Four Ways to Play New Gold Rush
By Jon D. Markman
Managing Editor, MSN MoneyCentral
01/30/2003 11:45 AM EST
Gold has become the color of hope for paralyzed investors in the past year. Since the start of 2002, shares of the public companies that dig the stuff out of the earth have marched forward 50% to 300% to the drumbeat of war as all the major equity indexes have plunged.
It has become the investment of choice, not just for wizened old men on park benches and 'fraidy cats in the Adirondacks, but for everyday professionals saving for retirement, daytrading speculators and sober fund managers seeking a hedge against uncertainty. Whether in the form of 100- ounce bars, futures, stocks or coins, the metal has come to be seen as the antistock of the post-dot-com world. It's a combination of security blanket, insurance policy and Lotto ticket. The metal with moxie.
A Prebubble Buying Opportunity
But the market for gold around the world is looking ever more like the market for technology stocks, circa 1997. Though not quite there, it seems on the verge of becoming the topic of soccer mom conversation, like stock tips at cocktail parties back in the day.
Gold is not at all in a bubble stage. The physical material has gone from $250 an ounce to $360 an ounce in the past few years, hardly a massive move for a commodity priced at $800 in 1980. But it is certainly heading in that direction, and at $368.40 an ounce, it hit a six-year high last Friday. All 10 of the top-performing mutual funds in 2002 were gold or precious-metals sector funds, and they're doing well again so far this year.
It is probably not too late to join this crowd, if you are so inclined and are patient enough to wait for prices to recede a bit. After all, it's still a pretty small crowd. The total net assets of those top-10 gold funds amounted to less than $850 million through the end of 2002. That's a tiny fraction of the size of a single mainstream fund, such as Dodge & Cox Stock, which weighs in at $12 billion in assets. And gold has not yet made an appearance on the cover of a major news magazine, or become the subject of a television drama -- the two iconic levels at which true manias are immortalized.
Gold's Value? The Price of Fear
Indeed, what I find fascinating about gold is that even after a solid two-year run, it is still embraced by some of the most bearish and skeptical of professional equity investors and observers, such as James Grant, Bill Fleckenstein and Jean-Marie Eveillard. These are the sort of folks who demand high levels of intrinsic value when they buy shares of public companies, but are willing to embrace ownership of a clod of yellowish ore that has no real intrinsic value at all.
What is the value of gold? Its price is said to be the single most widely disseminated bit of information in the world, and yet it is worth only whatever market participants say it's worth at any given time. Its pricing is a psychological event, untethered to perceived scarcity or its tremendous usefulness as a conductor of electricity. Think of it, instead, as the price of fear.
As Eveillard put it in an interview last week, the value of gold depends in large part on the ebb and flow of distrust that people have for paper currency, not for its worth as a commodity. Consider that new Federal Reserve Board Governor Ben Bernanke in November openly backed the wholesale printing of money as a way to stave off potential deflation.
One hedge fund manager told me that the value of gold is simply that it has been considered a store of wealth by people in every part of the world for 5,000 years -- and is more likely to continue to be considered valuable in the future than any paper currency or government debt. As a result, many major buyers of gold who hold it in their safety deposit boxes or home safes don't see it as an appreciating asset that should be compared with the projected rates of return of other assets.
Instead, they see it as an insurance policy against future world uncertainty, a hedge against a time when terrorists, for instance, might find a way to wipe out the global power grid, rendering all of our electronic methods of accounting for wealth worthless. (Absent an ATM machine or a bank computer's records, how do you really prove you have liquid assets of $250,000? And even if you could prove it, how would you access your money?)
Holders of this extreme view don't really care if gold drops 60% in value from the time it is purchased to the time it might be liquidated for use: It's better than having no money at all. You might recall that following the Sept. 11 terrorist attacks on the World Trade Center and Pentagon, all paper securities in the buildings were destroyed, but a large vault of gold was recovered from the basement intact. And how many stories have we heard along the lines of the one told by former Lazard Freres chief Felix G. Rohatyn, whose family was able to escape from Nazi persecution only because his father had a few gold coins?
Stashing Gold in Your Portfolio
Eveillard, who runs the First Eagle SoGen Gold Fund, up 107% in 2002, says he thinks of gold as a way to maintain a margin of safety in one's personal asset mix. Let's say you have 70% of your net worth in equities and the market declines another 20% over the next two years amid hostile economic circumstances. That's a big hit to your net worth. If you have 5%-7% of your net worth in gold, meanwhile, and the metal doubles in value over that time due to the world troubles, then you have at least some profits to offset your loss. Eveillard thinks that this strategy will start to come into play more and more over the next six months to a year -- particularly by large state and corporate pension funds, which are currently not owners of the metal but are expanding their use of alternative investments.
There are several ways to own gold, or to participate in the bull move.
Buy shares of unhedged gold-mining companies, such as Newmont Mining (NEM:NYSE - news - commentary - research - analysis) of Colorado, Harmony Gold Mining (HMY:NYSE - news - commentary - research - analysis) of South Africa, Goldcorp (GG:NYSE - news - commentary - research - analysis) of Canada and Glamis Gold (GLG:NYSE - news - commentary - research - analysis) of Nevada. Gold stocks generally rise or fall three times as much as the physical metal, Eveillard says. If the metal rises 10% in a month, stocks are likely to rise 30%. Disadvantage: You're still buying paper certificates, not cold, hard metal.
Buy 100-ounce bars of bullion, which currently cost about $36,000, from a dealer. You can take your 6-pound gold bar home in your briefcase and then place it in a your home safe, a safety deposit box or a certified public gold depository. Disadvantage: The dealer takes a considerable margin on the sale.
Buy gold coins from a dealer that are good as legal tender, such as the Australian Kangaroo, the Austrian Philharmonic, the Chinese Panda, the Canadian Maple Leaf and the American Eagle. Disadvantage: Same as bullions; you pay extra for the nice designs and convenience.
Buy gold futures at a commodities broker. This requires you to put up the least amount of money, as the futures are a highly leveraged market and spreads are low. Disadvantage: Highest risk.
More abstract methods and strategies, including bondlike "gold-linked notes," are listed at the Web site of the World Gold Council. The bottom line, according to partisans, is that in the event of further monetary or political trouble, gold is money and the green stuff in your pocket is not. If you decide it seems worthwhile, you might wait for the metal's current war premium to ease off. Several analysts I spoke to believe the right place to buy might be around $330 an ounce, down 10% from its current perch around $363.
If you have a similar or contrasting view, let me know by writing to supermodels@jonmark.com.
Fine Print
The World Gold Council Web site has a wealth of information about the metal. Most of the U.S.' gold reserves are stored in a vault at Fort Knox Bullion Depository under the supervision of the U.S. Treasury. More American gold is stored at the Philadelphia Mint, the Denver Mint, the West Point Bullion Depository and at the San Francisco Assay Office. See more info at the Web site of the U.S. Mint. ... The PBS Web site has a nice set of pages detailing the California Gold Rush.
Critics of gold like to say that the metal has become just another commodity. If that's so, then where's the Fort Knox of pork bellies and orange juice?
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