Author, The Cul-de-Sac Syndrome
Coming soon: the loud thud of a gold bust
Some time in the future the price of gold will crash and it won’t have a fairy-tale ending for the millions of investors who piled on in recent months.
If I could tell you when gold was going to bust, I’d likely be wrong or bigger than Warren Buffett, so I won’t even try. Just be incredibly cautious now. There are too many signs that gold is frothier than a Starbucks cappuccino.
It’s not that I don’t nod in agreement when gold bugs rant about why their metal holds a special value now. The dollar is in deep trouble as the U.S. sinks deeper into debt. Will Portugal and Spain be the next Ireland on the bailout boulevard? Ben Bernanke may not be able to put a dent in U.S. unemployment or the intractable housing crisis.
And yes, I also know the argument on how gold is nowhere near its inflation-adjusted equivalent of its high in January, 1980. According to the Leuthold Group, gold will have to hit $2,400 an ounce to match the $850 high mark it hit in 1980 in real terms. That doesn’t mean it will, of course.
Yet the back story of the world’s financial insecurity isn’t necessarily about gold being the last or only store of value. It just may be the most popular red herring at the moment.
One flaw in the “gold can still climb to $2,000″ argument is that the last boom was due to the hyperinflation of the 1970s and early ’80s. Everyone who is leery of the U.S. debt flooding the bond market is right to suspect that a new version of stagflation (no growth, higher prices) may be upon us.
Right now, though, we’re in a deflationary mode. This “deleveraging” could go on for some time as demand for credit stays low and foreclosures continue to ravage the housing market. Home prices are still falling in some places and hot money has shifted to stocks and commodities because of record-low yields in Treasury securities and savings vehicles.
I also tend to side with the behavioral view of why gold is so popular. Not only is it a play against the continued pessimism on the dollar, it’s a psychological refuge. People think it’s secure because it’s tangible. There’s still a finite amount of gold in a time when you can still print as many dollars as you want — something the Federal Reserve is doing in the short term.
Then there’s the less-often discussed side of gold. Why are they beginning to sell gold in vending machines? Why is the leading gold exchange-traded fund, the SPDR Gold Trust, up more than 19 percent year-to-date even though inflation is barely 1 percent?
Is there an unholy alliance here between a false threat of inflation and irrational exuberance? I think so. I smell a strong aroma of the dot-com mania.
The real story to me is demand for commodities overall. Every developing country needs copper, tin, coal and a host of minerals to build their infrastructures. So they are bidding up prices from the mines of Chile to the coal pits of Australia. That much makes sense to me and it’s definitely a long-term trend.
So I’m suggesting that you become less of a conquistador obsessed with the sun metal and focus on a broad, long-term (buy and hold) portfolio that includes a basket of commodities. You can protect yourself against inflation and take advantage of commodity-price increases.
My two best suggestions are the PowerShares DB Commodity Index (DBC), which holds a number of leading commodities, and the PIMCO Commodity Real Return Strategy Fund (PCRDX), which holds treasury inflation-protected securities and commodity derivatives. It’s a staple in my individual retirement account to stave off inflation.
As for gold, if you’re a real nervous Nellie, maybe you’ll want to invest directly in the metal through coins (Maple Leafs or Pandas are handsome collectibles that I own) or bullion.
Just keep in mind that gold doesn’t pay any dividends, is not directly linked to corporate earnings and has no intrinsic value. And when the hyperinflation fervor goes away, gold will be about as exciting as its less glamorous cousin: lead.
A man displays gold bars at the Sacombank gold bar factory in Vietnam’s southern Ho Chi Minh city January 22, 2010. REUTERS/Kham
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