Sign in
Become a MarketWatch member today
Weekend Investor
Nov. 12, 2010, 5:20 p.m. EST
View all Weekend Investor "º
"¹ Previous Column
How to survive the market's next "?flash crash'
First Take "º
Path to Irish deficit reduction isn't austerity
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) "” Gold does not always glitter, but you wouldn't know that from surging worldwide interest that has turned the yellow metal red-hot.
Gold has become highly prized bling, as anxious and astute buyers alike, from hedge-fund players to central bankers, flock to the "currency of fear." Gold at around $1,400 an ounce is almost double what it commanded two years ago, and gold's price is up almost 25% so far this year alone.
It's been a great ride. Except gold is a bad investment.
Gold's feverish run has made a lot of people a lot of money, and though the rally has taken a breather in the last few days, there's no shortage of flag-waving supporters who claim gold is on a march to $1,600, $1,800, $2,000 and beyond. After all, gold is still well below its 1980 peak, when it was worth around $2,300 an ounce in today's dollars.
Many investors expect gold to protect their portfolio from economic uncertainty, but gold's recent sharp rise is being fueled by speculation that could end badly for buyers, says Kurt Brouwer, editor of MarketWatch's FundMastery blog.
Certainly there are reasons to own gold in a diversified portfolio. Yet gold isn't like a stock or a bond. It offers no income, no dividend, no earnings. It is considered a store of value, an alternative currency that's safe beyond reproach, but it is not cash in the bank, or even the mattress. Gold has no untapped intrinsic value; it is worth only what people are willing to pay for it. And lately, many people have been only too willing.
"Gold is going up because people are buying it, and people are buying it because it's going up," said Leonard Kaplan, president of Prospector Asset Management in Evanston, Ill., and a longtime gold trader.
You might be convinced you have the Midas touch, but if you're buying gold at these prices, you're speculating, not investing. There's nothing wrong with that "” but call it what it is.
"Gold is always a speculation," James Grant, editor of Grant's Interest Rate Observer and a longstanding gold bug, noted in his latest newsletter.
Gold may be a good speculation; even cautionary voices concede that gold is not yet displaying the parabolic hockey-stick pattern that frequently forms an ugly bubble. Low yields on safer assets such as bonds and cash encourage risk-taking and speculation, which favors gold, silver, metals, commodities and many stocks. If the U.S. dollar continues to decline, gold will be a main beneficiary.
Hedge-fund managers George Soros, John Paulson and Eric Mindich have surmised as much, judging by the massive stakes they held in SPDR Gold Trust ETF /quotes/comstock/13*!gld/quotes/nls/gld (GLD 134.17, +0.48, +0.36%) , the leading exchange-traded gold fund and the world's second-largest ETF with assets of almost $58 billion versus about $40 billion a year ago.
The three hedge-fund titans alone controlled around 10% of the Gold Trust's shares outstanding at the end of June, according to the most recent data available. Of course, they staked their claim early, and their view on gold and the dollar now may have changed, as investors will soon discover when these influential funds release Sept. 30 portfolio holdings.
Other exchange-traded products that own gold have also seen rapid asset growth and trading volume, including iShares Gold Trust /quotes/comstock/13*!iau/quotes/nls/iau (IAU 13.44, +0.06, +0.44%) , the leveraged PowerShares DB Gold Double Long ETN /quotes/comstock/13*!dgp/quotes/nls/dgp (DGP 40.29, +0.34, +0.86%) , and ETFS Physical Swiss Gold Shares /quotes/comstock/13*!sgol/quotes/nls/sgol (SGOL 137.00, +0.72, +0.53%) .
The rush to gold is not without some fundamental drivers.
The Federal Reserve's easy-money "QE2" program announced earlier this month has riled and rallied the gold bugs. They're convinced the Fed's rolling printing press will damage the U.S. dollar further and stoke inflation for years to come.
The quickest way to tame out-of-control deficits, as Ireland is learning, is not harsh spending cuts, says Steve Goldstein.
31 min ago11:42 a.m. Nov. 15, 2010
- rv6672 | 5:26 p.m. Nov. 12, 2010
"Retail in line for best holidays since 2006: PNC's Stuart Hoffman http://on.mktw.net/cEUqQj" 11:10 a.m. EST, Nov. 15, 2010 from MarketWatch
"U.S. stocks open week with gains; Home Depot paces 40-point blue-chip advance http://on.mktw.net/cRAyzE" 9:52 a.m. EST, Nov. 15, 2010 from MarketWatch
"U.S. retail sales climb 1.2% in October -- fourth straight monthly rise http://on.mktw.net/9WSsSQ" 8:34 a.m. EST, Nov. 15, 2010 from MarketWatch
"Fed's gauge of the New York-region business climate plunges to negative-11.1 reading http://on.mktw.net/bmKI3T" 8:32 a.m. EST, Nov. 15, 2010 from MarketWatch
"Caterpillar to pay $7.6 billion cash in buyout of mining-equipment manufacturer Bucyrus http://on.mktw.net/bUSIPC" 7:38 a.m. EST, Nov. 15, 2010 from MarketWatch
Wall Street Irregulars
Sound Advice cranky, but still bullish
Marsh on Monday
Weak currency still Germany's principle
Home Economics
Water leaks at home can cost you
This Week in China
Singapore growth shows up Hong Kong
Vital Signs
Changes coming for flex-spend plans
Read Full Article »