In response to my
latest dispatch on investing in gold, several readers
posted some great questions on the strategy. For example: what
percentage of assets should be in gold, and at what point
should investors get out?
Its a very difficult question for asset allocators,
notes Shayne McGuire, portfolio manager for the GBI Gold Fund
of the Austin-based Teacher Retirement System (TRS) of Texas,
who also is managing director and head of global research at
TRS. "At a 2009 gold symposium, a renowned global strategist
said it might make sense to hold 1 percent in gold but
only sometimes. Then I went to a Hong Kong presentation last
fall and a precious metals strategist said the percentage
should be anywhere from 10 percent to 20 percent."
"This shows how Asians think about gold as a savings
instrument, while for the U.S. gold is seen as a speculative
asset," McGuire reasons. "Quite often its coupled with
end of the world or some horrible situation the idea of
owning it because of a disaster."
Gold performs well when its 1, 2 or 3 percent of a
pension funds portfolio, he says.
Another reader comments, "Income growth will continue apace,
as will dividend growth, while gold, producing no income, will
be left in the dust and will increasingly be accumulated only
by central banks."
In response, TRSs McGuire
says that a lot of people see it this way. "What youre
really buying is just rocks that dont produce cash flow.
But look at the correlation with the stock market when
stocks are doing well, like before the credit crash, gold was
doing fantastically well, and when stocks were not doing well,
right after the deluge, gold still does well. So you buy gold
because its value increases."
Adrian Ash, head of research at BullionVault of London,
looks at central bank sales: "When the gold price was at a
25-year low in 1999, central banks were dumping gold. Britain
sold 400 tons, half its gold reserves, as did the Swiss and the
French. Of course, this has ground to a halt now, but big
central banks in Europe continued dumping gold 500 tons
in 2004. Not all central banks sold Germany and Italy
"But central banks were selling at the bottom, and starting
last year realized that they wanted to hold onto what they
have," Ash continues. "Now the price is up four or five times
from what they sold their gold at. Its the first time in
20 years that European central banks have been buying gold
Russia has been doing so for the past five years."
Gold production is dependent the most on economics and when
the price goes up, they simply bring more mines online. "Gold
produces no income, and historically whipsaws in price.
Furthermore, as Asian currencies become more stable, I think
householders will actually sell their holdings," says one
reader. Again, BullionVaults Ash responds: "Were
not going to return to the gold standard. When world economies
abandoned gold in the 1930s, it helped make recovery possible.
Money supply is one element of the gold story."
In terms of gold mining, he notes that output rose seven
percent last year, according to the GFMS Limited, a precious
metals consultancy in London. "New reserves are becoming ever
harder to find and at greater expense, too. GFMS now puts the
all-in cost of a new mine (including infrastructure, schools,
hospitals and other essentials) at $950 an ounce. Instead the
action is in mergers and acquisitions. "Its difficult to
find the ore but easier to buy a gold company," And he ought to
know. On June 21, the World Gold Council and Augmentum Capital,
a growth fund backed by the Rothschild Investment Partners, RIT
Capital Partners, announced an almost $20 million funding round
How Are Pensions and Institutions Using
"I think that institutions will be a main driver in gold
investment, taking a larger part of the gold pie," says
He is not alone. The World Gold Council (WGC), in its Gold
Demand Trends report for Q2 2010 published today, found that
investment demand was the strongest performing segment during
the second quarter, posting a rise of 118 percent to 534.4 tons
compared with 245.4 tons in Q2 2009. Further, it notes that the
largest contribution to this rise came from the ETF segment of
investment demand, which grew by 414 percent to 291.3 tons, the
second highest quarter on record.
"The report states as well that 291 tons were purchased in
just the last quarter," says Jason Toussaint, managing director
for the U.S. at WGC, "and these statistics are absolutely
astonishing." The investment section includes retail
"Institutional investment shows a reawakening of the
marketplace," he continues. "It was the forgotten asset when
gold was linked to the dollar but the current state of
investment markets globally, as well as ETFs making gold
investable, are primary factors in its growth."
He sees a paradigm shift as having taken place with the
introduction of gold ETFs. "With physical gold, theres no
price transparency its not on an exchange
and theres the quandaries where to store and how to
insure. The SPDR GLD ETF traded a billion dollars on only the
fourth day of its history. Its been extremely
Toussaint also points to the new reports statistic
total gold demand in the second quarter rose by 36
percent to 1,050 tons, "and thats at the same time period
that the gold price was up 30 percent. "TRSs McGuire sees
gold investments looking increasingly intriguing to any major
pension fund over $10 billion in assets. His own interest in
gold began around 2003 and grew with his reading about the
shiny ore. Its translated into "Hard Money," a book he
authored that will be out in a few weeks. Its his second,
"Buy Gold Now," was published in March 2008.
The main reason to own gold is diversification, he says.
"While the stock market has been having a rough day lately,
gold is up."
McGuire also is of the opinion that gold shouldnt be
called a commodity. "While its highly correlated with oil
in good times, gold is also a currency. And its been
strong, moving up even when other commodities are down." He
adds, "We have to acknowledge that gold is a rock, which means
that it does not produce a cash flow. But the important thing
to consider, which I believe few do, is that gold performs
extremely well within a portfolio setting: When one holds a
small position in gold (say 1-3 percent of a portfolio), it
benefits a portfolio over time. It helps the portfolio when
stocks are down, and when stocks (the majority of a portfolio)
are up, you don't care if gold is down."
For example, he noted that copper was down two percent in
late August, oil down one percent but gold and silver have
remained buoyant. "Its acting like currencies," he says.
Interestingly, in 2008 all industrial commodities collapsed but
gold was up.
Janice Fioravante is a financial writer whose work has
appeared in the New York Times and the Harvard Business