The Power of Gold: The Risks and Rewards

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Gene Allen is intimately familiar with gold ... as a color. Allen co-owns an industrial paint company, and a bright golden yellow is particularly popular with some of his clients. As an investor, however, Allen didn't touch gold for decades. And for good reason: The 56-year-old remembers the metal's 20-year losing streak. "I didn't know how to invest in gold, and none of the bankers I dealt with knew either," he says.

Allen's financial adviser was just as shy—until earlier this year, when he changed his mind and encouraged Allen to start buying. So Allen reluctantly joined millions of other Americans, putting $150,000 of his portfolio in new American Eagle gold coins from the U.S. Mint. He's already made a decent profit on the investment, but he's not exactly happy with it. Gold's value will probably go up, but it's "more just a hedge," he says.

Forget Ugg boots, Glee and Sarah Palin—if you follow the markets, you know that America's biggest obsession these days is with a shiny old friend. Gold's price, though it's tapered lately, has flirted with near-record highs, prompting everyone from hedge fund managers to barbers to talk about the yellow stuff. It's not just talk, either. Americans increasingly want their own personal hoard, and they're buying up coins, bars and bullion at a breakneck pace and storing it in bank vaults, hidden safes or other places perceived as safer than a shoe box. Mall-walkers in Boca Raton, Fla., can even buy gold out of a vending machine whose screen updates the metal's fast-moving price every 10 minutes. Over the past year, Americans have bought more than 100 tons of gold, spending an average of $81 million a week on the stuff. That doesn't include the billions more spent on exchange-traded funds that track the price of gold.

But this isn't a stereotypical gold rush or even a typical investment mania. Yes, people are buying gold in record amounts, but in many cases they don't really feel good about it. Some are upset about having missed gold's massive price surge over the past decade and are worried about buying too late. Others fear they'll be targets for robberies or scams, or be branded as crackpots by their friends and neighbors. Some financial advisers, who are supposed to act in the best interest of their clients, are embarrassed to even talk about gold. "I didn't believe gold would be a good investment, and it turned out to be a great investment," says Dennis R. Marvin, a financial planner outside Cleveland who only grudgingly started recommending gold in 2009.

Even as it puzzles advisers, gold is intriguing behavioral-finance experts and infuriating investing pros. Those who are buying believe the nation's rising debt and the crises abroad could send the price even higher. At the same time, investors who have been bitten by two stock market crashes and a real estate bubble worry that gold could lose its luster just as fast. It all leaves gold with a unique status in the public imagination—equally fascinating and repulsive.

To think, it wasn't long ago that some people couldn't get rid of gold fast enough. Around the turn of the millennium, governments worldwide sold billions of dollars' worth of bullion to pay down debt and launch spending programs, unloading an asset that had been on the decline ever since Ronald Reagan was shot. The U.K. sold more than half its gold—almost 400 tons—in three years. Investors weren't much interested either; in 2000 they bought $3.4 billion worth of coins and bullion, less than one-fifth the amount people spent on wine that year. Michael Fuljenz, president of gold dealer Universal Coin & Bullion in Beaumont, Texas, remembers umpiring Little League games where many of the parents were financial planners and stockbrokers, and nearly all, he says, would scoff at the idea of investing in gold.

People who unloaded gold then ended up selling at the worst possible time. On Aug. 25, 1999, gold was at $252.55 an ounce, its lowest price in 20 years. If investors were lucky enough to have bought $1,000 worth of bullion that day, their investment would be worth almost $5,400 now. If they'd put $1,000 in the S&P 500 then, the investment would be worth about $1,200. The only thing that put the brakes on gold's upward movement was the 2008 financial crisis, when the value of nearly everything cratered. But gold was soon heading higher again. These days, Fuljenz no longer umpires baseball games, but he gets asked about gold at charity events, at church and anywhere else he goes. "People are tired of batting zero for the 21st century," he says.

Nevertheless, it has taken a long time for the public to get into a gold frenzy. As recently as 2007, Americans bought 17 tons of gold for investing, about $370 million worth—only slightly more money than they spent that year on tickets to Spider-Man 3. Indeed, for decades, investors who've embraced gold have been thought of as somewhat eccentric, even a bit crackers. "Goldbugs," as the stereotype has it, go around quoting Ayn Rand, think the world's governments conspire to keep the price of gold down and believe gold is the only currency of any real value; they worry that hyperinflation is on the way. And some goldbugs seem to fit the stereotype—people such as 41-year-old Stephen Wilder, a stock analyst whose only investment is gold. He turned to gold after studying the so-called Austrian School of economics, which supports getting rid of central banks and basing all currency on a strict gold standard. He has his gold stored not near his Katonah, N.Y., home, but in Zurich. "I think some people think I'm a little crazy," says Wilder.

The U.S. government's continuously growing deficit, however, has persuaded many investors to look beyond the goldbug stigma and see gold as a hedge against deficits and surging inflation. Joe Carney, a 72-year-old retiree in Lake Hopatcong, N.J., never thought seriously about owning gold until the federal government bailed out the nation's banks and enacted a nearly $800 billion economic-stimulus package. "We're just printing money and not looking at what the result is going to be in the long run," Carney says.

But stocking up on the metal itself still doesn't come naturally to Americans, who own only about one-eighth of the gold bullion and coins in the world.Owning the real thing inspires legitimate wariness: Some Americans find getting a safe-deposit box inconvenient or fear that dealers could overcharge or defraud them. Price Harding stayed away from gold for more than 30 years for a simple reason—he and his family were held up at gunpoint in their own house as thieves stole metals from his family's business. "Owning gold had a risk that I didn't want to encumber my family with," the 51-year-old Atlanta native says.

Harding started investing in gold again in 2009, allocating 10 percent of his portfolio to the metal. But he wasn't enticed back by the idea of holding ingots in his hands. Like millions of others, he got into gold through, of all things, the stock market, buying an exchange-traded fund that gives investors the chance to invest in the metal but trade it like a stock. Gold ETFs didn't even exist in this country as recently as 2004 but now have more than $50 billion in assets. Investors who buy shares in a gold ETF don't ever see the metal; much of it is stored in vaults scattered around England and Switzerland. "Before the ETF, some people viewed gold like a high-priced stamp collection. Now it's in their portfolios," says Jason Toussaint, managing director of the U.S. and investment for the World Gold Council, a trade group. The price of the largest gold ETF, SPDR Gold Shares ( GLD ) , is pegged to about 10 percent of gold's price. Advisers around the country have embraced the ETFs; they're one of the easiest ways to get clients into the metal, says Greg Gilbert, an Atlanta-based planner for Ronald Blue & Co.

When all is said and done, is gold really a glittering investment? The recent price rise seems stratospheric, and gold's current price is close to the highest anyone under the age of 30 has ever seen, but it was higher, on an inflation-adjusted basis, in 1980. For gold to reach an all-time, never-before-seen-in-human-history value, the price would have to top $2,000 an ounce. Such a prospect probably would have been dismissed as lunacy a decade ago, but these days predictions as high as $10,000 an ounce are getting at least a bit of respect from professional investors. Gold tends to do well during major geopolitical crises: Its value soared after the Sept. 11, 2001, attacks and has seen smaller spikes after particularly bleak news from Iraq, the Middle East and North Korea.

Gold's value also is tied to the U.S. dollar: The weaker the greenback is, the higher gold's price will be. Gold's proponents feel the nation's huge deficit (expected to reach $1.5 trillion this year), combined with the Federal Reserve's policy of keeping interest rates extremely low, will cause the dollar to plummet over time. "Gold is a bet against Ben Bernanke. It's a bet against the feds," says Bill Bonner, founder of the financial newsletter The Daily Reckoning . Global demand for gold, whether in jewelry, bullion or ETF form, props up gold's price too. Demand for gold has continued to surge in Asia, particularly India, China and even Thailand. Last summer, Thai citizens bought nearly as much gold for investment as Americans did.

Still, gold isn't expensive, on a historical basis, when compared with stocks, according to research firm The Leuthold Group. Some well-heeled investors, used to making big bets on exotic assets, have built huge positions in gold. Paulson & Co., a hedge fund made famous—and fabulously rich—by betting that the U.S. housing market would crash, now holds more than $4 billion in the SPDR Gold ETF, on top of big stakes in gold-mining stocks. Other big-name gold owners include hedge fund manager David Einhorn and multibillionaire George Soros. Small-time backers, meanwhile, include Florence and Milton Schneider, of Boca Raton, Fla., retirees who recently became the first U.S. customers to buy gold out of a vending machine. Milton deposited $122 in cash in the Gold to Go kiosk at the Town Center mall (it doesn't take plastic). When the Schneiders returned to the mall a couple of weeks later—Florence needed a haircut—the 2-gram gold piece was selling for $123. "We made a profit on it," Florence says.

Of course, a further price surge isn't inevitable or even, in the eyes of some professional investors, probable. Gold, after all, is a commodity, and its price can rise and fall based on the amount of metal dug from the ground. Billions of dollars have been spent building mines worldwide over the past few years, so it's not inconceivable that gold's supply could outstrip demand. Indeed, gold's supply has been rising gradually since 2007, according to the World Gold Council. Other investors go so far as to say there's a gold bubble, inflated by the biggest wave of economic anxiety since the Great Depression, that will burst the moment people stop being nervous about the economy. Jason Apollo Voss, a former fund manager and the author of The Intuitive Investor: A Radical Guide for Manifesting Wealth , predicts a big sell-off in gold—its price falling by nearly half—some time in the next two years. "I don't like to invest in things that depend on people's nervousness," Voss says.

And therein lies just one of the problems that make gold so tantalizing—and so puzzling. The metal has some practical value (about 400 tons a year is used in electronics, dental work and other manufacturing). But many experts say its price really moves based on people's perception of world events, inflation and currencies, not because of its beauty or even its scarcity. It doesn't pay interest or a dividend. And for all the talk that it's the only "real" currency, there aren't many convenience stores that will let anyone pay for a gallon of milk with a gold bar. Even fans of it remain perplexed. Mark Luschini oversees $2 billion as chief investment strategist of Janney Montgomery Scott, and he recommends that gold be about 3 to 5 percent of a portfolio. It took him 10 years to decide that the metal had a place in investing, and his view is still colored by seeing gold's price fall throughout the '80s and '90s. Gold's price could go far beyond $1,400, he says, or it could fall back below $1,000, and each seems equally likely: "You think sometimes it's really tantamount to putting it on either black or red."

Performance for "Mining a Gold Mine" is since 12/30/2000.

Additional reporting by Anna Prior.