No gold rush here
The lure of gold is hard to resist. With the price of bullion more than doubling since the onset of the financial crisis, many are clamoring for this most solid of assets. But you won’t find the investment managers at T.E. Investment Counsel among them.
Let’s be clear – investing in gold and investing in a business are not the same thing. When you invest your money in a business you are putting your capital to work in a going concern, an entity that produces goods or services that can be sold for income to generate earnings and possibly dividends to be paid to you. Investing in gold does none of that. Gold has no intrinsic value other than what people are willing to pay for it. For now, it appears that people are willing to pay dearly. You can’t get an income from gold. All you get is a store of value, and that’s assuming the price holds.
Nothing distorts the investing landscape more than fear and greed and that is exactly what the gold story is all about. Gold has traditionally been perceived as the ultimate safe haven – a solid asset that you can hold in your hand. In 2006, gold’s fortunes began to rise in earnest going from just over US$400 an ounce to as high as US$1,421 an ounce before the end of the decade. Early on, it was fear that was driving the renewed interest in gold. Initially, concern about commodity-price-induced inflation spurred on gold’s rise. When the financial crisis took hold, the price of gold actually weakened, briefly, as investors flocked to the U.S. dollar. But with concerns about central banks switching on the printing presses, the price of gold was once again on the rise. As it climbed above US$1,000 an ounce, entering new territory in nominal terms, there was chatter about the price reaching U$2,000 an ounce and investor sentiment shifted from fear to greed. Now that worrisome term “bubble” is being attached to gold.
At T.E. Investment Counsel, we have not been advocating that our clients buy gold. It’s not just the recent talk of a speculative bubble that has formed our opinion; we wouldn’t have favoured taking a significant position in gold even before gold’s recent rise. We believe that our investors have ample exposure to gold by owning shares in the mining companies that actually make a profit from gold. Typically, exposure to these shares takes up no more than 5% of a balanced portfolio. In our view, this is a prudent amount given that gold is not an asset class in and of itself, but a commodity – a precious metal – whose price history over the long term, and fundamentals over the short term, do not make a compelling case for owning the metal.
The last time gold was in the current price territory was 1980. Inflation was in the double digits and interest rates in the U.S. were as high as 20 percent. Within a few years gold had retreated to around US$300 an ounce, where it hovered until 2002! On an inflation-adjusted basis, if you bought gold at its previous peak of US$850 an ounce in 1980, your “store of value” is still under water. During this period, stocks and bonds would have been a much better bet. From 1980 to 2010, a typical balanced portfolio would have grown by 10% per annum whereas an ounce of gold has gone from US$850 to US$1,421, a total gain of 67% or just 1.7% per annum. Even if you bought gold in the 1970s, before the previous peak, you would have enjoyed good returns for about a decade and then endured poor returns for more than 20 years before the price of gold began to rise. Many investors have been frustrated by the lack of progress in stock markets over the past ten years. Imagine watching the price of gold languish for nearly 30 years before seeing any positive momentum!
If you buy gold today, the only way to gain is if someone else is willing to pay you more for it. Yet the fundamentals just don’t support this. In the last decade, demand for gold jewellery has declined while central banks have reduced their holdings of gold. At the same time, there is more gold in supply today with the current total world supply hitting the highest level in a decade. Diminished demand and excess supply are usually a recipe for falling prices. But it is investment demand that has been taking up the slack, accounting for more than 1,500 tonnes out of a world supply of just over 4,000 tonnes. We’re not saying that there may not be more gains ahead for gold. But the demand for gold is being driven by investor sentiment and not underlying fundamentals. For the long-term health of client portfolios, we’ll place our bets on fundamentals every time.
Pop, chips and gold bars
In Europe and the United Arab Emirates, Ex Oriente Lux AG operates 20 “Gold to go” vending machines that dispense gold bullion bars. Now these gold-dispensing ATMs have come to the U.S., the first being installed in Boca Raton, Florida, with a second machine opening in Las Vegas by the end of 2010. The ATMs accept U.S. dollars (credit card access is coming) and can provide four weights of 0.999 Pure Credit Suisse gold bullion bars and two weights of U.S. minted American Eagle gold coins.
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