Gold fever strikes again in Calgary
Buying or selling, investors try to cash in
BY JEN GERSON, CALGARY HERALD
Hundreds of people stood outside the Bank of Nova Scotia to bet their savings on the precious metals market.
Among them were a 13-yearold Calgary Herald paper boy, an art gallery operator from Cochrane, and Elaine Abercrombie, who was trading her retirement fund for silver bars.
“The dollar isn’t going to be worth much,” Abercrombie told the Herald after buying 150 ounces of silver.
The value, she said, “is going to go up again. It’s an investment. Paper money isn’t any good.”
It was Jan. 4, 1980.
Within weeks, the precious metals market crashed.
Gold dropped hundreds of dollars, prompting lines of dejected buyers to return to the bank, sell their investment and eat their losses. By March, monopolies on the silver market had been broken. Within a few short years, the price of silver dropped to $5 an ounce from a high of about $50.
With hindsight, it was easy to see that gold and silver had been in a bubble - like Nortel stock and American homes, their value was artificially inflated by feverish demand.
In 1980, gold reached a peak of $850 per ounce. More than 30 years later, gold and silver are again breaking price ceilings.
Gold hit a record $1,781.30 US an ounce Wednesday.
Likewise, silver is commanding rates of about $40 per ounce.
As they did in the ’80s, those prices are prompting long lines at bullion exchanges.
Calgarians are sorting through buckets of old coins looking for pre-1967 silver quarters. They are wrapping their broken chains and orphan earrings in Ziploc bags and crumpled paper, hoping to cash in on the scrap hiding in the back of their jewelry boxes.
Even highbrow jewelry seller Birks has jumped in. For the past year, it has bought its customers’ gold. The jeweller is holding several consultations in Calgary this week.
There’s a tidy profit in store for those who would sell otherwise unworn or unloved gold and silver. Buying such metals, on the other hand, is a riskier strategy.
Experts and skeptics of silver and gold’s new price run are already warning that the commodity is wildly overvalued. In short, they say, this is just another bubble.
But those warnings were not heeded at Albern Coin & Foreign Exchange on 16th Avenue N. earlier this week, where the phone was ringing off the hook. Behind thick glass and locked doors, the line of customers continued unabated all day.
“It’s stupid panic is what it is,” says Don Carlson, the general manager. “This is more like Y2K, when people were afraid every computer would shut down.”
Carlson now sits behind a series of living graphs and Microsoft Excel spreadsheets listing the latest values. Prices change by the minute.
Every time a seller steps up to the glass window, he prints out the latest price sheet, which is stapled to a baggie filled with coins or jewels.
Cufflinks, clasps, commemorative medallions and tarnished rings (sans stones) are then whisked to the back of the office to be tested. The gold buyers also take dental fillings, as long as all tooth material is removed.
There, Stan Clute pulls out a loupe the size of a dime to search the metal for markings. Then he draws the jewelry against a black whetstone, leaving a thin yellow or white scratch.
He drips nitric acid on the stone - if the gold is of a low karat, the marking fades almost instantly.
“This is more art than science,” he insists.
Although after 11 years and a finger stained yellow with acid, he’s developed a reliable instinct for grading gold. He sees it all - cufflinks engraved with initials, a brooch shaped into a delicate leaf.
“Some pieces you wish you could salvage, but the price of gold doesn’t allow it,” Clute says.
After sorting, the gold is sent to the Royal Canadian Mint, which melts the scrap down to distil the pure gold and silver. The gold is shaped into a one-ounce coin stamped with the Queen’s face, a maple leaf and a $50 face value.
On this day, Carlson will sell a maple leaf coin for about $1,800. He’ll purchase one for just over $1,700.
Despite the profit, he has no illusions about these prices.
They’re too high. Buyers “are sitting on the sidelines for a while,” he says. More are selling gold and buying the cheaper metal, silver.
“When things go up this fast, they are due for some kind of a correction.”
That is a disputed idea. Celebrity figures like Glenn Beck appear on Internet advertisements for collector coins. Investors, called goldbugs, say gold is an obvious alternative to tumultuous stocks and cash.
The spike in gold prices is “simply a reflection of market uncertainty about not only the value of the dollar, but of all currency,” says John Munro, professor emeritus and economic historian at the University of Toronto.
As both Europe and the U.S. face major debt crises, investors have lost faith in the system. Governments that use fiat currency - money in which value is determined solely by the issuing authority - manage their deficits by encouraging inflation, essentially devaluing their own money to make debts easier to pay. When currency isn’t backed by solid assets like gold, governments can effectively print money. It’s almost like creating bills on a laser printer to pay off a credit card debt.
The practice is risky and some people fear it could spiral out of control, causing inflation and even the collapse of fiat currency altogether.
But gold price skeptic Mark Williams, a master lecturer with Boston University’s department of finance and economics, calls this crowd of investors the “gold, guns and baked bean survivalists.”
Sure, there’s money to be made in a bubble, if you know when to buy and sell. But gold is not a currency. Rather, the price spike “is basically giving central banks an F report card on their ability to manage capital markets and keep risk under control.”
The goldbug argument is irrational, he says. Gold and silver certainly have properties that make them desirable - they’re pretty, scarce, malleable and have a long history as a store of wealth. But the same collective delusion that governs the value of a paper bill also determines the worth of a seashell, a house, a hunk of copper or a bar of gold.
In other words, whether an ounce of metal is worth $1 or $10,000 is solely determined by how much a buyer is willing to pay.
“It’s only liquid as long as you and I are willing to say it’s worth $1,700,” he says. “If everyone is selling or running to the door, gold is not going to have an orderly price reduction. It’s going to drop dramatically.”
Investors do use precious metals as a hedge against inflation, or as a place to park cash in volatile times. However, the second the economy turns around, Munro says, gold and silver become less valuable.
Unlike stocks and bonds, gold pays neither interest nor dividends. It is costly to mine and expensive to store.
If fiat currency collapses as catastrophically as its detractors claim, they’d be better to invest in guns and tinned food than a sack under the bed filled with shiny metal, Williams says. Gold won’t do much good. You can’t eat gold.
This is a bubble, Williams says. And it’s close to popping.
“Here’s a commodity, gold, it costs about $500 per ounce to pull out of the ground and, in an instant, you can turn around and receive X times more than the cost of production. It sounds illogical,” he says. “There’s a lot of components to any bubble. What we do know is that it’s fuelled by irrational exuberance.”
Of course, many more people disagree with Williams.
On Wednesday, Deutsche Bank set a price target of $2,000 per ounce in 2012. Over the past two months, South Korea purchased 25 tonnes of gold to bolster its reserves. The University of Texas’s endowment fund recently converted almost $1 billion into solid gold bars.
Among them, Julius Jagersma lined up behind the glass of Albern Coins to purchase seven 10-ounce silver bars.
It’s an “investment,” he says.
“Because there’s a lot of doubt and instability in the economy right now. I guess there’s a lack of trust for fiat currency, especially the American dollar.”
More than 30 years apart, and yet, so much like Abercrombie. The dollar isn’t going to be worth much. Paper money isn’t any good.
jgerson@calgaryherald.com
