Investment

Don’t Let the Gold Bug Bite

Gold-Don’t Let The Gold Bug Bite copy

As it tends to do in tumultuous times, gold is once again shining brightly.

There was a sort-of Mea Culpa recently by one of my favorite financial authors, Jason Zweig, in the Wall Street Journal. Reflecting back on a comment made five years ago disparaging gold as an investment, he admits that the 10.5% annual return has since enjoyed made a hash of that prognostication. And while still urging caution he also offers up some valuable insights. Most important is a reflection on how diverse – and often contradictory – theories on why gold is being recommended at any given time.

Gold - Jason Zweig - edfu2.com copyAt the opposite end of the “why buy gold” spectrum today was exemplified by a recent note from a less informed and more fanatical newsletter writer suggesting Now is the time to buy gold. As it tends to be in these politically extreme publications, the lack of logic is stunning. In the middle of July, a warning is sent about a bill introduced into the House of Representatives in March but now “redacted” (the correct word is “retracted”). But the bill could be reintroduced at some undefined time in the future, and if passed could cause the dollar to crash in value: so, Buy Gold Now. Why was there no recommendation to buy gold in March at less than $1,500 an ounce when there was actually a possibility of the bill passing? Why Buy Gold Now at $1,900 an ounce with that threat/justification gone?

“You can buy stock in companies that mine gold, or companies that sell gold. You can buy futures contracts and gamble on the direction of gold prices without ever taking ownership of anything physical. And, of course, there are mutual funds and exchange-traded funds – some own real gold, others just paper proxies and still others holding both.”

More worryingly over the short term is the simple statistic that one year ago exchange-traded funds held $118-billion in assets and today those same gold ETFs hold $215-billion. That represents a lot of new gold owners buying at a time of record-high prices. Now, just for grins, I offer up a couple of paragraphs from an Invest-Notes blog post on August 4, 2014, discussing some thoughts around asset allocation. This was prior to Zweig’s disparaging comments on gold as an investment:

Perhaps the easiest way to demonstrate this concept is gold.

You can just buy physical gold as bars, coins, or jewelry. You can buy stock in companies that mine gold, like Newmont (NEM) or companies that sell gold, like Tiffany’s (TIF). You can buy futures contracts and gamble on the direction of gold prices without ever taking ownership of anything physical. And, of course, there are mutual funds and exchange-traded funds – some own real gold, others just paper proxies and still others holding both.

However, when gold finds itself out of favor, all of these “diversified” assets will decline in value. In the last ten years, the price of an ounce of gold has been as low as $400 and as high as $1850. Gold has lost nearly a third of its value in the last 18-months. TIF was clearly an outlier in the list above, yet it has seen its share prices move between $19 and $100 over the same time.”

(A quick update; last ten-year pricing for an ounce of gold $1000 to $1,900. For TIF the stock price has been $38 to $138.)

Gold is simply a diversifier that can easily fit into most portfolios in a number of different forms but should be kept to a single-digit percentage of your overall holdings. Personally, I’ve got a couple of dozen gold coins purchased over the last twenty years, and there’s usually a junior gold mining stock somewhere in my equity portfolio. In fact, gold coins like the $20 Saint Gaudens are gorgeous as a physical object and could be classified as either a commodity or an artwork – depending on how specific you get with your asset allocation preferences. More important is knowing that successful portfolios tend to be built over time and rarely by making big additions (or sudden reductions) based on the latest shout-out from the crowd.

Finally, for your consideration, in Investnotes #5 from November 13, 2007:

One of the most successful family dynasty’s of all time, the Rothschild’s, have followed a very simple formula for diversification that has proven robust for over 400 years. There is a benefit to working with this model, even if just as a mental exercise, because it allows for considering the bigger picture. It is too easy to look at a stock portfolio or collection of rental houses while overlooking the many other things of value that are owned, or that can help create a truly diversified collection of assets.

  1. One-third in cash; this includes equities, bonds, mutual funds, foreign currencies, certificates of deposit, and pretty much everything else represented by paper.

  2. One-third in real estate; this includes a primary residence(s), vacation home(s), income-producing property, and raw land.

  3. One-third in art and antiquities; this includes not just paintings and Greek pottery, but jewelry (think gold, precious gems, wedding rings, and wristwatches), furniture, fine china and flatware, and pretty much any object that has a market value.”

 

Useful Links:

Gold - On Prognostication - Invest-Notes.com copyGold - Historical Prices of Gold by the Ounce copy

 

More Invest-Notes

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