Investing in gold
By Julie Sturgeon • Bankrate.com

So you think of gold as just a wartime investment.

Think again. Because it's negatively correlated -- meaning it rises when stocks, bonds, real estate and Treasury bills fall -- gold is a solid investment any time government debt translates to inflation. And it's the perfect antidote to Wall Street chaos.

"I would not buy gold as a means of investing due to temporary calamities," says Leonard Kaplan, president of Prospector Asset Management in Evanston, Ill. "Those tend to be a temporary rally, which soon quits. When we invaded Iraq in the early '90s, the gold market dropped almost $30 the minute the first bomb fell.

"But right now, if all goes well in the world -- Iraq and North Korea go away, there are no sensationalistic terrorist events -- we'll still see gold's price rise in 2003," he adds.

Americans think gold during rough patches because it's the only true money source recognized through the centuries and around the world. It holds its value: studies show one ounce of gold has bought about 400 loaves of bread for the last 3,000 years. Unlike other money sources, it's liquid, portable and, along with silver, the only asset in the world that isn't someone else's liability.

And silver has less monetary trading clout. Its appeal today lies in the huge industrial demands. Because it's worth so much less per ounce than gold, it takes up more space to own a comparable amount. (But if you do want silver in your attic, opt for bars over coins to avoid paying more in markup, says Jim Puplava, president of PFS Group in San Diego.)

Platinum falls in the "very speculative" category, financial advisers say, and it doesn't convert to currency in doomsday scenarios.

"When we talk about precious metals, the question is should you own real money, and if so, how much," says Robert Prechter, author of Conquer the Crash.

Which way do I go?
Gold investors, such as Jackson Ferry, a 56-year-old communications consultant in New York City, face two paths at the outset: Do you want to own actual gold or stocks? Stocks appeal to the aggressive risk-takers.

Or, to blunt the edge, Puplava steers people with portfolios under $20,000 toward gold stock mutual funds such as Tocqueville Gold or First Eagle SoGen Gold. The final decision rests on the same factors as any investment: Study your allocations. Diversification always rules. Next, Puplava determines how the stock holdings in a portfolio would pan out during a recession.

You should value gold companies differently than Procter and Gamble, Puplava warns.

"It's like oil -- you're buying a mining company, a warehouse and reserves in the ground," he says.

So if the company sells commodities out the front door, it needs the means to replenish the gold through the back door. That's why gold mining companies tout ounces of production per share, ounces of reserve per share rather than price-to-earnings ratios.

Finally, you can choose between hedged and unhedged companies. Hedged means they've sold production into the future, locking in what they get per ounce, so if prices rise dramatically these firms can't capitalize on it.

But overall, stocks' leverage is attractive to investors looking to make a buck.

"In the first two phases of a bull market for gold, the stock shares outperform the bullion," says Puplava.

That's why three years ago, Ferry sunk about a third of his holdings into 15 gold unhedged stocks around the world to maximize the profits. A year later, he had doubled his money.

"I am a conservative investor by nature," he says. "My motivation was to conserve our resources but be in a position to take advantage of the gold bull market."

Bullion
Prechter defines "conservative" as an investor who says no to stocks and heads straight for the real things.

"Often gold stocks go down over the life of a bear market like the one we're in now, just like most other common stocks," he explains.

Nor does he think much of owning gold certificates or gold storage accounts, which tempt investors with cheaper prices than if they chose to have the metal slapped into their hands. These pieces of paper promise to deliver the physical gold should you call in your claim. In a catastrophe, that guarantee may not be worth the paper it's written on.

"When people discuss buying gold, it usually means they've become worried about the social situation on the outside world, and they want some protection," Prechter says.