TSX Venture Exchange:  BVT

By Ameet Sachdev
Chicago Tribune

After watching the value of his stocks sink for three years, Ken Jensen began 2003 looking to diversify his portfolio by considering a long-forgotten investment.

His search led him far from his stockbroker's office to Harlan J. Berk Ltd., a coin and collectible shop in Chicago's Loop. There, on the second day of the new year, Jensen went shopping for gold.

"Well, the stock market keeps going down," said Jensen, a 55-year-old Chicago business executive. "I invested in gold a long time ago. I thought it was time to revisit it."

Gold enjoyed a resurgence in 2002, as the precious metal reclaimed its traditional role as a financial haven during precarious times. For the year, gold futures shot up 25 percent, or $69.20, to $348.20 a troy ounce in trading at the Comex division of the New York Mercantile Exchange.

Gold enthusiasts say it's not too late to buy the precious metal. There is a bevy of reasons to think the rally will continue this year, said David Meger, director of metals trading at Chicago-based Alaron Trading. Among them: a weak dollar, higher oil prices and the threat of war with Iraq.

That potential has a lot of small investors like Jensen thinking of adding gold to their portfolios as insurance against another decline in stock prices.

There are several traditional ways to invest in gold. One can buy coins, gold bars, stock in gold-mining companies or mutual funds in gold-related stocks.

But some financial advisers are not dazzled by gold's new glow. Despite last year's gain, the yellow metal has not been a good long-term investment. Also, gold's volatility makes it a risky play for the average investor.

"Gold is an asset class we used to use way back in the '80s," said Armond Dinverno, co-president of a money-management firm in Schaumburg, Ill. "We don't use it now. We view it as more of a trading play, where you have to get in and get out quickly."

Investors who got in last year rejoiced. Gold was one of the commodity markets' stars after being shunned for nearly two decades.

When the price of gold rises, gold-related stocks often beat the performance of the actual metal. This is because the value of mining companies' reserves increases while their costs remain fixed, analysts said.

Shares of Newmont Mining of Denver rose 51.9 percent, one of the biggest gainers among stocks with a market value of $5 billion or more. Gold-oriented mutual funds increased 62.88 percent in 2002, compared with the average stock-mutual fund's decline of 20.84 percent.

Gold still has a bright outlook, analysts say.

"We believe this is not just a fly-by-night rally," Meger said. "The fundamental factors (that drove gold prices higher) are not going away anytime soon."

There also are industry-specific reasons to think the rally will continue, said Frank Holmes, chief executive of U.S. Global Investors, which manages two gold-related funds. A 20-year period of declining gold prices forced mining companies to streamline operations. Explorers also have not started any new mining projects in recent years, cutting supply and boosting prices.

"Nobody believes it," Holmes said, referring to last year's price run-up. "That's the most positive part."

The turn of the calendar has not stopped the run. Gold futures closed Friday at $368.40 an ounce, down from recent six-year highs.

Yet skeptics are not convinced. Gold has a history of temporary runs, especially in times of war. The metal rallied more than $40 an ounce, to more than $400 per ounce, when Iraq invaded Kuwait in August 1990.

But within 24 hours of the start of the Gulf War to oust Iraqi forces in January 1991, it fell more than $25 an ounce.

Over the past two decades, gold has proved to be a poor investment compared to stocks and bonds. Gold's value has fallen by more than half since 1980, when inflation fears helped drive prices to historic highs.

Still, individual investors are seeking alternatives after suffering in 2002 the sharpest decline in stock prices since 1974.

Despite the volatility of gold, metal dealers say interest in gold bullion, both coins and bars, is higher than it has been in years. They are seeing people who either have never bought gold before or who are returning to it after many years — investors like Jensen.

"I've got people coming in and buying 100 ounces," said Harlan Berk, who owns the 38-year-old downtown coin and collectible shop. "I had one customer, a secretary, buy $70,000 worth of gold."

The most popular form of bullion, according to dealers, is 1-ounce coins, such as American Eagles, Canadian Maple Leafs and South African Krugerrands.

A coin's value is based on the spot price of gold, plus a small premium to cover coinage and distribution costs.

Investors don't have to worry about liquidity because the coins are easy to buy and sell, dealers say.

Gold dealers do not recommend buying gold jewelry for investment purposes because the retail cost is much higher than the wholesale value.

Investors who do not want to worry about the safekeeping of gold coins have other options in gold stocks and mutual funds. Whichever option one chooses, analysts caution against going overboard.

Holmes advises stashing 5 percent of a portfolio in physical gold or gold-related stocks, and rebalancing every six months. He also warns against chasing returns or trying to time the gold market.

Jensen is heeding the advice and expects gold to be a small part of his portfolio. But given his investing luck recently, he said, "I wouldn't be surprised that once I start buying gold, the price will start dropping."