i am heavily long gold and silver stocks...
I think time will prove you wrong and make me rich beyond my dreams...
Famous last words from bam bs, my new heavy metal guru. May those dreams come true and may your precious metals don't turn into fools gold and quicksilver due to psychostimulant or psychotropic drugs.
As they say, may you corner the market and not have a market on the corner.
Happy hoarding.
Mick (_$_)
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Is Gold Relevant? Quiet, Please!
By MARK HULBERT
NYT, Oct. 7, 2001
THE debate over the role of gold in investment portfolios may boil down to just a few percentage points. But you would never know that by listening to the fervor with which the two sides disagree.
In one corner are those who say gold funds should play a permanent part in diversifying a portfolio, despite gold's 21-year-long bear market.
That viewpoint received a lift when gold for December delivery rose to $294 an ounce by Sept. 30, from $273.70 before the terrorist attacks on Sept. 11.
The price spike helped to make precious-metal funds the top performer of any domestic or international equity category in the third quarter. As a group, the funds rose 3.18 percent, compared with a decline of 14.7 percent on a total return basis for the Standard & Poor's 500.
In the opposite corner are investment professionals and finance professors who deride these arguments as the delusions of what they call "gold bugs" — people who cling to an outdated notion of gold as an eternal store of value.
Relatively little research has been done on the investment role of gold. While many market debates can be decided by the historical record, this one quickly dissolves into a dispute over which periods, if any, are relevant.
Those who shun gold tend to concentrate on the last two decades, when gold has performed poorly. But is such a limited focus justified? While many researchers concede that it would be better to analyze more than two decades, they say that in the case of gold, the data before 1980 is of limited relevance.
From the end of World War II until 1971, the price of gold was fixed at $35 an ounce. As a result, these researchers say, nothing can be learned about gold's role as a portfolio diversifier by studying that period. Even gold's behavior in the 1970's is suspect, because at least part of its impressive rise in that decade might have been caused by a delayed reaction to inflation in the previous years.
Another factor might have been pent-up demand from individual investors in the United States; until then, it was illegal for them to invest in gold.
Even when analyzed with a limited, two-decade focus, gold still earns a passing grade for reducing risk. That is because bullion tends to zig when stocks zag and, as a result, a portfolio that includes gold will be less risky than one that is invested in stocks alone. Since 1980, an equity portfolio with a 10 percent allocation to gold would have had its volatility reduced by 9.6 percent.
Foes of gold, however, say it deserves no permanent place in a portfolio because it forfeits too much performance as it cuts volatility. Since 1980, an investor would have made more money, with less risk, by substituting 90-day Treasury bills for gold.
So how do gold's defenders answer that? They disagree less with this analysis than with the historical period to which it is applied. Of course, they say, investors should not buy gold if they assume that the future will be like the last two decades — characterized by relative geopolitical calm, robust economic growth and low inflation. But what if the future is less rosy? What if the war against terrorism takes longer or is less than successful?
This attitude toward recent decades leads to defining risk over much longer periods. Unlike some analysts, whose risk models use a year or two of data to define the relationships among various assets, gold's advocates tend to focus on events that occur rarely but are extremely significant when they do.
Certainly, gold excels as a hedge against rare events. Those who say gold has a permanent role in an investment portfolio refuse to dismiss the 1970's, because that decade offered the best modern example of financial distress. The 70's contained America's exit from the Vietnam War, the resignation of a president, an oil embargo, high inflation and sluggish economic growth. Gold's advocates say these factors, not the deregulation of the gold market, caused bullion to skyrocket to more than $800 an ounce, from $35.
The battle of precedents goes on and on. Must you resolve it before deciding on your asset allocation? Given the volume of the two camps' arguments, you might think so. But there may be a way to sidestep the debate.
On one practical level, the two sides are not so far apart as their arguments would suggest. Consider first the gold allocation recommended by academicians who do not like gold as an investment.
That allocation — while small — is not zero. And it derives from a prevailing academic theory of efficient and rational markets. Implicit in that theory is the idea that an investor's allocation to an industry should not deviate from its proportional weight in the overall market. If the auto industry represents 10 percent of the market's capitalization, for example, investors should allocate 10 percent of their portfolios to auto companies' stocks.
According to Wilshire Associates, United States companies involved in gold and related precious-metals mining have a combined market capitalization of about one-half of 1 percent of the total U.S. stock market. So even ardent believers in efficient markets do not object in principle to allocating at least this much of an equity portfolio to gold and precious metals. And because most of the world's leading gold-mining companies are not based in the United States, the number probably understates the industry's market weight globally.
NOW consider the asset allocation recommendation of the World Gold Council, a trade association of the world's leading gold mining companies whose goal is "stimulating and maximizing the demand and holding of gold."
The council commissioned a study simulating thousands of situations involving alternating periods of financial calm and distress. Researchers built portfolios with the best risk- reward characteristics, combining large- and small-capitalization stocks, Treasury bills, long-term Treasury bonds and gold.
Even assuming that periods of financial distress like the 1970's are as likely to occur as periods of calm like the 1990's — an idea that is favorable to coming up with a high gold allocation — the study concluded that the optimal allocation is 6 percent of investable assets.
So the debate that seems so intractable on a theoretical level boils down in practical terms to a difference between a small number and a very small number. Though that range is not insignificant, it is far less momentous than many investors might think.
Where you fall within this range depends on how much you want to hedge your portfolio against terrorism and war. If you believe that the world never can return to the relative innocence that prevailed before Sept. 11, you might favor a gold allocation toward the higher end of that range. If you think normalcy will return quickly and remain for a sustained period, then that allocation should be much smaller — but not zero.
nytimes.com |
