Rattled investors seek safe haven in gold

Advisers weigh in and wonder: Is it a sound investment or a panic move?

Sep 28, 2008 @ 12:01 am

By Aaron Siegel

Investors scared away by shaky equity markets have been mining the gold market, but advisers are mixed as to whether the investments in the precious metal are a long-term play.

Since the financial markets began their descent Sept. 12, the price of an ounce of gold has increased $134.58, or 18%, to $881.05 by the close of trading Friday.

Gold prices had risen 5.7% year-to-date.

"With the concerns in the financial system, we are seeing an increase in the demand for gold bullion," said Paul Burchell, senior mining analyst at Dundee Securities Corp. of Toronto.

He noted that many exchange traded funds have upped their purchases of gold bullion in recent weeks.

"People are less comfortable with U.S. dollar investments and are flocking to gold as a safe haven," Mr. Burchell said.

As gold prices rose, the value of the dollar declined about 3% against the euro to around $1.46 at the close of trading Friday.

George Milling-Stanley, director at the World Gold Council, based in London, thinks the recent spike in gold prices is part of a trend that began in 2001 that stems from stronger demand for gold, a declining dollar, rising inflation, the subprime-mortgage crisis and increased geopolitical tensions.

Gold prices have risen 224% since the beginning of 2001.

"[The recent] chaos in financial markets has been added to some strong reasons for gold to be going up," Mr. Milling-Stanley said.

BAILOUT FALLOUT

While many analysts expect gold prices to continue to rise, advisers are mixed on the direction of the commodity.

"I think the price increase in gold is a panic move," said Roman Franklin, an adviser at Franklin Financial Planning Inc., a four-year-old firm in DeLand, Fla., that manages $9 million in assets.

"Gold made this climb recently as part of the fallout that has resulted from investor perception of an economic crisis."

Mr. Franklin expects that once the details of a government bailout package for the financial markets are hashed out, investors will jump into the equity markets, causing gold prices to fall by as much as 5% in a day.

But Steven W. Medland, a partner and principal at TABR Capital Management LLC in Orange, Calif., which manages $150 million in assets, feels that a government bailout package will make gold investing a safe bet.

"I think that a bailout package will eventually cause significant inflation in the economy and it may take a long time to work its way through the system," he said, noting that he recommends a 5% exposure to gold in client portfolios.

"People are right to buy gold at these levels to hedge that risk," Mr. Medland said.

E-mail Aaron Siegel at asiegel@investmentnews.com.

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