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November 13, 2011 at 09:33 AM
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One of the most perplexing questions facing investors these days is what to make of gold. With the cracks in the global financial system seemingly growing wider, and gold prices in the midst of a decade-long rally, more investors are wondering, do I buy? Sell? Wait until later?
With the listing of the SPDR Gold Shares, then called the StreetTRACKS Gold Trust, exchange traded fund (GLD) in November 2004, questions about gold have become more pressing. Prior to the fund’s launch, there really was no convenient way to invest in gold, and so few investors owned it. Those who wanted to speculate traded futures, and the true believers stashed coins in their attic.
Now, there is $2.1 billion in Gold Shares traded every day and it is the second largest U.S. ETF by assets — $68 billion as of October 31. Several copycat ETFs – including the iShares Gold Trust (IAU), the ETFS Physical Shares Gold Trust (SGOL), and the ETFS Physical Asian Gold Shares (AGOL) – have sprung up to tap into the demand for gold, proving the old adage that imitation is the sincerest form of flattery.
These new offerings, together with the dramatic rise in gold prices since 2005, the financial crisis of 2008 and 2009, and the massive budget deficit spending programs underway in the U.S. and Europe, have served to make gold a central topic of investor interest.
There is no shortage of opinion about where gold prices will head in the future, but nobody really knows for sure. Standard & Poor’s Equity Analyst Leo Larkin, who follows gold mining companies, believes that gold prices will reach $1,900 per ounce by the end of 2012. While that may seem attractive, it’s only a 6% gain from gold price levels that prevailed in early November 2011.
Diehard gold fans probably own gold already, so for those still asking whether or not to own gold, a better question might be whether gold would help or hurt their portfolio’s overall, risk-adjusted return.
While the merits of gold as a long-term store of value or a hedge against inflation can be argued ad infinitum, it seems intuitively clear that gold belongs to an asset class that is distinct from the equity and fixed income categories that dominate most portfolios.
That intuitive sense is backed up by the numbers as well, according to a recent report from the World Gold Council, a trade group for the world’s largest gold miners.
For the period of January, 1987 to June, 2011, the monthly returns delivered by gold had a negative correlation to most domestic equity asset classes, and less than a 0.5 correlation to all 16 asset classes studied. (Interestingly, the study found that gold has been less volatile than seven of those 16 categories, including U.S. large-cap equities, developed world equities, and real estate.)
