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."