Gold spike: New boom times for precious metal

November 12, 2009 at 12:00a.m.

CHICAGO (AP) — The new gold rush is on.

The price of the precious metal is soaring, hitting a record $1,119 an ounce on Wednesday — 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.

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

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

This time is different. Investors are buying gold to protect themselves against the falling dollar.

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

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

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

Some analysts are panning the gold speculation.

“You just don’t see increases like this over the short term” that last, says Steve Condon, director of investor advisory services for Truepoint Capital in Cincinnati. “This isn’t materially different from gambling.”

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, said Ernest Perry, who owns an antique and estate jewelry store in Charlotte, N.C. He predicted silver would become the primary metal used in jewelry if gold prices drive customers out of the market.

For the most part, though, demand for gold is coming from investors and speculators, not from people who actually want to use it. Demand for gold for jewelry and for industrial and dental uses was already falling during the second quarter, according to the latest data available from the World Gold Council.

Perry said customers looking to sell their gold should go to dealers with plenty of experience and expect to get, on average, about 70 percent of the current price. And there are other ways to get into gold than selling family heirlooms.

There are gold funds, publicly traded gold mining companies and gold bullion or coins, depending on what makes someone the most comfortable. No way is certain to be the safest or most lucrative.

And of course, there’s no guarantee the bubble won’t burst.