MY THOUGHTS TURNED TO GOLD....
<<FT MONEY - PERSONAL FINANCE: When thoughts turn to gold
By Alpesh B Patel
Financial Times; Jun 08, 2002
With the Queen's Golden Jubilee, the thoughts of this online trader have turned to gold. Well, it is not just the Jubilee, but also the five-year high in gold prices and the potential war in the Indian sub-continent.
Deciding whether to be exposed to gold prices is not the most important step. After all, pundits have been advocating exposure for years. Rather, it is deciding how - whether to buy the metal, a fund, futures, spread betting, or mining stocks. On this, and how to use the web for it, the pundits are quiet.
It has been eight years since I traded gold futures - back when I was a Congressional intern. Of course in 1994, the same time I stumbled across the web, I should have been buying Amazon and AOL stock, not trading gold.
Buying gold should have less to do with whether you think the price will rise and more to do with the benefits of diversification for your portfolio. During major stock market recessions, by holding gold you would have outperformed pure share investors.
For instance, in the periods 1929-1934, 1968-1974, 2000-2002, the Standard & Poor's 500 fell around 63 per cent, 34 per cent and 26 per cent respectively. However, the price of gold rose 69 per cent, 347 per cent and 9 per cent in turn.
Even if you bought leading companies Coca-Cola and Disney in 1972, you would not have shown a positive return until 1985; whereas gold spot prices went from $44 to $341 per troy ounce over the same period. So far this year, the US precious metals sector is up 63 per cent, the Dow is flat.
The value of gold is not its unique properties or its glimmer in jewellery but that it is negatively correlated (that is it does not move in tandem) with most other asset classes.
The economic forces that determine the price of gold often push in the opposite direction to the factors driving the price of other asset classes. When long-term bonds decline, there is a tendency for gold to go up. When equities fall, there is an even greater tendency for the gold price to rise. Indeed, gold is more negatively correlated to stocks than any other asset class typically used as portfolio diversifiers such as foreign stocks, real estate, bonds, small-cap stocks and emerging market stocks.
With most asset classes, studies show higher correlations when markets decline (the so-called 'contagion-effect' where markets fall in tandem) implying that the benefit of the safety net of diversification is lost when it is needed most. Not so with gold - it retains its diversification benefits even under volatile falling markets.
Moreover, if the dollar devalues, the price of gold - in terms of dollars - should rise. As such, it represents a hedge against the dollar and offers protection if, like me, you hold dollar denominated investments.
The message appears to be: buy gold and gold stocks while the dollar is strong and the dollar price of gold is historically low. The dollar is currently declining as foreign capital looks for investments elsewhere, causing the dollar-denominated price of gold to rise. Online investors need to consider the best way of gaining these diversification benefits.
The problem with using funds is that they can vary from the conservative to the daring - from those mainly holding bullion to those trading derivatives. Thankfully, some specialist websites provide the type of data which was previously near impossible for the private investor to obtain.
Mining shares are the obvious way to link into the price of gold. But if I want to tap into gold for its diversification effects, I do not necessarily want to be exposed to the management skills of any one particular company. Consequently, gold mining companies are not of particular interest, correlated though they are to the price of gold.
Similarly, gold is not particularly attractive for its short-term trading opportunities if we want to have the diversification benefits the metal offers. So trading in gold futures, options and spread bets is strictly for those less concerned about diversification. For the golden benefits to a portfolio, I prefer direct investment in the metal - coins such as the Krugerrand and the Canadian maple leaf. They are easily acquired and tradable without the complications of other direct investments in gold.
Most private investors would only be recommended by financial advisers, depending on personal circumstances, to hold around 6 per cent of their total long-term holdings in gold.
There is one further unique property of gold if you like continuity - its staying power. Gold will still be here in 100 years; only one company in the Dow Jones Industrial Average remains in the Dow from one hundred years ago: General Electric. |
