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  Worth Its Weight?: Investors Seized by Gold Fever amid Economy Worries

Worth Its Weight? Investors Seized by Gold Fever amid Economy Worries

By Alexander Jung

Part 2: A Return to the Gold Standard?

Gold bugs -- pessimistic investors who believe the global financial system is on the brink of collapse and who have long predicted the dawning of a new gold-standard monetary system -- are suddenly back in the headlines. These prophets of doom meet regularly at seminars, in online forums and at precious metals conventions, where the mood can best be described as civilized but apocalyptic. They tend to reinforce each other's convictions that gold is the only reliable asset, while the value of paper money is fleeting. They also insist that the decision to eliminate the gold standard in 1971 was a disastrous move. These gold prophets see their skepticism confirmed by central banks' recent efforts to rescue ailing banks by flooding the markets with billions.

Investors like Uwe Bergold boldly predict that inflation will shoot up to between 8 and 10 percent this year. Bergold's long-term "minimum price target" for gold is a whopping $6,000.

Martin Siegel, a fund advisor, even believes that there is no end in sight to the current upward trend. "A deepening financial crisis in the paper money markets could lead to an explosive rise in the price of gold at any time," he says.

To those who remain skeptical, the gold bug contingent likes to relate the tale of a man who, in the days of hyperinflation during the 1920s, went to a bank pushing a wheelbarrow full of paper money and went inside for a few minutes, leaving the wheelbarrow unattended. When he returned, he found that his money was still there -- but the wheelbarrow was gone.

There are still people alive today who remember how the devaluation of the currency in Germany in 1923 left millions of savers practically penniless. Even Alan Greenspan, the former head of the US Federal Reserve Bank, has pointed out that savings are not immune to being consumed by inflation. "Gold stands in the way of this insidious process," he once wrote. Is gold superior as a form of currency after all?

In this context, it's important to remember that there are -- so to speak -- two sides to every coin. And the flipside of the golden euphoria is that gold has proved to be a relatively poor capital investment, even in the long term. The precious metal has gained little in value in the last 25 years. Conversely, those who placed their trust in the financial markets and purchased shares in the companies included in the Dow Jones Industrial Average index, for instance, were able to increase their initial investments 12 times over during the same time period -- not to mention the annual dividends they earned from the securities.

It's no surprise that material gold plays only a marginal role as a form of investment. The business is mainly driven by the jewelry industry, which also controls two-thirds of the total demand for gold. But its customers react with extreme sensitivity to price increases, which explains why jewelry sales have sagged in recent weeks.

This makes for a very tense mood in the jewelry industry, says Bernd Bauer, a precious metals specialist with Sparkasse Pforzheim Calw, a German savings bank. "Right now a lot of gold is being melted down," he says.

Nevertheless, prices continue to rise, which only proves how little records on the precious metals exchanges have to do with the physical market -- and how much speculation plays a role in the current boom.

In addition, the worldwide inventory of gold increases year after year, all production difficulties aside. The volume increases automatically, because gold is in fact used in very small quantities and the recycling rate is high.

In the end, it is practically a question of faith as to whether gold is a worthwhile investment. More than anything, the answer says a lot about an investor's frame of mind. Optimists put their faith in stocks, or at least some form of savings account. Those who expect the worst prefer gold.

Gold's current popularity with some investors may have a lot more to do with the inexplicable aura surrounding the metal than with logic. Instead of gold, mankind could just as easily have made a metal like indium into a universal object of value and medium of exchange. The white element is extremely rare and is used in electronic components and protective shields. Its value has grown rapidly, from less than $100 a kilogram five years ago to more than $1,000 at times.

But there is one thing that indium lacks: gold's incomparable glow.

Translated from the German by Christopher Sultan