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Julian Phillips: A ''spike'' or something else?

Section: Daily Dispatches

In the Face of Inflation,
Gold is a 24-Karat Bet

By David Nicklaus
St. Louis Post-Dispatch
Sunday, May 14, 2006

http://www.stltoday.com/stltoday/business/columnists.nsf/davidnicklau
s/story/8E4BBBF316D308268625716D000B2F5A?OpenDocument

The price of gold has risen $100 in a month and $300 in a year, but
the public hasn't caught gold fever just yet.

Wistar Holt, founder of Holt & Shapard Capital Management, is
perhaps St. Louis' No. 1 gold bug. He has put virtually all of his
clients' money in gold-mining stocks since 2001, and they've handily
outperformed the broader stock market.

But even with gold hitting a 26-year high last week, the public
hasn't shown much interest.

"It's misunderstood," Holt says. "Most people don't realize it's
really a currency. There's a whole generation that's been misled to
believe it's a barbaric relic.

"If the stock market undergoes some kind of sharp correction, it
would accelerate the public's interest in gold," he says hopefully.

Gus Saettele, owner of Saettele Jewelers in Clayton, says his
customers don't seem very concerned about the price of gold, even
though it has added a couple hundred dollars to the price of a
$3,000 diamond ring. When gold hit a record $850 an ounce in 1980,
Saettele recalled, customers often spoke of their desire to buy a
piece of jewelry quickly before it got more expensive. He hasn't
heard that comment recently, although he says business has been
brisk.

As a businessman, Saettele has to pay attention to the daily
gyrations of precious metals markets. "You can't sell everything as
if it was $500 gold when you've got to replace your inventory at
$700," he said.

A gold price of $700 seemed far-fetched even a year ago, when the
metal was selling for about $415 an ounce. It passed the $700 level
on Tuesday, and closed Friday at $714.80.

The rapid runup has traders trying to guess whether the record of
$850 will be surpassed this year. One analyst has even predicted
that the rally will take gold to $2,000, which is close to what the
1980 price would buy in today's dollars.

Gold is considered an inflation hedge, which is why it performed so
well in the inflationary 1970s. Don Vaught, a futures analyst at
A.G. Edwards & Sons, jokes that gold is merely trying to keep up
with less precious commodities like copper and oil.

Oil, as everyone knows, is in record territory at more than $70 a
barrel, and copper hit a record price last week of $8,800 a
ton. "Gold traders ... believe that the strength you're seeing in
the base metals and energy commodities is going to translate into
inflation across the board," Vaught said.

Global political instability adds to the demand for precious metals.
It's no coincidence that Iran, where an Islamic revolution occurred
during the last major bull market in gold, is now worrying the West
with its nuclear ambitions.

In essence, gold has resumed its role as a safe haven for people who
worry that paper currencies, like the dollar or the euro, might lose
value rapidly. Gold bugs like Holt think there's an additional cause
for gold's rapid rise: He says that major investment banks,
including Goldman Sachs, have taken huge short positions in gold
over the years, and are buying frantically to cover those positions.

Whatever the reason, this barbaric relic seems to be winning new
converts almost daily. Until the world becomes a safer place, it
seems likely to keep doing so.

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