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 never did."
"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 in BullionVault.
How Are Pensions and Institutions Using Gold?
"I think that institutions will be a main driver in gold investment, taking a larger part of the gold pie," says TRSs McGuire.
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.