Investors Divided on Desirability of Gold
A sickly dollar lifted gold to a fresh 16-year high this week, just as a newly launched exchange-traded fund offered individual investors a new way to own the gleaming asset. But Wall Street experts, less than unanimous about its prospects, are divided about what sort of role gold should play in your portfolio.
Prized for their intrinsic value, precious metals like gold and silver are often used in investing as a way to offset rising inflation or currency losses, and are seen as a safe haven in times of market tumult. But while gold can be a useful diversification tool, over the very long term experts say it is not as good an investment as stocks or bonds, because it doesn't throw off any sort of income, interest or dividends.
With the dollar on the skids and inflation accelerating, gold has gotten a great deal of attention lately and is approaching $450 per ounce. Gold has been trekking higher for the past three years, but the pace of its climb accelerated in the last few months. It hasn't been a steady ascent, though; an ounce of gold dipped down to $375 in May.
Investors pounced on a new ETF that tracks the commodity itself when it debuted Thursday. The streetTRACKS Gold Shares ETF, which trades under the ticker symbol GLD on the New York Stock Exchange, set a volume record on its first day.
Sponsored by the World Gold Council and marketed by ETF provider State Street Global Markets, the fund is designed to reflect the performance of gold bullion; each share represents one-tenth of an ounce of gold. On Friday, GLD shares rose 40 cents, or 0.9 percent, at $44.78. A second gold ETF is expected soon from Barclays Global Investors, the market's largest ETF provider.
While most analysts link gold's strong run to the performance of the dollar, and some of the buying is probably speculative, other factors could support a longer bullish trend, said Michael Cuggino, manager of the Permanent Portfolio Fund, which keeps about 20 percent of its assets in gold.
"Low short-term interest rates, the decreasing dollar, the trade deficit, the unstable situation in the Middle East, the war on terrorism, the overall feeling of instability and the need for safety _ these are all things that move people toward gold," Cuggino said. "And recent numbers suggest inflation may perk up in the near future. I'm not one to focus on one statistic ... but when you start looking at a lot of statistics put together over a multi-month period, you develop a sense."
But not everyone on Wall Street is convinced. Investors who are just now waking up to gold's rising price should think twice before leaping in, because chances are "they've already missed the boat," said Milton Ezrati, senior economic and market strategist at money management firm Lord Abbett. Ezrati is very skeptical about how much higher the price of gold will climb, and is equally dubious about how much more the dollar will fall.
The best way to get exposure to precious metals, or commodities in general, Ezrati said, is to hold related stocks, such as gold mining companies. These will benefit when the price of the underlying commodity rises, but tend to see less precipitous declines when it falls. And if you do decide to add some glitter, he suggests taking a close look at your portfolio to make sure you're not already hedged against inflation or the declining dollar.
"If you use gold as a diversification play or a hedge, that's legitimate, but a lot depends on what else you own," Ezrati said. "If you have oil stocks, or other price sensitive or inflation-sensitive commodity stocks, you could wind up doubling your bet, and you may not be aware of it."
Owning stocks or gold funds is certainly more practical than trying to store gold itself. But investors should be aware that bullion and gold coins are considered "collectibles," so any returns from the new gold-tracking ETFs would be taxed at a substantially higher rate than the 15 percent applied to most long-term capital gains.
Gold is still nowhere near its all-time high of about $850 per ounce, reached in January of 1980. It was a difficult time, shortly after the start of the Iranian hostage crisis, in the midst of an oil embargo; the Hunt brothers of Texas were trying to corner the silver market, inflation was widespread and it was an election year. Gold stayed at elevated levels before dipping back to $450 in 1981, and then declined into a bear market in the 1990s as the world's central banks sold off parts of their stockpiles, flooding the market.
Still, said Dan Vaught, futures analyst with A.G. Edwards & Sons in St. Louis, "You're in an area where gold has not been too terribly often in the past."
Which is precisely why it's not a good idea to buy into it, contrarians say. Ken Janke, chairman of the National Association of Investors Corporation, said when he buys gold, it's usually a piece of jewelry for his wife. He agrees that mining stocks are probably the best way to invest in it, and recommends people be skeptical about sales pitches for things like gold coins.
"When you look at anyone who tells you how good gold is, usually they have an ax to grind," Janke said. "A money manager may tell you to hold some gold mining stocks, but they won't necessarily say you should buy the commodity itself. The people who push it in ads in newspapers and magazines and on television, they are just trying to sell you something."
