Reuters Money

Recent sell-off sets up next gold rally

The following is a guest post by Lawrence Carrel, author of “ETFs for the Long Run” and “Dividend Stocks for Dummies.” The opinions expressed are his own.  Full disclosure: The author has had 7 percent of his personal retirement account in a gold ETF for the past four years.

When the price of gold plunged 20 percent last month, many market watchers declared the gold boom over. Stalled, yes; ended, no, according to many gold analysts, who believe the precious metal may instead be near a new sustained rally.

“I can tell investors don’t sell off your gold,” says Martin Murenbeeld, the chief economist at DundeeWealth. “We’re at a crossroads here.”

During the summer, gold surged 29 percent to a record high of $1,920 a troy ounce. This jump caused the price to drastically detach from its 200-day moving average, an important trend line in technical analysis that the gold price had closely hugged for much of the last decade. Technical analysts considered this jump unsustainable and in September gold gave back most of these gains.

Gold fell to a low of $1,534.49, much to the technicians delight, and it bounced off the 200-day moving average’s support level of $1,527.  While most gold watchers expect the metal to experience turbulence during the next few months, the world hasn’t changed much, and gold prices may climb higher because of its status as a safe-haven during turbulent times.

“Have the countries around the world solved the debt crisis?” asks Nick Barisheff, president of Bullion Management Group, a precious metals investment company based in Toronto. “Have the bailouts ended? Have their currencies stopped tanking?“ With the world already worried about Greece’s fiscal problems, gold summer’s rally was sparked by fears that the U.S. might default on its debt.

After Standard & Poor’s downgraded the U.S. debt, investors flocked to gold as one of the few safe havens left. This raised the specter of recession, which is never good for gold. The combination of increased collateral requirements for trading with falling commodity and stock markets, gold tumbled as investors sold it for liquidity amidst a flurry of margin calls.

Has gold been trumped?

When Donald Trump accepts gold bullion as a security deposit for one of his buildings, is it time to bail out of the yellow metal as it heads for its worst month in three years?

However you interpret gold’s recent slide — or the Trump factor –either the pale metal has lost its luster for now or large investors have ratcheted down their fear levels. Either way, there’s going to be more downside volatility in that market.

As I’ve written in the past, I don’t regard gold as a real investment. It doesn’t pay dividends, has no intrinsic value and is no replacement for bread and water if catastrophe strikes.  Gold may be due for a huge correction. The raising of exchange margin requirements for gold traders and the possibility of the Eurozone debt woes being addressed led to a huge sell-off of gold in the past few weeks.

After making a run at $1,900 an ounce, the metal fell to around $1,600. It may be that large investors actually fled gold to be in cash again, thinking that either gold’s run was over or they needed to be in something safer.

Yet if you believed that gold is a proxy for extreme uncertainty — as millions have — when would you begin to shift into less-volatile vehicles such as government or inflation-protected bonds?

Where gold is headed is not something that can be easily predicted. I’m not a big believer in using past results to forecast future market trends or pricing. In fact, I think it’s one of the worst ways to invest. It always gets investors in trouble because they conflate random price movements with actual patterns where none exist. Last year’s winners will often be tomorrow’s losers.

So the bevy of predictions that gold will hit $2,000 an ounce or that any number of technical elements predict its infinite ascent don’t mean too much to me.

Six investment scams to avoid

Money is a powerful lure. Pretty much everyone wants more of it, and a whole lot of people want to get theirs by taking it from others. Investors are typically more savvy, but they’re targets nonetheless.

The North American Securities Administrators Association (NASAA) put together its annual list of “tricks and traps” for investors to avoid. For most, due diligence and skepticism is what stands between the investor and the scam.

Here are some of the scams to watch out for so you’re better prepared if one comes your way.

Real estate The beaten-down real estate market, with its abundant opportunities for real investors, has also spurred a growth in schemes tied to distressed properties. Earlier this year, Lawrence R. Hamel was convicted in federal court in Florida of a conspiracy that took $2.3 million from 39 investors around the country who thought their money was going to refurbish distressed properties that would then be sold for a profit. Authorities say Hamel didn’t buy properties and used the money from later investors to pay earlier investors in a Ponzi scheme.

Energy These scams are connected to the time-honored lure of buying into the big rewards that come with investing in oil and gas reserves. “Investors must realize the distinct possibility that they could lose their total investment in legitimate ventures. Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich,” the NASAA warns.

Gold As the price of gold has risen, so has the temptation to get a piece of the action. That’s a powerful draw for a scam. There are a couple of variations in this arena, the NASAA says. One offers investors a chance to buy into a mine that had been closed with the promise of getting all their money back plus interest. Another involves marketing coins or nuggets that supposedly have a superior return. This summer, the operator of the Lake Worth, Florida-based Gold Bullion Exchange was accused of defrauding more than 1,400 investors of more than $25 million. Jamie Campany allegedly got investors to buy under a variation of margin financing, and collected commission and fees but never bought any bullion.

Promissory notes On the face of it, these seem like a good investment. After all, it’s on paper that you’re going to get a fat return on your investment. “Unregistered promissory notes are often covers for Ponzi schemes and other scams,” NASAA warns. Investors should check with their state regulator to determine whether a promissory note and the seller/borrower are properly registered. Former FBI agent Cary Alan Burdette pleaded guilty this summer to using promissory notes in a scheme that brought in more than $4 million.

Panning for gold: You could profit or just have fun

With the wild ride on the world’s markets enough to give even the most seasoned investors the jitters, everyone is talking about gold.

You could shell out $1,700-plus for an ounce of the precious metal, or diversify your portfolio with gold ETFs. But how about finding it the old-fashioned way and panning your way to a get-rich-quick fortune just like the pioneers in the Old West? It can happen: A guy named Jim Sanders found a 9-pound nugget last year which would be worth about $230,000 at today’s prices.

From California to Alaska to the Yukon, gold prospecting vacations have long been a source of entertainment, but now have the allure of big-time profit (which is never directly promised). But don’t book your ticket to the Yukon just yet — unless you promise to not quit your day job. And, keep in mind that the fun is what most folks who take these trips talk about, not banking the motherlode.

“It’s not as much about the gold as it is getting out there and having a good time with friends and families, but yes you can find gold,” said Brad Jones of the Gold Prospectors Association of America. “Yes, serious prospectors do make a living, but they are few and far between and they know what they are doing.”

The association cautions anyone with gold dreams to proceed cautiously, while acknowledging there is gold in them there hills.

To start a cost-benefit analysis of whether you can make money on a gold-panning vacation, remember it costs money to get there, costs money to stay there and costs money to get access to the area approved for mining or panning and for the equipment you’ll need. So you could easily start more than $3,000 in the hole (about an ounce and a half of gold you can cash out).

Mark Castagnoli, president of Placer Gold Design in Vancouver, British Columbia, has plenty of experience in the gold business including in Western Canada’s placer mines. He believes in gold adventures for what they bring to the economy and the potential that you can actually find something more than a bit of gold dust.

Gold Mine: Links and tweets from around the Web

One consequence of the stock market decline is that everyone is talking about investing in gold as it hits record highs. But what are they saying?

A quick trip around the Web today came up with a treasure trove of things to think about, from advice on what to do now, to historical perspectives to funny tweets. There’s analysis that says gold will go up, there’s analysis that says gold will go down. And there are worldwide repercussions that you might not have ever considered.

Here’s a sampling:

From the anti-gold crowd, there’s Roland Gribben, writing in the London Telegraph that this gold rush is nothing new and there shouldn’t be such a frenzy, and Alexander Green, Investment U’s chief investment strategist, writing in ETF Daily News that gold and silver investors are losing their minds. And then there are true contrarians, like Gary Noth writing on LewRockwell.com, that all the experts telling you how to invest in gold, or why to invest in gold, are not worth listening to.

Among those bullish on gold are the powers that be at JP Morgan Chase, who issued an advisory predicting that gold will hit $2,500 by the end of the year. There’s also analysis from the Autochartists Team at FXStreet.com that shows gold continuing to go up. And then there are reports like Maike Currie’s in InvestorsChronicle.co.uk that explain why “the sky’s the limit.”

For historical perspective, there’s a link to an Alan Greenspan essay on gold from 1966 that was first published in Ayn Rand’s  ”Objectivist” newsletter titled “Gold and Economic Freedom.” It’s mostly a defense of the gold standard, but it includes gems like: “Deficit spending is simply a scheme for the confiscation of wealth.”

As for unintended consequences of gold and uses of gold that you might not have thought of, there’s an article on the “Consequences of high gold prices on weddings in Pakistan” and one on gold-plated contact lenses that are now, even more, the folly of the rich. And for anyone considering wedding bands, there’s the statistical note that now gold is as valuGolable as platinum.

How Americans buy gold and precious metals on eBay

Looking to stock up on gold bullion as gold prices soar to all-time highs? Plenty of Americans are turning to eBay’s Gold and Silver outpost. The company says sales of gold bullion have increased more than 60 percent from 2007 through 2010.

Some notable facts about precious metals sales on eBay:

* The top three states for precious metals sold per capita are Alaska, Wyoming and Nevada.

* Almost half of the silver and gold buyers in the first quarter of 2011 never purchased these items on eBay before.

* There are two silver buyers for every gold buyer because silver is so much cheaper.

* Privately minted bars are purchased more frequently than the American Eagle, the bullion coin issued by the U.S. Mint.

What will you get for your money? On Thursday morning, you could buy a 2011 American Eagle silver coin from a top-rated seller for $48, including shipping. This represents a $8.40 (or 21 percent) premium over the spot price of $39.60, according to eBay. You could also purchase a 2011 American Eagle gold coin for $1740 — a $143.10 (or 9 percent) premium over the spot price of $1596.90.

Gold crash: What could trigger the inevitable

Before you sell that last piece of jewelry, keep in mind that the gold price will not go up indefinitely. There are number of reasons why it might crash.

If you’re overweighted in gold or commodities, the warning is the same: A stronger dollar, strengthening U.S. economy or rising interest rates could derail the epic yellow metal mania. Who knows? Congress could even reach an agreement to clear up its balance sheet and pay down its debt.

What are the chances of any of this happening? It’s beyond the limits of my minuscule, clouded crystal ball, which is about the size of a pinhead. Nevertheless, you should prepare your portfolio for any number of eventualities, which can be easily accomplished with exchange-traded funds.

Gold is troublesome in my book because it really isn’t an investment. It’s a reserve currency of sorts that’s heavily traded by institutional investors. It doesn’t pay any dividends or interest and is bought in times of widespread fear.

The savviest traders buy gold as a hedge against the dollar. In the past few years, it’s also been a bulwark against the Euro as well, which has been bruised by sovereign debt woes in Greece, Ireland and Portugal.

Is the Euro financial fizzle over? I don’t think so, but it’s still not a reason to load up on gold.

The clearest threat to gold’s reign as the reserve currency of nervous Nellies is a possible rebound of the dollar. Given the congressional wrangling over the debt limit, budget and growing inflation, betting on the buck is like trying to figure out whether a racehorse will finish. They often pull up lame.

Are commodities too risky for individual investors?

The commodities sector offered one of the best storylines in recent years:  strong growth thanks to increased demand from emerging markets, an opportunity to hedge against inflation, along with all-important portfolio diversification. Until the recent selloff, silver was the best-performing commodity in 2011, nearing all-time highs of $50-per ounce.

But as silver plunged 30 percent in the last two weeks, and oil, cotton, gold and other commodities prices have similarly been battered, investors seem to be spooked by the volatility. Case in point: the world’s largest silver-backed exchange-traded fund,  iShares Silver Trust, has seen massive outflows.

With so much churn, do mom and pop investors belong in commodities? Although they are often targeted to individual investors because they are so easy to buy and sell, exchange-traded funds (ETFs) that focus on commodities are especially popular with professionals, such as hedge funds, who thrive on volatility. Professional investors have the resources to closely monitor every move of the ever-changing commodities market — but most individuals might not have the time or tools to stay on top of the long list of factors that impact commodities prices, including the futures market, political events, economic data and even the weather. That’s why experts suggest keeping commodities exposure to no more than five percent of your overall portfolio.

Tell us what you think.

Are commodities too risky for individual investors?

• Yes, they pose too much risk
• No, they provide a great investment opportunity

Is it too late to buy gold?

With all of the recent hubbub about gold’s return to greatness and its phenomenal returns, is it too late to add a little shine to our portfolios?

According to a recently released report by the Thomson Reuters Proprietary Research team, many factors seem to suggest continued momentum for gold. Since 2000 gold bulls have pushed the price of the yellow metal up 404 percent, making it one of the best-performing asset classes for the decade. However, we heard the same espousals during the tech run-up of the late ’90s—only to be deeply disappointed.

So, is this just another bubble getting ready to burst, or are there continuing opportunities to profit from the forces that are pushing values higher?

Given the continued uncertainty in the global economy, the falling dollar, greater Fed easing, high unemployment, and ongoing Eurozone debt concerns, it is not beyond anyone’s imagination that gold and other commodities have a fair shot of continued success. However, as in 1999 during the tech craze we need to be prepared and have a plan for a drastic change—just in case.

Déjà vu? Let’s keep in mind that gold hit a record price of $850 per ounce in 1980 as a result of the international crisis arising from the Soviet Union’s invasion of Afghanistan and from the Islamic Revolution in Iran. By 1983 the price of gold had fallen to around $300 per ounce and didn’t find its way back to the $850 mark until 2008—28 years later!

So, if you believe prices are going higher and you want a little gold in your portfolio to gain the benefits of investing in an uncorrelated asset class, keep a keen eye on your purchase, set a reasonable amount of decline you are willing to experience, and be ready to make that sale.

Or, even better—if you’re using exchange-traded funds (ETFs), implement a stop-loss order to minimize any untoward decline. Used sparingly in your asset allocation model, precious metals can help immunize your well-diversified portfolio against both fear and inflation.

How I beat Yale’s David Swensen

It’s not every day that one’s portfolio beats David Swensen, the great money manager of the Yale endowment.

According to the blog Seeking Alpha and MyPlanIQ, that’s what I did over the last year with my humble “Nano” portfolio. How is it possible that I (narrowly) beat Swensen’s portfolio, the product of a man widely considered to be one of the best institutional money managers in the world?

Created in 2006, the Nano is about small expenses, simplification and asset classes that don’t always move in the same direction. There are only five funds in it (see below), and I spread out my money evenly — 20% in each fund. I tried to cover most stocks and bonds with some real estate and Treasury Inflation-Protected Securities (TIPS).

The Nano portfolio was my concerted effort to create a passive, “lazy” portfolio that you would rebalance every year and mostly forget about until you were close to retirement.

While I’d love to continue hoisting my flag, I will warn you that past performance is no guarantee of future return. And I’m no David Swensen, who has an incredible long-term record with Yale.  My picks also didn’t make the final cut for MyPlanIQ’s “playoffs” for lazy portfolios. They calculated their returns with their software, which is not open to my scrutiny, so my 0.24 percentage-point besting of Mr. Swensen is no big deal.

Sadly, my bragging rights hit a brick wall when you look at my three year-returns — losing almost 2 percent. But let’s put that in perspective: That’s still not bad considering the S&P 500 Index lost more than 40 percent in 2008. Yet it pales in comparison to Harry Browne’s Permanent portfolio, which gained 7.4 percent during that period.

Browne’s secret it that it performs well when fear rules and stocks are being clobbered; only a quarter of its holdings are in the iShares S&P 500 Index ETF (IVV).