Gold

A Modern Day Gold Rush


Fear of financial collapse has enhanced gold's glitter, with prices soaring more than 300 percent the past decade, including 30 percent just in the last 12 months. And just as strong U.S. real estate prices a few years ago created a burgeoning ecosystem of entrepreneurs exploiting that bubble, gold's surge has led to a new crop of prospectors seeking gold and the business around gold.

One is Mark Franklin. About four years ago, Franklin, 52, watched a television show on treasure hunting and decided to try his own luck at gold prospecting. The Dayton electronics technician had never prospected before, but he saw a future in the precious metal—a world awash in debt could trigger inflation and a robust outlook for gold, a so-called "hard" asset that typically rallies in times of economic distress. Gold is now about $1,209 an ounce, near the all-time high of $1,266 per ounce in June. Plus, Franklin says, the quest for gold was a good excuse to get outdoors. He discovers about $50 worth of gold, in flakes and larger pieces called "pickers," on an average day prospecting in Ohio or on longer trips to Idaho, Alaska, Michigan, and Georgia. His total take? Just more than $4,000.

Franklin is far from a lone prospector. "Every time the gold price goes up, our membership increases," says Jinny Iodice, customer service manager at the Gold Prospectors Association of America, a Temecula (Calif.) group that provides forums and outings for recreational miners. There have been plenty of new members: The association's membership jumped 93 percent in 2008, followed by a more modest increase of less than 10 percent so far this year, as the gold bug infects more recreational miners. The GPAA has more than 62,000 members nationwide.

Just as past gold booms produced incredible wealth for some, however, far more of those seeking to strike it rich went bust. "When you see such a dramatic move, the tail end almost becomes hysterical," says Gus Sauter, chief investment officer at Vanguard, comparing today's gold rush with the Internet boom of the late 1990s. "People who threw caution to the wind are still scrambling." In the past, gold has done well when U.S. Treasuries yielded less than the inflation rate, which is not the case right now, according to Paul Kasriel, chief economist at Northern Trust. But "markets are weird," he says. "Why did people keep buying houses when it was pretty clear house prices were going to fall?"

But "gold is real money," says Gerard Adams, president of the National Inflation Assn., a year-old group in Fort Lee, N.J., that seeks to warn about hyperinflation, which it considers inevitable. In Adams' view, the price of gold has not yet peaked.

Adventure Trips

Many companies are banking on that. Three years ago, Terry Soloman decided to turn his lifelong passion for prospecting into a formal business with Arizona Gold Adventures in Congress, Ariz. Soloman gets two types of customers: families wanting an outdoor vacation and individuals serious about prospecting. With his children out of the house and the price of gold rising, Soloman turned the recreational prospecting trips he had taken for some two decades into a formal business. Now he has about 400 visitors a season. The average customer finds one to two grams, says Soloman, but some get even luckier. "You've got other people who walk away with several ounces," he said. "You've got to have a little luck."

Lucky or not, Soloman says everyone leaves with legitimate prospecting skills for his $349 daily fee. Those wanting more serious skills now make up about 40 percent of his business, double the number before gold surged, Soloman said.

Increased interest in prospecting can mean better business for companies that sell mining systems and equipment, such as Keene Engineering, a mining and prospecting equipment retailer in Chatsworth, Calif. "There are about 50 percent more people walking in and asking about basic information and looking to buy tools," says salesman Mark Svidor, who has been prospecting since 1979.

Coming to Stores Near You

For those not inclined toward prospecting, at least two companies are trying to make gold buying as complex as using a vending machine.

The Hon Corp., a Korean jewelry group and manufacturer with branches in New York and Hong Kong, unveiled its first Gold Rush vending machine in June 2009 in Seoul. Hon now has 20 machines in stores throughout Korea. The gold-bar cards are the size of credit cards and range from 0.5 gram to 10 grams. A customer can get a card right out of the machine or have it sent to a specific address. "We wanted to change the role of gold, not only [as an] investment but as a gift," says David Lee, general manager of Hon. The company next hopes to install its machines in U.S. casinos, supermarkets, and other stores, he says. A German company, Ex Oriente Lux, brought its first "Gold to go" vending machine to Abu Dhabi in May and is in talks with customers in Europe, Canada, Asia, and the U.S. about installing the machines in upscale hotels, airports, and casinos.

Customers looking to turn gold into cash have new options, too. Over beers two years ago, Virginia entrepreneurs Tim Oldfield and Price Shapiro devised a plan to make cashing in old jewelry quicker and more convenient than mailing it to a cash-for-gold broker or going to a pawnshop. They opened their first Goldrush kiosk in 2008 in a Virginia Beach (Va.) shopping center. The company now has 300 kiosks in the U.S. and 200 in Australia, with plans to expand to Asia and Europe, says Maurice Levine, Goldrush's global director. "Gold prices are on the rise, and people have a lot of unwanted gold sitting in their jewelry boxes." People uncomfortable mailing their jewelry and receiving cash later can show up at a kiosk, and within minutes, a Goldrush employee weighs and assesses the gold. The customer walks away with cash, and Levine says that "immediacy of the transaction" will fuel further aggressive growth.

Widespread Nervousness

Stephen Goldsmith, a gold trader at Jules Karp Coins & Bullion, a coin and bullion trader in New York, says the firm has witnessed growing interest and trading volume as the gold price has jumped. "Most of the people who are coming to us to sell are people who need the money," Goldsmith says. "Most of the people who are coming to buy think gold is a good investment. They're nervous about the situation in Europe. They're nervous about things all over the world. I see much more widespread buying by people of all walks of life."

Whether the customer's investment is bullion, gold-bar card, or a nugget straight from the earth, once an investor has his hands on it, storing it becomes an issue. Large banks such as JPMorgan Chase (JPM), Citibank (C), and Wells Fargo (WFC) offer safe deposit boxes and vaults, but not insurance, so many investors choose to keep their gold at home. That often means a safe. Dean Safe, in Arleta, Calif., had its best year in its 35-year history in 2009, sales manager Jacque Dean says, because of the tough economic times. And business has increased for such safe makers as Brown Safe Manufacturers, says Lynel Berryhill, vice-president of the San Marcos (Calif.) company. Brown Safe's sales have risen about 30 percent in the past year, partially due to more investment in precious metals, she says. People are interested in the more high-end safes, says Berryhill, realizing that if they buy a shoddy safe, valuables are "just organized for the burglar."

And when it comes to protecting your gold stash, don't think you need a hole in your backyard—insuring gold is pretty cheap, says Simon Codrington, international director at Hugh Wood, a global insurance outfit that specializes in art collections. Premiums vary according to the holder's risk, but if an investor holds $20,000 of gold in a bank vault, the premium is only about $50 annually. The New York company sees everything from "modest thousands to amazing millions" of precious gold, Codrington says. Hugh Wood's business has grown over the past year, partly due to increased interest in insuring precious metals. "There's been both an increase in the values [being insured] and an increase in participants," he says.

Two years ago, with gold topping $860 an ounce, Franklin, the Ohio technician, bought a mining claim on eBay (EBAY) giving him the right to mine on federal land in Idaho. As retirement approaches, Franklin hopes to turn his hobby into a full-time job, expecting that the more time he spends prospecting, the more lucrative it could be. "If more people had gold fever, they'd be surprised by how well they could do," he says.

Prentice is a contributing reporter for Bloomberg Businessweek.

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