A big bounce, ounce by ounce, as gold takes off

NEW YORK (AP) - For what is normally a sleepy month, there are so many customers at the Gold Standard, a New York company that buys jewelry, that it feels like Christmas in August. Uncle Ben's Pawn Shop in Cleveland has never seen a rush like this.

Welcome to the new American gold rush. The price of gold is on a remarkable run, setting a record seemingly every other day. Stomach-churning volatility in the stock market this month has only made investors covet gold more.

Some want it as a safe investment for turbulent times. What worries some investors is that many others are buying simply because the price is rising and they want to make money fast.

"Is gold the next bubble?" asks Bill DiRocco, a golf company manager in Overland Park, Kan., who shifted 10 percent of his portfolio earlier this year into an investment fund that tracks the price of gold. He stopped buying because the price kept rising.

In October 2007, it sold for about $740 an ounce. A little over a year later, it rose above $1,000 for the first time. This past March, it began rocketing up. On Wednesday, it traded above $1,793 an ounce, just shy of last week's record of $1,801.

Meanwhile, stocks, despite rising sharply in the last two and a half years, are only slightly higher in price than they were a decade ago. Since hitting a record high in October 2007, the Standard & Poor's 500 index is down 23 percent.

Gold hits a sweet spot among the elements: It's rare, but not too rare. It's chemically stable; all the gold ever mined is still around. And it can be divided into small amounts without losing its properties.

Ultimately, though, gold is valuable because we all agree it is. It was used around the world as a currency for thousands of years, and then it gave value to paper currencies for a couple of hundred more.

Now, in a time of turmoil, from the credit downgrade and debate over raising the debt limit in the U.S. to the growing financial crisis in Europe to worries of slow growth across the globe, gold is dazzling investors.

Since the financial crisis in 2008, central banks around the world have bought gold as a hedge against their foreign currency holdings. Earlier this month, South Korea announced it had bought gold for the first time in more than 10 years.

Gold is "an effective hedge in a world where there is too much debt and uncertainty," says Jim McDonald, chief investment strategist at Northern Trust, which owns $2.8 billion of gold in a gold fund.

The last time gold prices rose so precipitously was a few years after President Richard Nixon ended a decades-long fixed relationship between the value of the dollar and the value of gold.

In those days, the price of gold was fixed at about $35 an ounce. And many foreign currencies were pegged to the dollar. Gold gave the dollar its value, and the dollar gave everything else value.

Then the U.S. began running a trade deficit, and dollars piled up abroad. Central banks could redeem dollars for gold. But it was a poorly kept secret that the U.S. didn't have enough gold to cash out every dollar in circulation.

To head off a rush, Nixon "closed the gold window," essentially saying that confidence in the U.S. government, not gold, gives the dollar its value. Gold and the dollar began to rise and fall freely, and gold earned its place as protection against the falling dollar when confidence lags.

As inflation worsened later in the 1970s and dollars were worth less, the price of gold took off. Gold hit its high in 1980 - $850 an ounce, or more than $2,300 in today's dollars.

This time is different because gold is rallying against all currencies, not just the dollar, says Jim Grant, editor of Grant's Interest Rate Observer.

"Gold is the reciprocal of the world's faith in the world's central banks," Grant says, and right now, "the world is in a pickle."

Gold prices will probably keep rising until the U.S. and Europe get their finances in order, he says - and Grant doesn't expect that to happen soon. He predicts inflation, low for the moment, will soar, further eroding the value of the dollar and leaving only gold as a good investment.a