The Price of Gold… Three Reasons Why This Precious Metal Should Be In Every Portfolio
by Dr. Mark Skousen, Advisory Panelist, Investment U
Friday, January 4, 2008: Issue #748
"Gold, perhaps the most glamorous of the commodities, has hundreds of years of history of being noncorrelated with financial assets."
~ Dick Davis, "The Dick Davis Dividend"
Finally, after 28 years, the price of gold hit a record of $858 an ounce, besting its previous high of $850 way back in January 1980.
I well remember those days of heady double-digit inflation when the dollar was crashing, silver was at $50 an ounce, and gold was hitting new highs every day. Howard Ruff's book, "How to Prosper During the Coming Bad Years" and Doug Casey's "Crisis Investing" were bestsellers, and people at church were coming up to me and asking how much "junk" silver they should buy.
But $850 gold and $50 silver turned out to be the top - a good time to sell, not buy. The year 1980 was a "tipping point," when Ronald Reagan was elected president and Paul Volcker, his Fed chief, imposed tight money and high interest rates to kill the inflationary psychology. It worked, and commodities fell sharply, even as traditional stock and bond markets came back to life.
Is 2008 another tipping point in financial history? The Midas Metal has been on a tear since the war on terror erupted in 2001. Above all, remember that war is inflationary, and the central banks have been busy printing a lot of new dollars, euros and yen since 2001 - and since 1980.
It was clearly catch-up time for commodities in general, and for precious metals in particular.
Three Vital Lessons About Gold
First, the price of gold has tripled, from $270 an ounce to over $850. Still, it may have further to go...
In real terms, given the massive devaluation of the U.S. dollar since 1980, gold is relatively cheap. It's not the bargain it once was, but it could move higher.
Jim Rogers has made a historical study of commodities and found that the typical cycle lasts 15-20 years. That means we could be in for another decade of higher commodity and gold prices.
Much depends on the dollar and monetary policy. If the Federal Reserve maintains a tight money policy (M2 growth has slowed significantly in the past six months), the dollar could rally in 2008 and make it more difficult for gold to move higher. It could even decline in 2008.
The Price of Gold Is The Ultimate Inflation Hedge
In the latest (4th edition) of Jeremy Siegel's classic book, "Stocks for the Long Run," the Wizard of Wharton notes, "the price of gold closely follows the trend of overall inflation over the past two centuries. Its price soared to $850 per ounce in January 1980, following the rapid inflation of the preceding decade. When inflation was brought under control, its price fell."
For gold to perform well, the inflation rate has to continue rising, as it has been since 2001. If the inflation rate falls, gold will fall.
Gold is a good "non-correlated" investment, as Dick Davis points out in his new book, "The Dick Davis Dividend" (highly recommended). Gold actually rose when the stock market went into a severe bear market in 2000-03. It has continued to outperform the stock indexes since 2003.
In the past couple of days, while stocks have floundered, the price of gold and gold stocks have skyrocketed.
Consider Gold Investments In Your Portfolio
In short, gold serves as an excellent non-correlated investment in your portfolio. David Swenson, the highly successful manager of the Yale Endowment Fund, has emphasized the importance of having "non-correlated" investments in your portfolio, including energy stocks, real estate, foreign investments, and precious metals.
Because of "non-correlated" investments, his Yale Endowment Fund has consistently beaten the market over the past 20 years, and even rose during the 2000-03 bear market.
The Midas Metal should be an important part of anyone's portfolio, anywhere from 5%-15%. Just remember, gold is a good long-term inflation hedge, but in the short run, the yellow metal can be volatile.
Today's Investment U Crib Sheet - 3 Ways to Buy Gold
- Keeping a large quantity of gold bullion at hand is risky. If you store it safely, there are costs associated with that, too. That's why many investors are turning to the safety and convenience of exchange-traded funds...The StreetTRACKS Gold Shares (NYSE: GLD) and the iShares Comex Gold Trust (AMEX: IAU) are two examples. These funds hold, store and insure the physical metal. But the ETFs trade like stocks so they offer easy liquidity.
- Another alternative is to own gold shares in an ETF. Why? Historically, gold shares move three to five times as much (up or down) as the price of the metal itself. That's because gold-price movements create larger moves in the profitability of mining companies, due to their largely fixed costs.Take a look at the Market Vectors Gold Miners (AMEX: GDX). It's linked to the AMEX Gold Miners Index and owns all of the world's leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment.
- The top 10 holdings include: Newmont, Freeport McMoran, Barrick Gold, AngloGold, Harmony Gold, Kinross, Yamana, Gold Fields, and Agnico.
- How much gold (or gold shares) should you own? Here's the asset allocation model we recommend, where precious metals make up 5% of an ideal portfolio.