Monday, July 25, 2011

Should Investors Be Hiding In Gold?

I have had a number of calls from clients during the last few days asking what steps, if any, they should be taking in anticipation of debt default in Washington.

Frankly, I don't have a lot of answers.

Part of my problem, I guess, is that I have not been able to fathom what rationale any elected official could have to put our country in this predicament. I understand that there are strongly held views on both sides of the aisle, but default?

Ah, some are saying, doesn't today's situation scream out for investments in gold?

Well, maybe, but I don't think so. Still, with gold continuing to reach new highs on a daily basis, it is hard to argue with the gold bugs.

I believe that gold's popularity will be short-lived, and that if common sense prevails, investors will see the investment characteristics of an asset that doesn't generate any earnings, and costs something to store, are limited.

Saturday's New York Times compared the current popularity of gold to 1980, when gold soared to $850 an ounce from $35 in 1971. Then, as now, the papers were full of stories of the investment value of the metal, but if you had bought in 1980 your return for the next 30 years would have been around 2% per annum, assuming you hadn't needed to sell any gold to meet living expenses.

Meanwhile, common stocks over the same time period returned more than 9% per annum.

Then there's this: true, the price of gold over the last few years has moved sharply higher. Not only are investors concerned about the policy decisions of the global central banks, but strong demand from Asia has boosted prices. India, for example, has used some of its new-found wealth to increase gold purchases - but mostly for use in wedding dowries, not as an investment.

Here's an excerpt from the Times article:

While the price fell on signs of progress on these nettlesome issues, gold ended the week at $1,602.60. (That’s well below its 1980 inflation-adjusted peak of $2,516, said Edward Yardeni, an independent economist.) Gold hasn’t been flying this high since the halcyon days of supply-side economics early in the Reagan administration...

Even at central banks, gold’s standing has risen in some respects lately. In June, UBS held a gathering of managers of central bank reserves, multilateral institutions and sovereign wealth funds, and found that a plurality believed gold would be the best-performing asset class through the end of 2011....

In Gold's Popularity, Shades of 1980 - Strategies -