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Los Angeles couple Chantay and Conrad Bridges have been on the fence about buying gold for years -- even as the shiny metal was notching new highs. Their reason was Investing 101: They didn't want to buy high and sell low. But recently they've changed their minds, deciding like many investors that gold still has plenty of upside. "The dollar is losing its value and if we're going to do it we might as well do it now," says Chantay, a real estate specialist. "Even though gold is high it will get even higher."
Call them gold's newest converts. Last week's market upheaval following the unprecedented downgrade of United States debt has convinced some of gold's most-skeptical bears to suddenly switch teams. Indeed, they helped drive some $2 billion into precious metals exchange-traded funds in the week ending August 10, marking five straight weeks of inflows, a turnaround from the outflows seen in May and June, according to fund researcher Lipper. Scott Carter, chief executive officer of Goldline International, a gold retailer in Santa Monica, Calif., says gold purchases at his shop have increased by 20% since the S&P downgrade. "We're seeing the average guy go into the gold market," says Phil Streible, a senior market strategist for MF Global.
For many experts, of course, this everyman rush to gold is the ultimate contrarian indicator. When hard-core skeptics are converted, so the thinking goes, the market has entered pure bubble territory. In fact, they say it's close to popping: Gold prices fell 2% from their recent high of $1,780 an ounce after the news last week that CME Group, a futures marketplace, is requiring institutional investors to put up more cash as collateral before they can make bets on gold. But those prices have already bounced back, gaining $42 between Monday and Tuesday and settling at a new record of $1,782. "It's very tempting for investors to want to buy things that have gone up recently, but that shouldn't the reason for buying gold," says Gregg S. Fisher, chief investment officer of Gerstein Fisher, a New York based investment advisory firm.
And yet, many gold bugs -- new and old -- remain convinced the precious metal still has new highs to set. Because gold tends to perform well during extended economic downturns or inflationary periods, both still real possibilities in the U.S., some predict gold will continue its upward march this year; it's already up 25% year-to-date. For instance, J.P. Morgan Chase Bank is calling for gold to reach $2,500 an ounce or higher by the end of the year. Adjusted for inflation, that's above the metal's all-time high of $2,400 in 1980.
Many investors, like the Bridges, are worried their savings could deteriorate if the dollar falls, and are using gold as a hedge. The Bridges plan to move 10% of their assets out of stocks and other investments into gold. Those fears were stoked last week when Federal Reserve officials said they would keep interest rates low through 2013 and hinted they could consider additional measures ("think QE3")to help spur the economy -- two measures that could drag down the dollar's value, says Robert Wiedemer, managing director of Absolute Investment Management, a wealth management firm in Bethesda, Md. Wiedemer has increased his clients' exposure to precious metals, including gold, from 20% to about 22% on average in recent weeks.
For other converts, buying gold is a simply a response to the gyrating stock market. Despa Robinson, a 28-year-old managing director of a music label in the U.K., increased his holdings from a few ounces to about 35% of his investing portfolio in the last two weeks. "The stock market's been shaky lately," he says. "I'm looking to preserve my money."
Even some metal fans, however, are hedging their bets. Some advisers, like Heidi Schmidt, wealth manager at USAA Financial Planning Services, are using the new highs to take profits, buy beaten down stocks or to simply hold more cash until the market calms down. Fisher, who has about 10% of his clients' portfolios allocated to commodities including gold, says he is increasing equity exposure for some clients and thinking about redistributing the proceeds from gold to other currencies.
For investors getting into gold for the first time, strategist Streible recommends a slow but steady strategy. Consider cutting down exposure to equities by 0.5% a month and moving that money into gold or precious metals ETFs, which are easier to own than gold bars, which must be stored in a safe deposit box and require some skills to accurately value, says Streible. Investors can bet on gold by buying futures through their brokers; these derivatives give investors the right to buy gold at a certain price and gain value as the price of the metal surpasses the price on the contract, and lose value when the price drops below it. Advisers caution, however, that despite its many year rally, gold can still experience steep price drops. Other risks: it doesn't provide income and can at times be difficult to sell. "It's not for everybody," says Carter. "This is not for money that you need to pay your bills tomorrow."
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