Even at These Prices, You Should Consider Investing in Gold
Aug 15th 2011 12:00PM
Updated Aug 15th 2011 2:26PM
Remember when bell-bottoms were hip? Or back when people valued their privacy -- before social media (and reality TV) enabled people to broadcast their every move? The prevailing attitude toward gold has also shifted over the years.
During the 1970s, gold was as popular as bell-bottoms. Then people moved away from the ancient monetary metal and, by the 1980s, placed their full trust in governments and central banks to safeguard the value of their unbacked paper currencies like the almighty U.S. dollar.
Now the tastes have shifted once again -- and for good reason.
The Problem with Paper Money
Most onlookers scoffed at the recent downgrade of the nation's credit rating. Because the Federal Reserve can print dollars at will, they might argue, the risk of a U.S. default must be zero. But as economist Marc Faber points out, history is full of examples of nations essentially defaulting on their debt -- not by refusing to pay their creditors, but by paying them back in "a worthless currency."
So the credit downgrade is perhaps best understood as a downgrade of the U.S. dollar, based on an outlook that the only practical means of repaying our growing mountain of debt will be by continually devaluing the world's primary reserve currency. Ben Bernanke's announcement last week that the Federal Reserve will keep interest rates artificially low through mid-2013 offered powerful confirmation of that unfortunate outlook for the currency of the land.
Our 40-year experiment with unbacked paper currencies is not faring well. And while gold has gradually nudged its way closer to the mainstream of financial markets, it's not there yet. And that's good news for those who missed the metal's run-up until now.
The Start of a Sea Change
Even as recently as six years ago, there were still strong prejudices against investing in metals. In 2005, I first began encouraging people to place a portion of their assets into gold and silver. The typical response? People looked at me like I had grown a second head.
Since that time, I've watched as attitudes toward gold have run the gamut of indifference, disbelief, and even anger -- all natural human reactions when a new reality challenges someone's long-held beliefs. Consider what economist Nouriel Roubini said last year, perhaps his worst call ever, when he characterized as "delusional" anyone who believed gold would remain above $1,200 per ounce.
It has taken the first 10 years of gold's resurgence in price for its reputation to recover accordingly. Just recently, we can see some acceptance of gold's resurgent role in the modern financial world now that the metal has proven its value as an ultimate safe haven.
How to Make Room for Gold in Your Portfolio
I can certainly identify with anyone who may be feeling uncertain about whether to initiate some exposure to gold at these unprecedented prices. I do sense that gold could encounter some selling pressure after the incredible run it has had lately, and in fact as a gold investor, I am hopeful for a correction in the near term to help ensure a more orderly long-term advance.
Because I know bubbles form only sometime after an asset has percolated its way into the mainstream consciousness of financial culture, I am confident in saying that gold remains comfortably removed from bubble territory. Though plenty of newcomers may have entered the gold market this summer, I think most investors still have not made room for gold in their portfolios.
Fortunately for latecomers, most gold miners' stocks have failed miserably at matching the price gains of gold bullion to date, creating a compelling opportunity to acquire exposure to gold at what amounts to a significant discount to the metal's current price.
Newmont Mining (NEM) beneath $60 per share and Goldcorp (GG) under $50 represent incredible bargains relative to the enormous quantities of gold reserves these miners have amassed over time. Given the choice between paying full price for gold through a bullion vehicle like the SPDR Gold Trust (GLD) or building a stake in a deeply undervalued producer like Northgate Minerals (NXG) or Eldorado Gold (EGO), my inner bargain hunter keeps my own focus squarely upon the miners. Some of the silver producers, particularly Hecla Mining (HL) and Silver Wheaton (SLW), offer a similarly effective discount for those seeking exposure to the "poor man's gold."
The markets for gold and silver are growing increasingly volatile, so please tread with caution and consider building exposure in stages rather than all at once. If you ever need some guidance or encouragement along the way, stop by my blog.
Motley Fool contributor Christopher Barker owns shares of Eldorado Gold, Goldcorp, Hecla Mining, Northgate Minerals, and Silver Wheaton.