Should You Join the Crowd Piling Into Gold?

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Gold bullionThe price of gold has quadrupled in the last 10 years, but it was the financial crisis and the subsequent drop in interest rates on safe U.S. Treasury bonds that sent investors scurrying into the precious metal. Is this just a herd mentality at work, or is it a wise assessment of the economic road that lies ahead?

Gold closed was trading at $1,248 an ounce at the New York Mercantile Exchange on Thursday. That's a pretty dramatic run-up from $274.25 on Sept. 1, 2001.

Thanks to the Greek debt crisis and other economic shocks, investors have been piling into gold since the first of the year. The SPDR Gold Trust (GLD), one of largest exchange-traded funds on Wall Street, took in $7.7 billion in the first half alone. It now stands at over $50 billion.

Physical Gold or Gold-Mining Stocks?

John Person, an investment adviser and coauthor of the Commodities Trader's Almanac, says that given the momentum behind gold, he could see the price reaching $1,300 by year-end.

He says the rising price is a combination of retail demand for gold, particularly in countries like China, and speculative investments in gold bullion and gold-mining equities. Person says his firm, nationalfutures.com, favors investing in physical gold rather than the mining stocks.

Mark Johnson, vice president of equities at San Antonio, Texas-based investment manager USAA, says gold is so attractive right now because interest rates are so low.

"The wind is at the market's back," says Johnson, whose firm manages $2 billion in the USAA Precious Metals and Minerals Fund (USAGX). He cites two factors: Treasury Inflation-Protected securities (TIPs) yield just 1.5% and the yield curve, a chart of interest rates from the very short term to 30 years, is steep. That means long-term rates are much higher than short-term rates. He says when these two factors coincide, gold's price often rises dramatically.

"A Bubble With Some Foundation"


USAA invests primarily in mining shares because those stocks move more dramatically than gold bullion, which means you don't have to put as much money in that sector, Johnson says. Gold bullion, and even ETFs that own it, have been ruled to be "collectibles" by the U.S. Internal Revenue Service, which means they're not eligible for long-term capital gains tax treatment.

Asked if it's possible that a gold bubble is forming with so many investors piling in, Johnson says: "If it's a bubble, it's a bubble with some foundation. There is a heightened risk element in the economy, and as long as you have that heightened risk, there's a good foundation for gold to continue to rise."


But not everyone recommends gold for the small investor. Roubini Global Economics, a New York consulting firm, last week issued a report encouraging investors "not to get giddy about surging gold prices."

Over the long-term, Roubini's economists recommended underweighting or zero-weighting gold in portfolios. They said a state-issued currency system, like the U.S. has, will prevail, with moderate inflation and low growth in high-income countries reducing the need for gold's safe haven benefit. They added that there are "better financial risk/return trade-offs than gold."

Some investors are using gold as protection against possibly higher future inflation fueled by government spending and huge federal deficits. But a study by Goldman Sachs found that gold rises only 23% of the time when the U.S. has consumer price inflation, so the argument that gold is a good inflation hedge is weak.

"Closer to the Bottom Than the Top"

That doesn't deter determined gold bugs like Peter Schiff, president and chief global strategist for Euro-Pacific Capital in Westport, Conn. Schiff says he has been heavily invested in gold since 2001 and now keep roughly 50% of his portfolio in the metal.

"Gold is going to go much higher," he says. "It's still closer to the bottom than the top."

Schiff maintains that the Federal Reserve's decision to expand its balance sheet from $800 billion to more than $2 trillion at the height of the financial crisis has caused inflation, but he says there's a delay between the expansion of the money supply and a rise in prices, which most people consider to be the definition of inflation.

Schiff recommends investors keep 5% of their portfolios in physical gold and another 5% to 10% in gold-mining shares. He recommends Goldcorp (GG).

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121 Comments

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beach lovers

Hah, Gold is just the latest shell game in the financial sector. When will we wake up? It used to be investing in solid companies or products long term. Then things changed...the "dot-com" phenomenon of the 90s, then hedge funds, then foreign markets, then real estate all of which crashed and burned. Now its Gold. Funny, it is never the bigwigs at Goldman Sachs getting torched on this stuff. It is all the small investors, pension funds and the like. Do yourself a favor...steer clear of Gold.

September 07 2010 at 10:17 PM Report abuse +1 rate up rate down Reply
J Urso

Gold seems to be at an overinflated price (sound familiar?). Nope I'm not falling for this realestate like Pyrimid scam.

September 07 2010 at 9:58 PM Report abuse rate up rate down Reply
MSmailbox

Perhaps, we could freeze the value of gold at epoch 2000 A.D., last trade. I always thought that $365 / ounce, was a good U.S.D. level. Then, the Euro and the Yen could decide amongst themselves, what they would sell gold for. I gave away all the gold that I had, except for what's in my mouth. Some greedy embalmer (mortician) will probably get that. Then, I'll be gold-free and ready to meet my Maker. :-)

September 07 2010 at 4:38 PM Report abuse +1 rate up rate down Reply
bthered

If your buying from Genn Becks Sponser...."A fool and his money are soon parted." But! then if you listen to Glen Beck, you've got the fool thing covered.

September 07 2010 at 3:57 PM Report abuse -4 rate up rate down Reply
1 reply to bthered's comment
kat

You dont agree with Beck that there might be a Financial Crisis? I'm afraid at this point he might just be right about that.

September 08 2010 at 12:47 AM Report abuse +1 rate up rate down Reply
karl hassel

When gold prices seem too high and has not corrected to its 200 day MA. I will look to invest in some silver as well, knowing its prices will not correct as dramatically as gold prices.

September 07 2010 at 11:43 AM Report abuse +1 rate up rate down Reply
annedyth

Gold's ok but If fan and crap REALLY get together, it's only going to be useful as teeth fillings.....

September 07 2010 at 10:59 AM Report abuse rate up rate down Reply
grassyno

Now is the time for gold alright... to SELL it. Invest in something that is at the low end but will increase, like rental housing. Housing will go down even further, but it will eventually go up much higher. Gold, on the other hand, will do the reverse (just as it did in the 1979/ 1980).

September 06 2010 at 9:03 PM Report abuse -1 rate up rate down Reply
1 reply to grassyno's comment
prognesub

I'm betting that the super-high interest rates--Volker imposed in the early 80s--were a big factor in golds' demise. Nowadays they wouldn't dare raise interest rats; if they did the economy would crash in a day

September 07 2010 at 4:36 AM Report abuse +1 rate up rate down Reply
Don

Buyer beware of gold coins investments. Weigh the "gold coins" prior to buying and buy from someone you fully trust. There are lots of "COPIES" out there.

September 06 2010 at 1:20 PM Report abuse rate up rate down Reply
Jay

Geez...could Charles Wallace have chosen any worse sources of info for this article? Goldman Sachs? They are the most crooked, most foul form of human allowed to live...for now.

September 06 2010 at 11:22 AM Report abuse +1 rate up rate down Reply
engelmerrick

liberals are blinded by one sided agenda as much as wall street is blinded by greed . how many times have i heard price of oil is going down when the next week it rises. it doesnt take a genuis to figure out the problem we are trillions of dollars in debt states are over whelmed . over crowded with illegals that arent paying taxes a vast majority of americans such as illegal contracters, contracters, busineses and so on, arent paying taxes they were giving home loans to someone who cant afford a car payment, or have no means to repay. if they default they go back to there country all for poltical correctness.look at arizona ,calf ny etc garbage dump , solution close the border , put illegal contracters in jail ,let banks and business fail if they dont do the right thing no more bailout . no more loans to people that cant afford them, and audit this stimulus bill to see were all our tax payed trillions of dollars went and put those who stole in jail.give tax breaks to legit business to build in the u.s and reward those who play buy the laws and the rules .gold is being bought because intellgent people no where this country is heading with these clowns and leaders in office.

September 05 2010 at 11:07 AM Report abuse +3 rate up rate down Reply