 2008, central banks around the world have bought gold as a hedge against their foreign currency holdings. Earlier this month, South Korea announced it had bought gold for the first time in more than 10 years.

Gold is "an effective hedge in a world where there is too much debt and uncertainty," said Jim McDonald, chief investment strategist at Northern Trust, which owns $2.8 billion of gold in a gold fund.

The last time gold prices rose so precipitously was a few years after President Richard Nixon ended a decades-long fixed relationship between the value of the dollar and the value of gold.

In those days, the price of gold was fixed at about $35 an ounce. And many foreign currencies were pegged to the dollar. Gold gave the dollar its value, and the dollar gave everything else value.

Then the U.S. began running a trade deficit, and dollars piled up abroad. Central banks could redeem dollars for gold. But it was a poorly kept secret that the U.S. didn't have enough gold to cash out every dollar in circulation.

To head off a rush, Nixon "closed the gold window," essentially saying that confidence in the U.S. government, not gold, gives the dollar its value. Gold and the dollar began to rise and fall freely, and gold earned its place as protection against the falling dollar when confidence lags.

As inflation worsened later in the 1970s and dollars were worth less, the price of gold took off. Gold hit its high in 1980 -- $850 an ounce, or more than $2,300 in today's dollars.

This time is different because gold is rallying against all currencies, not just the dollar, says Jim Grant, editor of Grant's Interest Rate Observer.

"Gold is the reciprocal of the world's faith in the world's central banks," Grant says, and right now, "the world is in a pickle."

Gold prices will probably keep rising until the U.S. and Europe get their finances in order, he says -- and Grant doesn't expect that to happen soon. He predicts inflation, low for the moment, will soar, further eroding the value of the dollar and leaving only gold as a good investment.

Cetin Ciner, a professor of finance at the University of North Carolina-Wilmington, disagrees. He thinks gold is near a peak and people who buy now are blindly chasing the rising price.

"I'm thinking of it as like the dot-com stocks," Ciner says.

Both Ciner and Grant caution, however, that when it comes to gold prices, no one really knows. That's because gold doesn't have intrinsic value. It doesn't offer an interest rate, like a bond, or represent a share of a company, like a stock. It is inherently speculative as an investment: You only make money if the price goes up.

Amy Robinette, who owns Gold Buying Girl, a network of 70 women in six states who throw parties for people to sell their gold jewelry, says her clients "don't realize how much their gold is worth." She gets a cut of the sales.

"Once they sell, it kind of creates a frenzy," says Robinette, who quit a career as a personnel recruiter to start the business two years ago. "They either want to find more or tell their friends and their friends start selling."

Sharlett Wilkinson Buckner, of Humble, Texas, recently took an old bracelet, ring and necklace to her local jeweler and walked out with $1,070.

"I couldn't wait for my husband to come home," she said. "I fanned my money in front of him and said, `Look what I got for my gold."'

The next day, he sold an old gold necklace for $650.

If Peter Hug is right, this frenzy for gold is likely to continue. The director of the precious metals division for Montreal-based Kitco, one of the largest dealers of precious metals, says gold is no longer "just for the crazy people" -- Henny Pennys expecting the sky to fall.

Hug says that until the U.S. tackles its debt and deficit problems, there's no limit for the price of gold.

"As long as people are terrified that their purchasing power is going to be eroded, gold goes to $3,000 an ounce," Hug says.

Whether or not prices climb that high, many people are deciding it's as good a time as any to sell Grandma's jewelry. Pawn shops and gold brokers report a surge of people cashing in their gold.

In the past two years, Tansky, who runs Uncle Ben's and is president of the Ohio Pawnbrokers Association, says gold sales have doubled or tripled. That figure actually masks how hot gold is right now, he says, because others who would have come to his store have gone instead to unlicensed brokers that are trying to cash in.

"I saw a barbershop that had a sign, `We buy gold,"' he says. "A barbershop! Can you imagine?"