Gold investment columns hit the mainstream press.
Two columns in a row by a local business columnist. She's a straight shooter, and even quotes Jim Grant and Richard Russell.
Sorry JW, she didn't quote you this time.
1. sfgate.com
Gold traditionally has been touted as a hedge against
inflation. So why, at a time when the Federal Reserve
is worried about deflation, do so many smart money
managers like gold?
Pick a reason, any reason:
-- It's a hedge against geopolitical turmoil.
-- It's a hedge against deflation.
-- It's a hedge against inflation, which will rear its ugly
head once efforts to stimulate the economy take
hold.
-- It's a hedge against a falling dollar.
-- A new exchange-traded-fund, which will sell shares
in a pile of gold bullion, will create new demand for
gold, assuming it gets approved.
-- All or some of the above.
Today, we'll take a closer look at these arguments.
On Friday, we'll look at various ways to buy gold.
But first, this warning: Gold is an unpredictable,
highly volatile investment that's subject to worldwide
economic, currency and political risks.
"Gold can break your heart," says Lynn Russell, who
follows gold mutual funds for Morningstar. "Think of
all the people who bought gold in 1980 (when it
traded above $800 per ounce) and 20 years later have
never come close to recovering even half of their
investment."
If you buy gold at all, it should be used, sparingly, as
a wild card in your investment deck.
"It has a minus correlation to most other
investments. It tends to do well when other things do
not," says Alan Snyder, a San Francisco money
manager.
Snyder, who usually buys value stocks, has taken a
recent shine to gold. But even he says investors
should not have more than 5 percent of their assets
in gold. "It's like an insurance policy. You buy a fire
insurance policy on your house and hope you never
have to collect on it."
Snyder likes gold mainly as a hedge against global
political risk.
The price of gold surged from roughly $278 per ounce
in January 2002 to $382 in February 2003, during the
buildup to the war in Iraq, then lost steam, slumping
to $321 in early April.
The conventional wisdom was that when the war
ended, gold prices would collapse. But that didn't
happen. Gold rocketed up to $371 in late May and is
currently trading around $357 per ounce.
Snyder says that's because geopolitical problems
still loom large, especially in populous regions like
China, Korea, Pakistan, India and the Mideast, where
people "have been brainwashed for millennia to trust
gold during times of uncertainty. You can bury it in
the backyard, carry it across borders."
Other managers see gold as a hedge against
financial, rather than political,
uncertainty.
"Gold is a long-established monetary asset that
represents an alternative to paper money," says Jim
Grant, publisher of Grant's Interest Rate Observer.
"It is an off-and-on safe haven against many financial
disasters, including bear markets, currency
devaluation, rising domestic inflation rates and the
like. Gold is a hedge against monetary
disturbances."
Gold is also said to be a "store of value" that holds
up better than financial assets during periods of
deflation and rampant inflation.
During the last bout of hyperinflation, gold soared
from about $35 per ounce in January 1970 to a
short-lived peak of $850 in January 1980.
The Fed's successful war against inflation sent gold
into a 20-year tailspin, from which it only recently has
begun to recover.
Gold's recent revival has many possible reasons.
The conflict in Iraq certainly had some impact, as did
the falling dollar, falling interest rates, falling stock
prices and corporate fraud -- all of which made gold
relatively more attractive than stocks and bonds.
If the economy worsens, gold likely will remain
attractive relative to financial assets.
"If we have real deflation, things will start collapsing
here and people will go to gold," says Richard
Russell, publisher of Dow Theory Letters.
The last time the United States suffered deflation was
during the Great Depression. At that time, foreign
holders of dollars could exchange them for gold at a
price set by the U.S. Treasury.
In 1933, to restore faith in the dollar, the government
raised the price of gold from $20.67 to $35.
"Holders of gold stocks in the early '30s were unique
in that those stocks did not go down," says Grant.
Some gold lovers say that proves gold does well
during deflationary times. But things are much
different today.
In the early 1970s, President Richard Nixon severed
the link between gold and the dollar. That ended
dollar-gold conversion and set the dollar and gold
prices free to float.
Grant says he's not sure whether gold would be a
good hedge against deflation today. But he's not
really worried about deflation. He's much more
worried about inflation.
"The fear of falling prices is spurring the Federal
Reserve to create lots of credit, which may provoke a
new cycle of rising prices. Or it might scare
foreigners out of the dollar and provoke a cycle of a
depreciating dollar exchange rates. In either case,
gold may be a beneficiary," Grant says.
So there you have it. Gold could do well if we have
deflation, hyperinflation, a dollar that won't stop falling
and/or continued geopolitical uncertainty.
On the other hand, if peace breaks out around the
world, if the U.S. economy and the dollar recover, if
deflation fears subside and inflation can be kept in
check, gold would become less attractive.
On Friday, we'll take a look at the various ways to
buy gold.
2. sfgate.com
As you may have gathered from Thursday's column,
gold prices are almost impossible to predict. For that
reason, gold can add diversification to a portfolio
stuffed with stocks and bonds.
But it should be used like cayenne pepper -- in small
amounts, and only by people who can stomach the
fire.
Today we'll look at some of the ways to buy gold.
GOLD BULLION
The easiest way is to buy coins or small bars.
The 20-year bear market in gold has wiped out a lot
of bullion dealers, leaving a handful of large
companies that sell nationwide via telephone or on
the Web, and a few local shops that might sell gold
jewelry and rare coins in addition to bullion.
The most popular gold coins are the American Gold
Eagle, Canadian Maple Leaf and South African
Krugerrand. Each contains 1 ounce of gold, although
the Krugerrand and Eagle weigh slightly more
because they contain an alloy. The hues vary
slightly.
Dealers typically charge the daily spot price plus a
modest markup.
On Wednesday, when the spot price of gold was
$357.40, Kitco was charging $377.06 for an Eagle,
$375.27 for a Maple Leaf, $364.55 for a Krugerrand
and $3,694 for a 10-ounce gold bar.
Kitco, a large national dealer, charges no sales tax
but charges $30 per order for shipping plus $4 per
$1,000 in value for insurance.
On the same day, Numis International, a coin shop in
Millbrae, was charging $377 for an Eagle, $374 for a
Maple Leaf and $370 for a Krugerrand. The shop
does not charge sales tax on purchases exceeding
$1,000, and there is no shipping or insurance fee if
you pick it up.
The big problem with gold bullion is storage. Some
people keep it in a safe- deposit box, others like to
hide it at home so that it's accessible in an
emergency.
GOLD STOCKS
Buying shares in gold-mining companies avoids the
storage problem, but opens up a new can of worms.
Gold-mining stocks are two to three times more
volatile than gold prices, and no two companies are
alike, making them difficult to analyze.
"Gold has all kinds of varying grades, meaning grams
of gold per ton of rock," says Alan Snyder of Snyder
Capital Management in San Francisco.
If it costs a company $300 per ounce to get an ounce
of gold out of the ground, and the price of gold is less
than $300 an ounce, the company makes nothing.
If the price goes to $325, the company will start
mining, and its profit goes from zero to $25 per
ounce. If the price then goes to $350, the company
doubles its profit, with almost no increase in cost.
This is known as operating leverage, and it varies
widely depending on the company's ore deposits.
Also, companies must list as reserves any deposits
that are profitable to mine at current gold prices.
When the price of gold goes up, "a lot of ore that was
too costly to mine at yesterday's price and therefore
was not counted in reserves is now profitable and is
counted in reserves," Snyder says.
Investors value gold stocks based on their price
relative to reserves. When reserves go up, stock
prices tend to follow -- and vice versa.
Another variable is whether the company has hedged
or "sold forward," meaning it has sold future
production at current prices.
Last year, when gold prices were soaring, shares in
Barrick Gold -- a large, stable company -- actually
dropped because it had hedged a lot of its
production. "The perception was, if gold goes up,
Barrick won't benefit," says Lynn Russell, a gold-fund
analyst at Morningstar.
Most large companies have cut way back on
hedging.
Investors should never buy just one mining company,
because most of them work in parts of the world
subject to political upheaval, earthquakes and other
natural and man-made disasters.
Snyder's favorite large gold company is Newmont
Mining, based in Colorado. "It will be the automatic
(choice) if mainstream money managers start moving
toward gold," he says.
Among smaller players, he likes Golden Star
Resources, which is "very leveraged to the price of
gold, has $30 million to $40 million in cash with no
debt and is doubling annual production."
In the middle, he says, is Kinross Gold, a Canadian
company that "just completed a three-way merger
and is now the seventh-largest in the world, but not
on anybody's radar screen."
GOLD FUNDS
Investors can buy shares in a mutual fund that
invests in gold-mining companies, but this is only
slightly less complicated than picking individual
stocks.
"You have to know, does it buy only gold-mining
companies, or does it buy other metals? Does it
stick to companies that hedge, or to unhedged ones?
Does it buy mostly large companies or speculative
companies?" says Russell.
Last year, precious-metals funds were up 63 percent
on average, beating every other fund category,
according to Morningstar.
This year, they are up only 2.7 percent, trailing
almost every stock and bond fund category.
In a bad year, gold funds can plummet. "This
category lost almost 42 percent in 1997," Russell
warns.
Although Russell says gold funds are too speculative
for most investors, in the past she has recommended
Vanguard Precious Metals, which has low expenses
and "takes a more conservative approach, investing
in other metals besides gold." It is up 10.4 percent
this year, after a 33.4 percent gain in 2002.
For a pure gold fund, Russell likes American Century
Global Gold, up 4.7 percent this year and 72.6
percent last year.
Tocqueville Gold, which invests in smaller
companies, gets a lot of buzz. "It's more aggressive
without being wild and crazy," says Russell. It's up
6.7 percent year today after an 83.3 percent gain in
2002.
First Eagle Gold, run by veteran Jean-Marie Eveillard,
has a good long-term record, but charges a 5 percent
load. It's up 6.8 percent this year on top of an
eye-popping 107 percent return last year.
EXCHANGE-TRADED FUND
The World Gold Council, a trade organization, plans
to introduce an exchange-traded fund that would give
investors a new way to own gold bullion without
holding the metal itself.
The fund would buy gold bullion, which would be held
by HSBC bank in New York, and issue shares
representing an undivided fractional interest in the
gold.
The fund, called the Equity Gold Trust, has filed a
registration statement with the Securities and
Exchange Statement, but has not yet received
approval.
It has applied to list its shares on the New York
Stock Exchange vunder the symbol GLD.
The gold council could not comment on the fund
while it is in registration, but some analysts say that
if and when it gets off the ground, it could create a
new source of demand for gold.
In its registration statement, the gold trust says,
"Purchasing activity associated with acquiring the
gold required for deposit into the Trust . . . may
temporarily increase the market price of gold, which
will result in higher prices for the Shares."
The registration statement has some interesting
information for prospective gold investors, no matter
how they plan to own gold. It is available at
www.sec.gov. Click on Search for Company Filings,
then on Company and Other Filers, then enter Equity
Gold Trust.
A good site for historical and current gold prices is
www.kitco.com.
You can also find information on buying gold at the
World Gold Council (www.gold.org), but don't expect
unbiased advice. The council calls itself honestly
"The World Advocate for Gold." |
