Posted on: Thursday, June 23, 2005
AKAMAI MONEY
Bullion investment might not lead to pot of gold
By Andrew Gomes
Advertiser Staff Writer
Q: I've seen advertisements touting U.S. government-issued gold as a good investment. Does our government mint and sell gold? What are the risks? A: The U.S. Mint does promote and sell gold bullion, or investment grade, coins through authorized private wholesalers. However, these coins are considered a relatively volatile investment not necessarily for the risk-averse. Bullion coins are considered investment grade because they are valued by their weight and the fluctuating market price of gold, as opposed to commemorative or numismatic coins valued by rarity, condition and age.
Several countries mint their own gold bullion coins. Congress authorized the American Eagle Bullion program in 1985 to provide investors an alternative to foreign-produced gold and silver bullion coins. Platinum coins were added later.
The program also helps support domestic mining, as the precious metals for American Eagle coins must be from mined sources in the United States, the second largest gold producer in the world.
Gold is often regarded as a hedge against inflation, and the U.S. Treasury promotes gold as a way to diversify or balance an investment portfolio because the value of gold often runs counter to the value of other investments.
Local investment advisers say there are other, often better, ways to diversify an investment portfolio.
Kalei Cadinha, vice president at Honolulu-based investment advisory firm Cadinha & Co., said one alternative to gold is investing in an exchange-traded fund that's invested in gold.
Such products allow investors to buy shares in a fund that is traded on the stock market, making the investment more easily held or traded compared with gold bullion that's regarded as less liquid and requires physical transportation and storage. Exchange traded funds do have management fees, though they are often relatively low-cost like mutual fund management fees.
"If we feel the need to hedge, we'll use exchange-traded funds," Cadinha said.
Cadinha expects there could be some temporary rise in gold prices, but she said she doesn't foresee any dramatic rise in inflation that might make gold appear more attractive for some investors.
"We think gold is fairly valued," she said. "We wouldn't be putting money there. Because it's relatively valued, there is considerable risk it could go down."
Another indicator as to whether gold is a good investment is how popular it has become with the general public as opposed to sophisticated investors.
"There are a lot of (advertisements) out there — that concerns me," Cadinha said. "If it's on the cover of Business Week, it's too late."
Sellers predicting that future gold prices will soar should be of particular concern, investment advisers warn.
Gold prices per ounce have ranged in modern history from under $200 throughout most of the 1970s, to $615 in 1980, then to just under $300 in 1998. Last year the average gold price was about $410, and yesterday it closed at $438.
The price of American Eagle gold bullion coins varies because sellers add a premium for coinage and distribution costs to the market price of gold.
For instance, the Honolulu office of Travelex Foreign Currency Exchange yesterday was selling the 1-ounce gold American Eagle coin for $555. National distributor California Numismatic Investments priced the 1-ounce coin at $454.
The U.S. Mint sells four denominations of its American Eagle gold coin: 1 ounce, one-half ounce, one-quarter ounce and one-tenth ounce.
American Eagle gold coin sales were highest when first introduced, selling nearly 1.8 million ounces in the last three months of 1986, and about 1.3 million ounces in 1987, according to the U.S. Mint.
Last year the mint sold 536,000 ounces of gold bullion coins, or about $220 million worth based on the average price of gold last year. Year to date, the mint reported selling 185,000 ounces of gold, or about $79 million based on the year-to-date average price of $428 an ounce.
