Has gold been trumped?

September 30, 2011

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.

For big money managers like Chris Goolgasian of State Street Global Advisors, few of the numbers and ratios used to predict gold prices have much validity, either. While he doesn’t think gold is in a bubble, he thinks that broad-based investor sentiment is still favoring the metal.

As manager of the $71 billion-plus SPDR Gold Trust, the largest exchange-traded fund investing in bullion, Goolgasian doesn’t know of any behavioral finance metrics that have any solid utility, either, he told me recently. Instead, his team focuses on 40 factors.

“We think valuing gold is probably not the best use of time,” Goolgasian says. “A better use of time is observing items that you think actually matter and impact the price. We call these, for lack of a better term, ‘observables.’ ”

What does his team consider? Macroeconomics, money supply, central bank interest rates, inflation expectations, economic growth and political instability are weighed.

Yet most individual investors don’t bother with these indicators. In recent years, gold has become a refuge proxy currency as the stock market has become more volatile and the dollar and Euro have dropped in value relative to other currencies. The metal is also an indicator of abject fear, creating a haven for investors spooked about a global economic meltdown.

But gold is anything but a safe haven — as the recent sell-off has shown.  Even Goolgasian has noted that gold is nearly as volatile as stocks as measured by the MSCI index.

Still, even with gold’s riskiness, had you invested in the metal, you would have averaged 23 percent over the past five years in Goolgasian’s fund (through Aug. 31) and almost 45 percent in the past year alone.

That doesn’t mean you should pull a Donald Trump and start treating gold as if it was the same as cash. It isn’t, even though investments in money-market funds or U.S. Treasury Bills are hardly paying any yield. These vehicles are still backed by something while gold is priced based on mass sentiment and speculation.

As far as your portfolio is concerned, an ETF such as the SPDR product is a good way to hold the metal. Just don’t jump in and out of it and keep it to under five percent of your total holdings.  While Trump’s buildings may be bathed in gold — the color, not the actual metal — that doesn’t mean your portfolio should be as well. The Donald can take a lot more risk than you can.

 

13 comments

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Gold is backed by distrust of government central banks and overprinting of money. It cannot be printed. Shares in some so-called “trust” are no less paper than a greenback and no more reliable.

It has been a long, long, long time since Government leaders in any Western country have been held to account for debasing a currency or ruining a national economy. So they have no fear. Look out!

Posted by txgadfly | Report as abusive

Gold had its worse month in years, blah blah. The fact is are that gold has outperformed the S&P for the last ten years by quite a bit. Gold is not an investment, it is a store of value.

During this months downturn, the stock market retraced back to November of 2010, wiping out nearly a year’s gains. Gold retraced back to, July, just two months ago, and now seems to be holding fairly well. I started buying precious metals last fall and went completely out of stocks and mutuals funds last winter — I couldn’t be happier. Cash and gold is the place to be at this time as stocks and real estate head into a long-term bear market. Another benefit of gold — central banks can’t print it.

Posted by lordkoos | Report as abusive

One more note… gold is “backed” by thousands of years of human history. The dollar is “backed” by an increasingly untrustworthy and insolvent government and a system of finance that is rotten through and through.

Posted by lordkoos | Report as abusive

No intrinsic value, really? That would come as a real shock to the many and varied industrial users of gold. In fact gold has been worth something far longer than any paper currency has…far longer.

That being said, I think it’s currently way overpriced and due for a big correction! Silver, on the other hand looks very attractive…much to the chagrin of everyone I know who deal/deals with gold.

Posted by Bitwise | Report as abusive

There are some things wrong with this article. Let’s start shall we?

1.) you wrote that gold “is no replacement for bread and water if catastrophe strikes”

John, you are confusing 2 very different topics – investing and survival preparedness. People can’t reasonably expect to store their life savings in the form of food and water. This is simply impossible for most. Some argue that gold helps your “Financial Survival” in case bankers and politicians turn out to be untrustworthy. But really, who can imagine a banker or politician as untrustowrhty 😉

2.) The whole Donald Trump security deposit thing.

I’m not sure why this is a negative for gold. The man is a billionaire. I am even willing to go so far as to say he knows more about money and investment than you do. Shocking, I know, and I’m sorry 😉

3.) You didn’t mention the main reason for gold’s sell-off.

Liquidity was needed. Margin Calls. Stop-Losses. It is easier to sell off a winning investment for the quick cash needed to make a margin call, than a bank stock that’s down 15%. Many traders didn’t plan on selling their long contracts, their pre-arranged stop-losses just did it automatically.

4.) Gold not an investment.

By your definition, cash is as useless as gold. I am not talking about money deposited in a bank, but real paper bills. But unlike gold, cash is easily manipulated, because someone can simply add a Zero to the end and voila! It’s worth ten times the value. I guess it goes back to the trust factor.

Posted by rarn80 | Report as abusive

The author writes of gold: “It doesn’t pay dividends, has no intrinsic value and is no replacement for bread and water if catastrophe strikes.” Therefore he doesn’t regard it as a “real investment.”

Ridiculous assertion. Euros, Swiss Francs, Federal Reserve Notes, and every other fiat currency have no intrinsic value, pay no dividends (and even interest paid on such holdings doesn’t result in any real ROI), and are not replacements for bread and water if catastrophe strikes. Yet people invest every day in different currencies to hedge against risks in other currencies and to manage the maintenance of purchasing power. People also invest in various commodities that pay no dividends, either to hedge risk (if they produce such commodities) or simply because of the potential for capital appreciation.

People hold a certain amount of their “investment money” in fiat currencies and currency equivalents – and some may choose to hold some of that in gold rather than such currencies.

Posted by Hilaire | Report as abusive

You can deny it as much as you can but gold will alway be gold. When the catastrophe hits and there is no more governments, when states and society collapse, paper bills will only be worth paper. Gold on the other hand will buy you water and bread.

Posted by HarriPSG | Report as abusive

Gold appears to be replacing the US dollar as the international currency of exchange. This is obviously bad for the value of the US dollar and the US financial sector, so the US through some agent is selling gold to make it look unstable and push people back to the greenback.
It wont work, it just made gold cheaper for central banks all over the world and reduced US holdings of the yellow stuff.

Posted by Sinbad1 | Report as abusive

I never thought Silver would ever go under $30 an ounce. What a bargain. Looks like it’s time to start stacking physical again.

Posted by gruven137 | Report as abusive

John F. Wasik is a columnist for Reuters.com and author of The Audacity of Help: Obama’s Economic Plan and the Remaking of America.

That’s all I need to know.

I agree with ram80, gold is not a replacement for food or water, you buy that ahead of time and have some gold around because all the paper money will be worthless by that point.

Posted by 1goose2u | Report as abusive

I just bought Penny Stocks this past summer, in two gold mining operations. One of them is now 20 Cents per share and is going up, it looks like.

Don’t buy the gold, buy the gold and silver mines.

In the latter times, people(s) will be throwing their gold and silver into the streets. They are commodities, think of them as such, instead of being the backing of a money system.

Posted by Gregory8 | Report as abusive

“Last year’s winners will often be tomorrow’s losers.”

That is true, but who can argue with gold being a winner for the last ten years running? What have stocks done in the last ten years? They have done far worse.

Posted by 1goose2u | Report as abusive

Gold is just another commodity. Nothing more nothing less. Where is it going? I don’t know. Bob Kehl

Posted by jobonard | Report as abusive