Money Magazine, gold, and hedge funds

Last month's issue of Money Magazine carried a "Survival Guide" story offering a number of suggestions about what to do with your money during these trying times. On the subject of inflation, they offered the following advice to their nearly two million readers:

People warning of a return to '70s inflation or worse are often hawking gold investments. Gold is relatively easy to buy now (no vaults required), because you can use exchange-traded funds like SPDR Gold Trust. Except for run-ups during brief periods of high inflation or financial panic, however, gold has delivered lousy returns — on an inflation-adjusted basis, it's still trading far below its 1980 peak. "Gold is a purely speculative play, which offers no income and no guarantees," says Marilyn Capelli Dimitroff, a financial adviser in Bloomfield Hills, Mich.
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Treasury Inflation-Protected Securities, or TIPS, are an even easier call. Their principal is adjusted to keep pace with consumer prices, and they're cheap now because the market is still worried more about deflation. Unlike gold, the only way TIPS won't keep pace with inflation is if the U.S. defaults — and if that happens, you may be better off buying canned food and armor-plated doors.

Don't you just love that - the demeaning "hawking" of gold investments and the well-worn argument about poor "inflation-adjusted return since 1980"?

It's also underperformed other metals this year as some gleefully point out.

The fact that it's been about the best investment in the world since the last bull market in stocks came to an end in 2000 is apparently irrelevant to some and that's a good thing.

It makes you feel kind of warm inside and maybe just a little bit giddy to read this kind of thing in a major publication - one more piece of evidence that it's still pretty early for gold.

Hedge fund managers would probably get a little tingle inside if they picked up a copy of the nation's most popular personal finance magazine to read what passes for conventional wisdom, a full nine years after what was clearly the trade of the decade - sell stocks, buy gold.

According to this WSJ report($), they're still pretty keen on the stuff.

Hedge Funds' Unshaken Faith in Gold
Some hedge funds remain dazzled by gold. And the yellow metal's resilience during a rally in riskier assets suggests their bet might yet pan out.

A who's who on Wall Street piled into gold-related investments over recent months. Paulson & Co., Greenlight Capital, Eton Park Capital Management, Hayman Advisors, Blue Ridge Capital Holdings and Highfields Capital Management were among those buying gold futures, shares of gold producers and even physical gold.
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Fund-of-fund investors estimate that 5% or more of hedge-fund assets are in gold-related investments. John Paulson; Kyle Bass, who runs Hayman; and David Einhorn, of Greenlight, are among those who recently told investors that they remain convinced the trade will work. John Burbank, who runs Passport Capital, wrote to investors, listing various reasons his firm has 9% of its money in gold, including a prediction that China will continue buying.

The conviction: That it was easier for central banks to let the monetary genie out of their collective bottles than it will be to put back in. The risk: That the trade, with gold above $900 an ounce, already has become too crowded.

John Paulson, Kyle Bass, David Einhorm ... these are no dim bulbs, in fact, they're some of the smartest hedge fund managers in the world today and they'd be wise to keep an eye on what Money Magazine has to say about the yellow metal.

Why? Because Money Magazine will likely proved to be a great contrary indicator on what, to them, is investment anathema - when, in another year or two, they finally give in and recommend gold as an integral part of an overall investment strategy, that's when you and many hedge fund managers should start planning your exit strategy.