Tuesday, November 3, 2009

A Little Perspective on All that Glitters

I've never been a big fan of gold as an investment for a number of reasons. I think it is mostly due to having heard the gold bugs cry wolf for too many years. Even a broken clock is right twice a day, but the gold bugs never seemed to be right and they probably aren't right now either.

This brings us to the current state of affairs with gold at ~$1,060 per Troy ounce and daily headlines screaming about hyper-inflation in the US and gold going to $2,000 per Troy ounce. So I take all of this in and think "Gee, maybe I'm missing something here - maybe I should jump on the wagon with my clients' money while gold is still a bargain at $1,060. Hmmm...am I missing anything?"

Should I go down to my friendly neighborhood gold dealer and buy as many gold bars as I can? Maybe I should bury them in the back yard - it won't rot or tarnish - I can always dig them up later and trade them for a loaf of bread or a gun, right?

Maybe - but if it comes to that, gold won't be worth much either - and the gun owner would probably rather keep his/her gun. I would - you can feed yourself with a gun - you can't eat gold.

Should I recommend to my clients that we move a "modest amount" of their portfolios - say a conservative 5% - into gold? And if I do, what is the best way to do so? There is an Exchange-Traded Fund (symbol: GLD) that says it actually buys gold and stores it. Maybe I should just jump into gold mining stocks or mutual funds?


I've always been a fan of outcomes that are summarized with the phrase: "cooler heads prevailed". Does that mean I miss out on some of the excitement? Undoubtedly my cocktail chatter will be pretty ho-hum. Does that mean I might miss out on some capital gains? Of course I might. But I might also miss out on some capital losses. And if I get in now, what is my signal to get out? $1,500 a Troy ounce? $800 a Troy ounce? A family member bought gold bars back in the 1980's at around $800 a Troy ounce. Many years later I happened to meet the broker and he admitted to me that he "had to eat too" and that he had no regrets about having made that sale.

So I digest all of this conflicting information and I come to the conclusion that 1) boring cocktail chatter beats cocktail sob stories every day (reference: SEC vs. Madoff) , 2) I will never have regret in not buying something, and 3) I will be able to look in the mirror in the morning and know that I made the best decision with the information at hand.

I think there is a bubble in gold and at some point it is going to pop.

Please read the attached article/interview from SeekingAlpha.com for some very insightful perspective on gold.


Questions? kimm@sweetwaterinv.com

No comments: