All that glitters is not always a golden opportunity

ByABC News
March 7, 2008, 5:08 AM

— -- At Manfra Tordella & Brookes, the upscale gold dealer in New York, business is brisk. "Today, I sold a lot of gold," sales director David Phillips said this week. "I also bought a lot of gold."

The U.S. mint is selling a lot of gold, too. The mint sold 49,000 gold eagle bullion coins in February, compared with 9,500 in February 2007.

In fact, as gold hovers near $1,000 an ounce, the whole nation seems to be trading gold. "It's hot," says Eric Vallow, manager of Lev's Pawn Shop in Fort Wayne, Ind. People are bringing in gold jewelry and coins to sell, Vallow says. And on days when gold takes a tumble, as it did Wednesday and Thursday, he's happy to buy.

Given the huge surge in gold prices, a logical question is: Should you be a buyer? The answer: Yes, but not much, and not right away.

Gold prices bottomed in April 2001 at $255.95 an ounce; they've marched more or less steadily upward since. At Thursday's close of $975 an ounce, gold has gained $719.05, or 281%, from its 2001 low. Life hasn't always been so good for gold aficionados. Gold peaked at $850 an ounce in January 1980. Adjusted for inflation, gold would have to hit $2,144 an ounce to match its 1980 peak.

And that's one argument for buying gold, which is a hedge against inflation. As the value of paper money deteriorates, the value of gold rises, because gold tends to keep its buying power in times of inflation and economic uncertainty. For the price of gold to catch up to its inflation-adjusted peak, it would have to rise 100%.

Bear in mind, though, that the $850 peak in 1980 was a classic speculative blow-off top: Gold had soared 66% in just 14 trading days. The $850 gold price was available for just one frenetic trading day. The average price of gold during 1980 was $613, according to gold bullion dealer Kitco. If we use that as a slightly more rational starting point, gold would need to hit $1,570 an ounce to equal its 1980 level still a colossal gain.

Perhaps inflation parity isn't a good reason to buy gold, anyway. Gold averaged $307 an ounce in 1979, just one year before the 1980 peak. Using that as our benchmark, gold has already caught up with inflation: The inflation-adjusted equivalent of $307 in 1979 is $893 in today's dollars, according to the Bureau of Labor Statistics.