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Mathew Ingram

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Ever glittering

Mathew Ingram

TORONTO (GlobeinvestorGOLD) When interest rates rise, the first thing investors look for is a place to put their money where it won't be hurt, either by the rising rates themselves or the inflation that goes along with them. Many stocks suffer when rates are rising, particularly financial shares and those related to consumer spending. Bonds don't do all that well, either, at least in the early going. So where's a safe place to stash your cash, other than your mattress? Some strategists would recommend you follow the Golden Rule of investing: when in doubt, invest in gold.

Gold is well known for being a "store of value" that is, an investment which tends not to lose its worth (at least not for long), unlike some stocks we could mention. In part, this status stems from its appeal as a decorative element for jewellery, but for the most part its value is effectively tautological: in other words, it is valuable because it is seen as having value. Stocks, bonds and even money are the same, of course they only have the value we give them but gold is seen as being better because it is a physical thing with underlying real-world value.

When the value of other investments is being eroded, which is what happens when interest rates rise, gold starts to look better and better. But hasn't bullion already increased in price by a substantial amount over the past couple of years? Yes, it has. In fact, in April it hit a 15-year peak of $430 (U.S.) an ounce, and the reasons for that are numerous. They include the fear generated by the war with Iraq, which tends to increase demand for gold as a safe investment, and the fall in value of the U.S. dollar caused by spiralling budget deficits, which has caused many investors to move out of U.S. assets.

It's true that rising interest rates which most economists believe will be on the way soon in the U.S., if not Canada will tend to support the dollar, since higher rates effectively make U.S. dollars more attractive for investors to hold. But many market strategists believe that the U.S. budget deficit and trade deficit, both of which continue to climb to new record heights, will continue to keep pressure on the dollar, and that gold will continue to be seen as a refuge from that. Other countries such as China are also fighting inflation, and that will make gold more attractive to investors as well.

There is also likely to be continued pressure on gold prices as a result of the low level of activity in the gold-mining industry over the past decade, industry analysts say. Because the price of gold was so low for an extended period of time, gold companies such as Barrick and Newmont didn't spend as much on developing new mines or expanding old ones. In the mid-1990s, more than $3-billion was spent every year on exploration and development, but that figure is now around $1-billion per year. It also takes between four and eight years to bring gold to market after discovering a new deposit.

Analysts say the continued upward pressure this puts on the gold price will help gold miners, and particularly those that have not hedged their gold production by selling it forward as Barrick Gold Corp. was famous for doing over the past decade. While that strategy worked wonders when the price of bullion was low, it stopped working when gold started to spike upwards in 2002, and Barrick has paid the price as it has tried to unwind its "hedge book." Meanwhile, unhedged miners such as Newmont Mining Corp. have been growing steadily more profitable as the price of gold has climbed.

Newmont Mining's share price over 10 years

While higher interest rates may help the U.S. dollar to some extent and thus slow some of gold's forward momentum many market watchers believe that bullion will continue to climb as inflation fears and concern about global terrorism make safety a premium for investors. UBS says that it sees gold reaching $422 per ounce this year and $470 early next year. John Embry of Sprott Asset Management Inc. in Toronto said recently that the massive U.S. deficit will keep pressure on the dollar, which will make gold more attractive. He says bullion could hit $500 this year and possibly $1,000 by the year 2010.

A thousand dollars an ounce may be a stretch, but if safety is what you seek whether because of inflation fears, terrorism fears, or a lack of interest in U.S.-dollar assets gold is likely to retain its glitter.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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