You Don't Have to Fret Doom to Like Gold Now

The global money supply keeps growing, but consumer inflation has cooled of late. The Federal Reserve is on the sidelines until further notice, and, anyways, has only limited room to raise interest rates given the current state of the housing market and the yield curve.

Meanwhile, crude is back to $58 a barrel, leaving the Saudis with lots of petrodollars to sock away. China's in the same greenback-heavy boat, having kicked off 2007 with another huge monthly trade surplus. And the standoff over Iran's nuclear program doesn't appear especially likely to end well.

Sure enough, gold has reclaimed $675 an ounce, just 6% off the 25-year peak notched in May. In China, they're buying 14-karat hogs to mark the Year of the Golden Pig, an auspicious omen that comes around every 60 years. India seems to be mass-producing gold ETFs.

Here in the U.S., the StreetTracks Gold Shares (GLD) fund has piled up 461 tons of gold bricks valued at almost $10 billion. This sounds impressive until you realize that this is about the value of a Clorox (CLX) or a Dover (DOV). Never heard of Dover? Exactly. Citigroup metals and mining analyst John Hill calls the gold market in its entirety "vanishingly small."

Though it's growing fast, investment demand for gold continues to run far behind that from jewelers. Roughly three quarters of the (recently slipping) global gold output ends up on our ears, necks and fingers, or else inside safety deposit boxes and mattresses.

I think there's room for gold in everyone's portfolio, so it's pretty frustrating not to have any in mine just now. I hope to do something about that soon. But I thought I'd do some homework to make sure that my next foray into precious metals proves more rewarding then the last one.

Really, though, I can't complain. I bought the wrong proxy too late and sold it too late, but still made money by a happy accident. I remember singing gold's praises in 2003 and worrying that I was getting on the bandwagon too late at $380 an ounce. It took me another year to scrounge up the cash to buy my first stock, enough for a whopping 55 shares of Newmont Mining (NEM). At the time, Newmont was seen as an industry leader with the lowest costs and the most leverage to rising gold prices.

It turned out to be none of those things, but by the time I wrote this ode to global liquidity in January 2006, my investment was up 28%. It would top out at 37% at the end of that month. I sold three months later when I realized Newmont wasn't a good proxy for anything except mining hazards. By that time, my 18-month return was down to something like 13%, after commissions. And I was lucky to get that: While the price of gold has increased more than 60% over the last three years, Newmont shares are up 4% over that span, and half of that came in the last two days.

Newmont's troubles with rising costs, pollution claims and compressing multiples turned out to typify the industry's lot. The gold stocks that have done best are those of small-cap exploration outfits with modestly scaled new mines in Latin America and Asia. Meanwhile, the majors have been hurt by rising costs and the discounting of the "magical mystery multiples" traditionally accorded to gold miners.