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Portfolio > Economy & Markets > Stocks

Still Too Early to Go for Gold: Searching for Alpha, December 2009

By Ben Warwick

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The current “it” investment of the moment is gold. Everyone seems to be talking about the rally in what some have described as the last storehouse of value. Gold ETFs have become wildly popular. And now some of the best hedge fund managers are starting to build dedicated funds around the precious metal.

I’m not as bullish on the yellow metal, and I don’t believe that it deserves a dedicated position in most individual investors’ portfolios. Why? For starters, gold is treated as a collectible by the IRS. Instead of the 15% capital long-term gains tax rate enjoyed by stocks and bonds, any profit coming from a 12-month or longer holding period is subject to a 28% tax rate. If gold is held short-term, the gain is taxed as regular income.

Gold investors may have more tax exposure than they think. Most gold ETFs were created as grantor trusts. At the end of the year, any buying or selling activity in the ETF is passed pro-rata to each stockholder. The bottom line: even buy-and-hold investors will have a tax bill, and it’s likely to be significant.

The sudden popularity of gold has me wondering if there’s anyone left to take a position. Eventually, the first buyers will start paring down, and a lack of buyers would obviously result in a sell-off.

Finally, the thesis for owning gold is dependent on inflation making a comeback. Based on the tepid buying behavior of U.S. consumers, there simply isn’t enough price pressure for this to happen (at least in the next few years). Gold investors may be on to something, but it’s likely they are significantly early and will face a rocky road until conditions are ripe for the precious metal.

The Monthly Index Report for November 2009

Index

Nov-09

QTD

YTD

 Description
S&P 500 Index*

5.7%

3.6%

21.3%

 Large-cap stocks
DJIA*

6.5%

6.5%

17.9%

 Large-cap stocks
Nasdaq Comp.*

4.9%

1.0%

36.0%

 Large-cap tech stocks
Russell 1000 Growth

6.1%

4.7%

33.1%

 Large-cap growth stocks
Russell 1000 Value

5.6%

2.4%

17.6%

 Large-cap value stocks
Russell 2000 Growth

3.1%

-4.1%

23.9%

 Small-cap growth stocks
Russell 2000 Value

3.2%

-3.7%

12.1%

 Small-cap value stocks
EAFE

2.0%

0.8%

30.6%

 Europe, Australasia & Far East Index
Lehman Aggregate

1.3%

1.8%

7.6%

 U.S. Government Bonds
Lehman High Yield

1.0%

2.8%

53.2%

 High Yield Corporate Bonds
Calyon Financial Barclay Index**

2.4%

1.3%

-1.4%

 Managed Futures
3-mo. Treasury Bill***

0.0%

0.0%

0.3%

All returns are estimates as of November 30, 2009. *Return numbers do not include dividends.

** Returns are estimates as of November 27, 2009.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at [email protected].

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