Cash In A Mattress? No, Gold In The Closet.

In times of stress, gold's unique properties and its long history as a valuable asset make it an appealing buy. Gold is gold, its boosters say. Its monetary value may rise and fall, but its intrinsic value remains constant. Gold-industry people like to give this illustration: in the Middle Ages, a one-ounce gold piece bought a full suit of men's clothes. Today, a one-ounce gold piece—about $950 —buys a full suit of men's clothes. The ballast it provides, then, is both psychological and financial. "It looks like the sun and reflects terrifically," says Robert Hoge, a curator at the American Numismatic Society. "It can be beaten into dust or foil; it can be drawn into a wire that's the finest of any substance known. It is relatively soft and can be melted at a low temperature." Hoge pauses. "Even birds pick up glittering attractive objects."

At least since the sixth century B.C., when King Croesus of Lydia (of "richer than Croesus" fame) decided to melt gold lumps into standard shapes and weights, gold money has been spent, traded, hoarded—and valued above all other coins. For much of modern history, government currencies were backed by gold, an economic practice (known as the "gold standard") meant to limit inflation. But there's a rational aspect to buying gold now. Historically, the price of gold has been inversely correlated to fluctuations in the dollar; that's why it is seen as the ultimate inflation hedge. "Gold," says Jon Nadler, the bearish gold analyst for Kitco, "is life insurance for the rest of your portfolio."

Nadler knows whereof he speaks. When he fled communist Romania in 1972, "my clothing was full of four-ducat and one-ducat coins." He has dipped into that stash three times in his life: once to leave Romania; once to buy a small piece of property; and once, more recently, when his older son was accepted at Harvard: "I thought, OK, here it is." In North America, where democratic governments and financial markets generally function, the idea that a person might have to flee with hard assets is still considered somewhat freakish. But to refugees of real cataclysms, whether the Holocaust or the civil war in Rwanda, owning hard assets to trade or barter is not only sensible, it can save your life. "That's why people see gold as the currency of ages," Nadler says.

Geoff Farnham is clear-eyed about his investment in gold. It's a hedge, not a love affair. A retired software engineer from California, he started collecting gold when he inherited some rare coins from an uncle, but over the past year he's bought a lot more. He now has 15 percent of his portfolio in gold coins, he says, which he keeps in a safe-deposit box. He has never seen the attraction of gloating over his gold, like Gollum over his "precious." "It's just metal in the end," he says. "It's not as thrilling as I thought it would be." At the same time, Farnham believes that all gold bugs—regardless of who they are—at some level fear the worst. "There is a survivalist element to buying gold. Period. I think that's why my uncle had the gold in the first place. I would hate to see the day when you need it."

There's the rub. In the event of global collapse and inflation, in a world in which paper currency is worthless, what good will gold actually do? How do you take your gold bar to the 7-Eleven and buy a gallon of milk? Mark Albarian, chief executive of Santa Monica, Calif.–based Goldline, says that when dollars are worthless, a gold bar will buy a whole lot of dollars, which you can then use to go buy milk. "We buy gold in case the unimaginable happens," he says. James Turk, who runs a company called GoldMoney, takes this doomsday scene one step further: in a financial calamity, entrepreneurs will emerge who will melt and mold your gold into coins or exchange it for a currency that does have value.

Nadler shakes his head. First of all, it's disingenuous of the owners of gold retailers to stoke fears of systemic collapse for their own gain, he says (though he works for a retailer himself). Second, there are reasons to be optimistic. "Things tend to go in cycles; ingenuity, resourcefulness and human resolve solve problems. There's fresh management in the White House, really determined to address the immediate problem." In any event, Nadler says, gold bars and coins won't save your life in an apocalypse. "I say you're better off with Cipro and bullets on that day." Gold, he cautions, is at an all-time high—and we've seen what happens when too many people buy high. The best thing to do, says Nadler, is buy a little gold—"for your last airplane ticket to Fiji if you have to go"—and hope the price goes down. If gold goes down, your 401(k) will likely go back up—and you won't have to dig for treasure in your own backyard.

With Jessica Ramirez

© 2009