Gold rush could signal trouble
05/10/2002 - Updated 01:07 AM ET
By Matt Krantz, USA TODAY
Investors fed up with the gloomy stock market may be missing a bull market that's glittering right in front of their faces: gold.
Even while blue chips and tech stocks are in the dumps, the price of gold is on a tear. Stocks of companies that mine gold, which are closely tied to the price of gold, even hit two-year highs this week.
But unless you're invested in gold, this rally may actually be a reason for concern. It could be a clue the stock market is in more trouble than many realize, say analysts who study the metal.
"The gold market senses a continuation of the bear market in stocks and rising inflation," says John Hathaway, portfolio manager at Tocqueville Asset Management. "Nothing else is working."
When investors start buying gold, they're bracing for trouble. They're essentially turning away from the stock market and saying they'd rather protect the assets they have than risk losing more.
Unfortunately for non-gold investors, everything that's propelling gold is likely to be bad for non-gold stocks, says Mark Johnson, manager of the USAA Precious Metals and Minerals fund. Rising oil prices, fears of inflation and concerns about Middle East unrest all go into a stew of things that boost gold, he says.
Most important, the weakening U.S. dollar is causing nervous investors to buy gold for safety.
Whatever the reason, the gold rally is getting harder to ignore. Gold stocks have risen 44% this year and 88% from the bottom on Nov. 17, 2000, as measured by the Philadelphia Stock Exchange Gold and Silver index. Compare that with the Standard & Poor's 500, which is down 7% this year and down 22% since Nov. 17, 2000.
If the dollar continues to struggle, gold could run more, Johnson says. Also, if the Federal Reserve overstimulates the economy by keeping interest rates too low, too long, "gold will like that," says Bill Martin, manager of the American Century Global Gold fund.
Gold experts say that the revival of bullion has deeper meanings for all investors because it shows:
Anxiety about the U.S. economy and stock market is rising. Investors buying gold are betting problems such as rising oil prices and terrorism are being underestimated, Johnson says.
Others say gold is climbing as investors get more skeptical that the economy will recover this year as has been expected. James Dines, a longtime gold bull and editor of The Dines Letter, even calls reports of an economic recovery in the first quarter "a complete fraud."
Gold's performance is a warning that the market is not safe yet, says Bernie Schaeffer of Schaeffer's Investment Research. "A prudent investor would look for ways to survive if the world remains an unfriendly place," he says.
Questions remain about how weak the dollar will become. Typically, gold does best when investors are worried about the dollar losing value. This occurs when the Federal Reserve tries too hard to jump-start the economy by keeping interest rates low or by boosting the money supply.
So far, there are few signs of inflation. But gold bugs think that could quickly change, and they'd rather lock their money into a hard asset like gold, Hathaway says.
Investors are fed up with losing money by trying to make money. That's why being defensive is paying off, Dines says. "People who were overinvested in the market are seeing their portfolios melt away," he says.
Both Dines and Schaeffer say gold could continue to rally until investors completely give up on big-cap and tech stocks that were the craze during the '90s boom.
So should you buy gold? Not necessarily. For one thing, if the dollar stabilizes, the gold rally could peter out, Johnson says. Also, if gold continues to soar, companies can tap new mines and flood gold onto the market, which could bring prices back down.
Some of the factors that propelled gold, such as a rush of Japanese investors to buy the metal because their government is reducing insurance on savings accounts, could be short-lived.
But gold has suckered investors before. Gold and gold stocks cratered during 2000, for instance, because of foreign banks rejiggering their reserves.
Gold fans, though, say this time is different. "People have never seen a bear market," Dines says. "It's a bull market for gold."
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