Why Investors are Hoarding Gold

A hundred-ounce gold bar, when you hold it in your hand, is surprisingly small and even more surprisingly heavy. It's somewhat longer and fatter than a Hershey bar, but it weighs six-plus pounds—as much as your old calculus textbook. Its color is unforgettable. Pure gold is gold. It's not like your wedding ring or your grandmother's bracelet. It's a deep, dense yellow, the way the ocean is deep blue, and it sparkles. You can understand at last why the Bible says the streets of heaven are paved with it.

On the day I held the gold bar in my hand, it was worth nearly $100,000. My companion—an established, accomplished, affluent businessman of retirement age—had bought it as a hedge against the sinking Dow and his fear that Obama's stimulus package will inevitably trigger wild inflation. We had picked it up in the basement of an HSBC bank branch in midtown Manhattan. When I handed it back to him, he put it in his briefcase. We went upstairs, past guards, through metal doors. Out on the street, we said goodbye and I watched him go, a tall, thin man carrying a $100,000 briefcase. He doesn't want me to tell you his name—or, really, anything about him—because he's keeping the gold in a safe in his basement. His friends, he says, are doing the same thing. "There is an increase in the number of wise, reasonable, well-read, well-intentioned people who are buying some gold and putting it aside," says Dennis Gartman, editor of The Gartman Letter, a daily analysis of financial news.

John Wynocker, a hydraulics inspector, lives in Cincinnati and has been buying gold and silver coins and bars for 15 years, but since the passage of Obama's stimulus bill, he has been motivated to buy more. He is hiding the precious metal in places where not even he can find it, he jokes. Are you burying it? I ask. "Perhaps," he says. "Our country is so far in debt, it's staggering. I'd like to retire someday. What else am I going to do to protect myself?"

Is this madness? Here is a respectable and buttoned-down suburbanite, behaving like an end-of-the world paranoiac. Here is Wynocker, a working man, trying to get a grip on his own financial future with a shovel. The price of gold is near an alltime high—it topped $1,000 an ounce on March 13—yet the number of Americans who are taking delivery of gold coins and bars is rising. According to the World Gold Council, Americans bought 600 tons of gold bars and coins in 2008, a 42 percent increase over 2007. That's not as much as in Europe, where gold mania has become epidemic—but significant given the metal's high price. An uptick in the U.S. economy, and buyers are likely to find they've been part of a giant, golden bubble.

But analysts say that if stock markets continue to spin out of control and real-estate values continue to sink, more people will want to take shelter in an investment with a reputation for being safe, reliable and not dependent on governments for its value. "Back in November, when the credit crisis really started getting out of hand, people started to pull the trigger on gold," says Scott Thomas, president of American Precious Metals Exchange. "It's primarily moms and pops, people who have seen their 401(k)s deteriorate over time." Bullish investment advisers, meanwhile, are hyping gold, some promising that it will reach as high as $2,300 an ounce. "We say, 'Panic now. Avoid the rush'," jokes Addison Wiggin, who publishes the online financial newsletter The Daily Reckoning.

There are, traditionally, two kinds of gold investors: speculators and hoarders. The first group trades on the futures market, which establishes the price of gold. The money they make—or lose—usually has nothing to do with taking possession of gold: like most modern-day investments, their gold acquisitions are blips on a computer screen. Hoarders are different. They buy gold, the real stuff, and save it for a rainy day. Hoarders have always existed, but their numbers increase during financial crises. To generate liquidity during the Depression, President Franklin Roosevelt outlawed hoarding in 1933. He demanded that everyone who owned gold coins (except collectibles) or bars turn them in and receive $20-plus an ounce in exchange. That law was rescinded in 1975, and since then retailers that sell actual, physical gold to individuals have jumped in.

Their business models vary, but all gold retailers charge a premium over the spot price and all will deliver it where you want it—usually through the U.S. mail. The mail? I asked Michael Maroney, who is vice president of sales for the Newport Beach, Calif.–based retailer Monex, as I imagined my own postal carrier slipping a gold bar in my apartment's group boxes. The post office offers low insurance rates on precious metals, Maroney explains. "We can never tell you when you're going to get it, but it doesn't disappear."

The last time gold sales spiked so dramatically was the year before Y2K, when Armageddon-minded Americans stashed gold—along with guns and cans of beans—in their basements and backyards. Keeping a lot of gold in your house makes you a target, it's costly to insure and, once stolen, gold, which is easy to melt and recast as something else, becomes nearly impossible to retrieve. That's why Nick Bruyer, the president of First Federal Coin, says he always recommends "a safe-deposit box in a good bank." Nevertheless, the mentality of gold hoarders is that they want it close by; in an emergency, they don't trust the banks. Sales at Cannon Safe were up 43 percent in 2008, and CEO Aaron Baker estimates that 30 percent of new safe buyers are holding precious metals. The company is developing a new ad campaign—"The bank that never closes. You're Cannon safe"—and hopes it will appear on billboards near Wall Street soon.

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.