"Money will always flow toward opportunity," Warren Buffett has said and
that as much as anything explains why the price of gold has jumped and slumped
this year. Investors, who hedged against fallout from Europe's default threats
in 2010, engaged in profit-taking early this year. Since then, the market has
swung wildly from rally to selloff and back to rally. Since Jan. 1, gold is up
about 30%, but it has been a bumpy ride. Over the past 60 days alone, the yellow
metal has swung from a high of nearly $1,900 to a low of about $1,600 and back
up to $1,780 with several peaks and valleys in between. While short-term gold
speculators cashed in on the volatility play, 2011 has been more of a dizzying
ride than an opportunity for income investors. Despite the volatility or
perhaps because of it having a little gold in some form makes sense for a
well-diversified portfolio. But what form makes sense? Gold bugs have long
touted the virtues of investing in physical gold over gold stocks or funds:
intrinsic value, inflation protection and the confidence of being able to hold
that tangible asset in your hand. But those who prefer gold-focused equities or
exchange-traded funds cite the problems with physical gold, which include
storage, transport and security. Since you can't slice a gold bar into small
pieces, investors also need to ante up big when investing in physical gold. Gold
exchange-traded funds also have tax advantages over holding physical gold. Maybe
that's why Buffett is down on the idea of investing in physical gold , as he
pointed out in his famous "gold fondling" interview with CNBC back in March.
The "Oracle of Omaha" differentiates between assets like stocks or farms,
which produce something, and commodities like gold, which don't. "Gold is a
way of going along on fear, and its been a pretty good way of going along on
fear from time to time," Buffett said. "But you really have to hope people
become more afraid in the year or two years than they are now. And if they
become more afraid you make money, if they become less afraid you lose money."
Buffett illustrated the speculative nature of buying physical gold bullion or
coins in this way: If you melted down all the gold in the world, you'd have a
cube 67 feet high and worth (at March market prices) about $7 trillion. That
amounts to about a third of the value of all the stocks in the U.S. Given the
choice of owning a third of the stocks and that cube of gold, Buffett would
choose the stocks in a heartbeat, because all the gold can do is "stand here
and look pretty. No doubt about it, Buffett is putting his money where his mouth
is. As InvestorPlace Editor Jeff Reeves pointed out this week , he's just sunk
$10.7 billion into IBM (NYSE: IBM ) shares alone as part of a $24 billion stock
spending spree. But Buffett's derision hasn't tempered the physical gold
bulls' enthusiasm. At Monday's City of Gold conference in Dubai, Standard
Bank's Walter de Wet predicted that physical gold would outsell gold ETFs by
500% this year . With so many conflicting opinions, is now the time to add
physical gold to your portfolio? For most investors, the answer probably is no.
Unless you have nerves of steel and understand the nuances of short positions,
gold-backed ETFs might be a better play for value investors now. Consider funds
like SPDR Gold Shares (NYSE: GLD ) and iShares Gold Trust (NYSE: IAU ), both of
which are backed by physical gold on deposit. Because the funds trade over the
exchange just like stocks, they're easier to buy and sell. The up-front
investment is far lower than with physical gold and they give investors liquid
exposure to the sector. Gold mining stocks like Barrick Gold (NYSE: ABX ),
Goldcorp (NYSE: GG ) or Newmont Mining (NYSE: NEM ) are another way to play
gold, although theyre not the same thing as shares in a gold-backed fund. Market
Vectors Gold Mining ETF (NYSE: GDX ) is an easy way to gain exposure to multiple
companies in the sector. As of this writing, Susan J. Aluise did not hold a
position in any of the aforementioned stocks.
No comments:
Post a Comment