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July 01, 2002 at 04:00 AM
By crackey, I remember the days when you didn’t even need to own a shovel or swish a tin pan to make money out of them thar hills. Wait a minute. You still can, sonny. Right? First, you need to follow our core investment principle of knowing what you’re thinking about buying before you wind up owning it. Gold is simple enough to understand, you begin to say. Sure, simple–about as simple as explaining the concept of infinity to a five-year-old.
Despite my caveats of last summer (see the August 2001 issue), gold–the commodity and the mining stocks–has continued climbing to higher highs, while the overall market hasn’t produced much more than plugged nickels. Not surprisingly, client interest in gold has also resurfaced from the cavernous vault of safety- and profit-consciousness. With terrorism, wars, rumors of war, and consumers’ steadfast irrational exuberance in the face of bear market facts–all of which have their own logic–no doubt investing in gold has become a topic of many client conversations.
Given the level of global instability, it’s hard to argue with the idea of putting some of your assets into gold or, better yet, gold mining stocks–or better still, an actively managed gold fund (we’ll get to that in a minute). But let’s hope that it’s the worst-performing of your asset classes; if it isn’t, that means all hell has broken loose. Still, before you become a glitter bug, or let a client succumb to one, let’s mine the negatives for what they’re worth. The truth is that, over longer periods, owning gold hasn’t panned out.
First, gold doesn’t always do all that well when the world looks as if it’s going to hell. If you knew last August what would happen on September 11, you’d probably have expected the price of gold to rise–and it did. But it was only a flash in the pan: 5.6% in September 2001. (Not that you’d have regretted holding it for that gain, especially given what other investments were doing.) With geopolitical factors more stable, however, gold has gained more substantially this year, with prices up 18% through May.
Glitter Bugs
For a commodity, gold prices actually haven’t been all that volatile over the past two decades, but gold stocks are considerably more volatile. It’s not uncommon to see short-term periods where gold stocks are among the best of investments, but longer term, the sector sinks, with most gold-related investments actually showing a negative return since 1980. On the other hand, gold sparkled throughout the ’70s, thanks in large measure to our own mismanagement of the dollar and inflation. It’s conceivable that such mistakes could be repeated, or that difficult choices (war- and/or oil-related crunches) may lead to inflation, a falling dollar, and a falling stock market. In that case, gold might again do well for some time to come. In fact, as you well know, the only thing missing from the above equation is inflation, and, since we’re no longer pegged to the gold standard, gold isn’t an inflation hedge.
Historical context? We wouldn’t bank on gold faring as well as the last time around. An ounce of gold went from $40 in 1971 to a peak of $850 in 1980; that twentyfold increase was primarily caused by the dollar’s being cut in half by inflation. As we’ve seen since 1980, gold, which is to say, gold investors, overreacted in 1980. Gold is arguably 22 years into a bear market, and 9 months into its own bull market. Will this last? Hold on, we’re bringing up the crystal ball from storage. The likelier scenario involves shorter-term moves, with gold doing well for, say, a year based on any given form of bad news, like a falling dollar and inflation, one or more nuclear explosions, or Alan Greenspan retiring. (If buying gold leads you to actually root for such bad news, then maybe you should stick to stodgier investments for your health’s sake.) Long-term gains in the real price of gold would lead to increased supply; the prospect of really cleaning up long-term in this field is probably no better than the probability of OPEC ruling the world.
What are your options for gold investing? Primarily: bullion and coins (gold itself), gold mining stocks, and gold mutual funds.
Buying the Shiny Stuff
