Panning For A Golden Hedge
By Dan Kadlec
Gold enthusiasts haven't had a bull market to crow about in more than two decades, but we're in one now. The price of an ounce has zipped past $600 for the first time in 25 years. Gold-mining stocks have doubled since early 2003, and most pros expect more gains--for mining stocks and the metal itself.
Conditions certainly are right. Booming economies globally and an emerging middle class in Asia, where gold jewelry is especially popular, will triple demand over the next few years, predicts the World Gold Council. Mining companies won't be able to keep pace because they failed to invest sufficiently in exploration and technology during gold's long slump. Meanwhile, soaring oil prices are contributing to inflation worries; gold is a classic inflation hedge.
Gold is also a traditional safe haven from a weak dollar, which many (including Warren Buffett) are betting on. Dollar pessimists point to the massive U.S. budget deficit, which if uncorrected should weaken the buck over time. With that in mind, insurers and pension funds have begun allocating 2% to 5% of their portfolios to precious metals and other commodities.
So it appears to be something of a perfect storm for gold. "We're still in the early stages," says James DiGeorgia, editor of the online newsletter Gold and Energy Advisor. He forecasts gold at $2,000 to $3,000 per oz. by 2012.
Yet once a bull market becomes this obvious it pays to tread lightly. Speculative money--mainly from hedge funds--has been pouring into the metal, and once something goes wrong, it will pour out just as fast. "We're getting a little nervous," concedes Anton Pil at JP Morgan Private Bank. But forecasts like DiGeorgia's are not all that outlandish. We may be in a modest inflationary cycle, and if you adjust for the past 26 years of inflation, gold should be at $2,150 already. Potentially, there is a lot of ground to make up.
If all you want is a hedge against rising consumer prices, gold may not be your best option. Consider Treasury Inflation-Protection Securities (TIPS), which are bonds for which the return rises with the CPI. If you are sold on gold, keep it to 5% of your portfolio. Here are some options:
o GOLD-MINING STOCKS These shares typically rise three times as fast as the metal, reflecting the value of the reserves of a company--its gold still in the ground. The downside: these are operating companies subject to mismanagement, and after their blistering run, many mining stocks trade at a hefty premium.
o MUTUAL FUNDS Actively managed gold funds invest in the stocks of gold-mining companies, so the same considerations apply. A more direct approach is to invest in an exchange-traded fund that owns gold bullion. There are two: StreetTracks Gold Shares and iShares Comex Gold Trust.
o COINS Government-minted gold coins are easy to trade and store, but you will pay a 5% premium because they are collectible, and you will not be able to sell them to a dealer for anywhere near that. Still, being able to lay hands on the metal you've bought can be soothing--and that's what a gold investment is all about.
MUTUAL FUNDS WITH LUSTER Gold funds (shown here in annualized returns) have been on a tear for the past few years. How long will it go on? GOLD FUNDS 1 YR. 3 YR. 5 YR. Gamco Gold 68.9 34.5 40.4 Fidelity Select Gold 68.8 32 34 Tocqueville Gold 64 37.5 41.3 American Century Global Gold 62.5 62.5 37.8 iShares Comex Gold* 35.6 -- -- StreetTracks Gold* 25.5 -- -- Precious-metals average 64.8 37.7 36.5 S&P 500 4.2 11.7 4
*Exchange-traded funds Source: Morningstar