Monday, March 10, 2008
Boy, you just don't hear that many dopey stories in the mainstream media anymore about how stupid you have to be to think that gold is a good investment.
Volatile - yes, bad investment - no.
You know the arguments:
More and more you're starting to hear:
Just like the stock boom/bust and the housing boom/bust, a gold boom/bust seems almost inevitable now that writers in the mainstream financial media are taking notice - simply reporting the events on the ground as they happen and trying to understand why they are happening.
Stories about the "barbarous relic" are popping up everywhere.
But, most economists still don't seem to understand what's going on with the price surge of the last eight years, quickly falling back on the old and tired characterization that indeed held true for more than twenty years after the 1980 price peak.
Here's a good example from the Chief Economist at Econoday from just two months ago:
"... it does not earn a return but offers limited hedging advantages and has not kept pace with inflation... John Maynard Keynes once called the gold standard a barbarous relic. ‘Barbarous’ could be applied to some of the logic in today’s market especially as it applies to gold’s role as a hedge against inflation."Naturally, TIPS (treasury inflation protected securities) were offered up as the far more "civilized" way to acquire an inflation hedge today.
If you're gullible enough to believe that the government is going to "protect" you from the inflation that they create, then, by all means, buy TIPS.
A good example of how the mainstream financial media is now turning away from the typical "economist's view" on gold (as expressed above) is this story in USAToday where personal finance columnist John Waggoner writes a surprisingly favorable article on the subject.
Why surprisingly favorable?
Having watched this change in attitude develop very slowly over many years, it's easy to become conditioned to expect a negative tone in a mainstream publication, so, it was quite a surprise to see that story didn't match the headline below.
All that glitters is not always a golden opportunityYes?!
At Manfra Tordella & Brookes, the upscale gold dealer in New York, business is brisk. "Today, I sold a lot of gold," sales director David Phillips said this week. "I also bought a lot of gold."
The U.S. mint is selling a lot of gold, too. The mint sold 49,000 gold eagle bullion coins in February, compared with 9,500 in February 2007.
In fact, as gold hovers near $1,000 an ounce, the whole nation seems to be trading gold. "It's hot," says Eric Vallow, manager of Lev's Pawn Shop in Fort Wayne, Ind. People are bringing in gold jewelry and coins to sell, Vallow says. And on days when gold takes a tumble, as it did Wednesday and Thursday, he's happy to buy.
Given the huge surge in gold prices, a logical question is: Should you be a buyer? The answer: Yes, but not much, and not right away.
Well, that's one big step in the right direction.
You wouldn't have seen that conclusion a few years ago when prices were about half the current level, but, for your typical retail investor, that's the way the system works - buy high and help push prices higher.
As for the "inflation hedge" theory:
Gold prices bottomed in April 2001 at $255.95 an ounce; they've marched more or less steadily upward since. At Thursday's close of $975 an ounce, gold has gained $719.05, or 281%, from its 2001 low. Life hasn't always been so good for gold aficionados. Gold peaked at $850 an ounce in January 1980. Adjusted for inflation, gold would have to hit $2,144 an ounce to match its 1980 peak.Yeah, it's all becoming clear now - commodities can be undervalued just like stocks.
And that's one argument for buying gold, which is a hedge against inflation. As the value of paper money deteriorates, the value of gold rises, because gold tends to keep its buying power in times of inflation and economic uncertainty. For the price of gold to catch up to its inflation-adjusted peak, it would have to rise 100%.
Mr. Waggoner goes on to provide additional useful information such as other factors contributing to the recent price increase - the dollar, the debt, declining mine supply - and then goes on to note the many different ways that individual investors can gain exposure to the metal.
Finally, the volatility issue is addressed and a suggested asset allocation is provided.
But the big problem with gold and gold funds is that they can be insanely volatile. If you make a big bet on gold, be prepared to take a big loss. You really shouldn't keep more than 5% of your portfolio in gold, and you should rebalance regularly. If your holdings grow to 10%, sell enough to get back to 5%. If they shrink to 2%, buy enough to fill your holdings to 5%. You'll be selling high and buying low — and that, at least, will help you keep some of the gold you gain.There's not a whole lot to disagree with in this story - very balanced and very well done.
About the only thing I'd suggest is that you add a 5 percent allocation of silver bullion to go along with your gold and then double that amount on the next correction.
Of course, you'll want to buy some gold mining stocks too.