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(MarketWatch) — It’s an old truth of investing that precious metals like gold get better looking as the stock market grows uglier.
Given the shakeup following Standard & Poor’s downgrading of America’s credit rating, investors are predictably flocking to such metals, hoping to hedge against uncertainty by stocking up on a tangible commodity. Is this a gold bubble in the making?All that interest has driven the price of gold to record highs. On Aug. 23, the price of gold /quotes/zigman/661658 GC1Z +0.19% reached more than $1,900 per ounce, more than double what it was when the recession began in 2007. Silver /quotes/zigman/704345 SI1U -0.32% is now trading over $40 an ounce near its five-year high in April of $48.
To some investors, such metals will always represent the proverbial safe harbor in a storm. But others are wary of overinvesting in a commodity that, while safe, isn’t without its downsides and risks.
Some arguments are familiar: Metals don’t make money. In fact, they can be pricey to own. Warren Buffet may have said it best in 2009 when asked on CNBC where he thought the price of gold would be in five years.
“The one thing I can tell you is it won’t do anything between now and then except look at you,” he said. “Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money, and it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”
This advice is particularly resonant in lean economic times. When jobs are hard to come by, investments which pay dividends or income take on special value. Precious metals offer neither.And while there are multiple ways to buy gold (mutual funds, ETFs, coins, bars) owning actual gold bars or coins often means paying a third party to store them, or the anxiety that comes with storing them in your own home. Insuring and delivering gold costs money as well.
Still, few advisors suggest avoiding these metals entirely. Conventional wisdom teaches investors to keep between 5% and 15% of their holdings in them, regardless of what the stock market does. They provide a steady hedge against market fluctuations.
But few advisors suggest going beyond the 15% mark, no matter how tempting it may be in uncertain times. One reason is that precious metals are subject to fluctuations of their own. On May 1, the price of silver suddenly plunged 12% in just 11 minutes. Having been at just $9 an ounce in October 2008, silver still represents a good bet for the long-term investor. But that dip proved sobering to many investors bullish on the commodity.
Gold is not immune to similar fluctuations. Like all holdings, investors are wise to consider the uses for gold that generate its value. Unlike silver, jewelry is still gold’s only major industrial use — 51% of it goes to that purpose, in fact — and in tough economic times, demand for jewelry predictably sags. As the Wall Street Journal noted in March, “In the U.S., yellow gold is considered old fashioned and less popular, and it’s becoming too expensive for many buyers in poorer nations.”
The price of gold is also greatly affected by fast-money traders, who are lured by the leverage of commodities contracts. Hence, gold is prone to the sort of rapid fluctuations that cause heartburn in even the steeliest investors.
“The metal has risen from $600 an ounce to more than $1,400 in less than five years,” reads that same Wall Street Journal article. “After the last great gold move in the 1970s, its price declined sharply and then essentially did nothing for more than 20 years.”
Opinions vary, but many analysts say the ceiling for gold is in sight. J.P. Morgan Chase recently predicted in a note that gold would top out this year at $2,500. Less optimistic is HSBC, which produced a note recently noting that “the bullion rally could be beginning to tire.”
Of course, most analysts today seem to agree that the only sure bet for the foreseeable future is volatility. Given the circumstances, the urge to double down on tangible assets is understandable. But the point of diversification — some money in stocks, some in bonds, some in precious metals — has always been to weather bad times. Smart investors remember that when the bad times hit.
source: goldrushintl.com
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