Gold mania 2010: Substance or sizzle?

Gold has hit the media like a storm again hitting new highs with a spot price of almost $1300. 10 years ago, gold was trading at about $300 per ounce. This week, I was on the Alberta Primetime Money Panel and asked to make some comments on Gold. Here are some of the highlights:

What’s driving the price of gold to new highs?

From a macroeconomic perspective, gold prices theoretically have an inverse relationship with the US dollar. When the US dollar weakens, the price of gold tends to go up. I’ve heard gold being described as the “alternate currency” or “secondary currency” to the US dollar.

The bottom line is people are concerned about the financial future of the US. There are concerns about falling US dollar. There is a major concern about US spending and how much debt they are accumulating. They have the taps turned on full tilt. Gold has been perceived as a safe haven or catastrophe insurance. So it’s no wonder that in tough economic times, gold tends to do well. But is the price of merely the outcome of hype and the herd mentality or is there some substance to its rise?

What is the outlook?

I’ve never been one to try and predict the future of the stock market or any component of the stock market like gold so I am not about to start here. What I will say is I think Gold is not as “safe” as people think to do the hype might be over-rated. Gold has a risk just like any other commodity or stock. Gold is volatile! I looked at some charts where I mapped the price of gold against some stock market indices and the history of gold has been just as volatile as anything else. There’s a lot of hype going on so be careful of the stories around gold.

I read an interesting article by Dan Hallett, a respected analyst suggests that it’s not as safe as you might think. Although Gold has weather tough times better than the stock market, it still has periods of loss. In the 1970’s it dropped 31%. More recently in 2008, Gold dropped 25% during the financial crisis. Just be careful in thinking that gold can’t go down. It can and it will.

Is it too late to get in?

Again, I’m no a fortune teller but I do I think that chasing winners is a form of buying high, sell low which is the opposite of what you are supposed to do to make money. Sadly, it happens over and over again.

How much gold should I own?

For most people, gold is not a primary holding but rather a tertiary holding. For most people a 5% to 10% weighting in gold is sufficient. That being said, if you own stocks or mutual funds you probably already have this exposure to gold through gold stocks like Barrick Gold. Having a concentrated position in gold can help you when times are good but also hurt you when times are tough.

How do you buy gold?

There are so many ways to buy gold now!

1. You can buy gold through mutual funds. There is a handful of mutual funds that specialize in gold.

2. You can also buy Exchange Traded Funds. Just like the mutual funds, there is a handful of ETFs that specialize in Gold investments.

3. Stocks like Barrick or Goldcorp. There are lots of Junior companies but that’s much riskier.

4. You can also buy gold bars. At one time you could only buy the 400-ounce bars (The ones you see in the movies). Now buying gold wafers, coins, etc is big business but remember you’ll pay more for gold, the smaller the quantity.

One last word

Gold is a commodity like anything else. It has a floating price determined by the market. Gold goes up when there are more buyers than sellers. Gold goes down when there are more sellers than buyers. You can have incredible hype with weak fundamentals and the demand will cause prices to go up. The opposite can also be true. You can have a good long term rationale for why Gold might go up or down but it’s unpredictable and non-controllable in the short term.

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