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IS GOLD STILL A GLITTERING INVESTMENT? correction in the price of gold or any other good. However, there is no theoretical limit to the upside potential of gold, or any other asset, when priced in dollars,” he said. Gold has its passionate backers as the one material that has travelled through the ages as symbol of wealth, security and protection against the ravages of a debased paper currency. With budget deficits as far as the eye can see and the Federal Reserve, in the eyes of some critics, “printing” money like it’s going out of style to boost a sluggish economy, the specter of inflation looms large in the investing world, although it has remained just that for the time being. MZ Capital principal Michael Zhuang calls inflation the “silent killer of wealth.” “Just imagine the inflation rate of 4 percent over the next ten years,” he said. “Within a decade you would lose 40 percent of your wealth.” But count him as naysayer when it comes to gold as the inflation slayer. Zhuang measures assets in terms of their correlation with inflation, and at 40.3 percent, gold has one of the highest correlations. But its return volatility rating of 38 percent does not make it an attractive inflation hedge. “Using highly volatile gold to hedge inflation is like using chemotherapy to treat a common cold. I am not sure which is worse – the treatment or the disease.” For the record, Zhuang likes short term (1 month) Treasuries as the best inflation slayer with an inflation correlation of 41 percent and return volatility of 3.27 percent. In addition to the possibility of a crash, Schrage offers some other gold cautionary notes. “There are no tax advantages associated with physical gold investing, unlike some other avenues. And also, you can’t use financing to invest in gold, so all of your cash needs to be on hand.” And of course there are no dividends from gold investing and so all your profit comes when you sell out. When Warren Buffet speaks, people listen, and on the topic of gold he has not been singing its praises as the road to wealth-building. “What motivates most gold purchasers is their belief that the ranks of the


LAST: 1748.70



HIGH: 1755.00

LOW: 1744.00

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MONTHLY Source: CME Group website

fearful will grow,” he wrote in the February issue of Fortune. “Beyond that, the rising price has on its own generated additional buying enthusiasm.” He likened this ardor to the Internet stocks and housing bubbles of the past couple of decades. “But bubbles blown large enough inevitably pop.” He then imagines the entire world’s gold supply of 170,000 metric tons melded together (Pile A) fitting comfortably within a baseball infield and valued at $9.6 trillion. For that same amount, you could purchase all 400 million acres of U.S. cropland and 16 Exxon Mobils (Pile B) and end up with “about $1 trillion left over for walking around money.” “Can you imagine an investor with $9.6 trillion selecting Pile A over Pile B?” Buffet asked. Lu said that Buffet creates a memorable image, but without much value to the investor trying to figure out a place for gold in his investment quiver. “In the case of Pile B, the resources are permitted to work freely by combining their productive power with those of outside economic resources,” he said, noting that cropland combines light, water, seed and fertilizer to produce food. “Yet the gold in Pile A must be held in a monolithic form with the owner only allowed to admire or fondle it.” “How would the assets of Pile B fare with a similar restriction? Will fondling

produce farmland?” he asked. And so, let’s say, like Lu, your clients are willing to put their own sagacity up against that of the Sage of Omaha and take the gold plunge. How do they go about doing it? Direct ownership can be through bullion, coins, or jewelry. “Have you ever tried to wear a mutual fund to a fancy dinner party?” asks Bahniuk. But Christopher Dukes, principal of Dukes Wealth Management, notes that at prices skirting $1,800 an ounce direct ownership can be pricey. “Exchange Traded Funds allow you to buy gold at ten cents on the dollar, and you can sell them with a click of a button or a call to your broker,” he said. Another popular route, gold mining stocks, can be dicey as poor management can lead to poor returns, even when the price of gold is soaring. In summary, it seems clear that investing in physical gold is not for the timid. Is it too late to invest? Of course it’s an option, and perhaps it has a place in certain portfolios. The final word: All that glitters is not gold, and that just may apply to the metal itself. Steve Tuckey has been a financial services journalist for more than a decade with a specialty in insurance. Contact Steve at Steve.Tuckey@

November 2012 » InsuranceNewsNet Magazine


November 2012