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A Golden Opportunity?
Two separate events brought this topic back to mind recently. One was the appearance of a little bug down at the corner of the CNBC screen in the early morning. Along with the Dow futures, the Nasdaq futures, and the S&P futures, all considered market indicators, suddenly gold was being tracked as it climbed north of the $300 an ounce mark, priced as bullion. To me this seemed a nonevent. Lately, the business networks have been scrambling to find the new newest thing, get on it and hope for a ride. Its kind of pathetic to watch Liz Claman interviewing a boy band at 4:00 am pacific time. Must be even more so in the east at a later time in the morning. I hope they find something soon, because when things are hot, these folks are fun to watch.
The second came in a series of e-mails, apparently from viewers of similar shows wondering if this was to be the next greatest run.
My history with gold goes back to the late seventies. I was advised to purchase some by a grizzled old man who bought defaulted mortgages, collected rents from the former owners, and did it so he would eventually own the town. As a side note, he died before realizing his dream, but left three uneducated children in charge of three parcels worth close to forty million dollars. But he didn't die before he told me to invest in gold. He simply said, buy everything you can afford.
At $150 an ounce, I bought fifteen gold kruggerands at a downtown coin store, whose owners all carried guns visible on their belts. To make a long story short, I sold that little investment when gold hit $793 an ounce. I took the money to Europe and spent no more than fifteen dollars each day. When it was gone, I came home. I was there a really long time.
So with gold back in the news again, these readers, six in all, wanted to know why and if it had any legs.
No. And Yes.
On many levels, you can look at gold as having risen quite substantially in the last several months. Sure there have been some worry and that may have pushed the price up, but that isn't the reason gold is buzzing around the $300 neighborhood. Folks are nervous and that pushes money managers looking for something in the nature of a comfort investment. The bank in Japan continue doing stupid things with money, and then there is the gold producers themselves.
Now these gold companies do some relatively fancy booking keeping themselves. They sell gold forward, which I imagine isn't wholly different than GM booking a car sale the minute they receive rather than the delivery date. These producers do this as a sort of hedge betting on lower prices in the future, selling it for the contract price, which is higher. But they have slowed this type of contract, and this is what seems so attractive. Companies like Anglogold, Normandy and Barrick have all stopped doing this type of forward sale and this has attracted some mutual funds whose lack exposure. Barrick, as a side note, actually used to make money by borrowing gold fro European banks, turning around and selling it, then buying U.S. Treasury bills with that dished out a 6% yield. The difference in that transaction was a little over 4.5%.
But gold continues to fascinate us, and probably always will. Roughly 34,000 tons of the precious metal sits in governmental bank vaults, and this keeps the price higher than it should be if this were on the open market. Time was we backed our money with gold, which is at first glance, a good idea. You should be able to turn your paper dollar over and receive something tangible. The problem came when commodity based money was really controlled by the commodity's producers. If you mine gold, you, in essence control inflation. Inflation is greatly disliked in money circles largely because a dollar out one door return through another with less buying power.
The gold standard ended in the 1971 when Nixon set the dollar adrift from its gold anchor. Besides, it was illegal for Americans to own gold and Nixon realized that the one redeeming dollars for gold were actually foreign governments. And that had to stop.
So if some mutual funds are seeing the possibility of another gold rush, is there a gold fund that would be part of a balanced portfolio? That depends. Gold itself has been in a twenty year bear market. Investors have been skittish after three in the equities market. But if you are chasing gains, then there are a few funds that specialize in the trade of precious metals.
Vanguard Precious Metals Fund (VGPMX) would have been a consideration. It had proven to be a steady runner in the sector with a diversified holding of metals, and a fund manager who was smart enough to get out of industrial metals last year and buy into the gold producers. This fund carries the Vanguard brand name and the reputation for inexpensive. In part, the problem with many of the funds in this kind of sector, is cost and that seriously eats away at returns. This fund returned a healthy 33.4% in 2002. This fund is now closed.
Another low cost favorite, and not because of the 73% return on '02, is American Century Global Gold Inv (BGEIX). This fund is probably one of the better funds to have should gold do anything worth noting this year. Remember, if the economy can be talked back into healthiness, then gold will suffer and this fund would be harder hit than the previously mentioned fund.
Gold will always, it seems, call investors late to the table. Investing a small percentage of your portfolio is probably okay if you fail to buy into the belief that the economy will recover. For you, the answer is Yes, gold will be a good place and any strength above that psychological mark of $300 will make you some money. If you feel as though the economy will rebound this year and will do so in a stronger rather than a weaker fashion, you are already too late. So the answer is No.
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