Gold is trading at 16-year highs, but holds limited appeal as investment
November 27, 2004
NEW YORK – A sickly dollar lifted gold to a fresh 16-year high this week, just as a newly launched exchange traded fund offered individual investors a new way to own the gleaming asset. But Wall Street experts, less than unanimous about its prospects, are divided about what sort of role gold should play in your portfolio.
Prized for their intrinsic value, precious metals like gold and silver are often used in investing as a way to offset rising inflation or currency losses, and are seen as a safe haven in times of market tumult. But while gold can be a useful diversification tool, over the very long term experts say it is not as good an investment as stocks or bonds, because it doesn’t throw off any sort of income, interest or dividends.
With the dollar on the skids and inflation accelerating, gold has gotten a great deal of attention lately and is approaching $450 per ounce. Gold has been trekking higher for the past three years, but the pace of its climb accelerated in the last few months. It hasn’t been a steady ascent, though; an ounce of gold dipped down to $375 in May.
Investors pounced on a new ETF that tracks the commodity itself when it debuted Thursday. The streetTRACKS Gold Shares ETF, which trades under the ticker symbol GLD on the New York Stock Exchange, set a volume record on its first day.
Sponsored by the World Gold Council and marketed by ETF provider State Street Global Markets, the fund is designed to reflect the performance of gold bullion; each share represents one-tenth of an ounce of gold. On Friday, GLD shares rose 40 cents, or 0.9 percent, at $44.78. A second gold ETF is expected soon from Barclays Global Investors, the market’s largest ETF provider.
While most analysts link gold’s strong run to the performance of the dollar, and some of the buying is probably speculative, other factors could support a longer bullish trend, said Michael Cuggino, manager of the Permanent Portfolio Fund, which keeps about 20 percent of its assets in gold.
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“Low short-term interest rates, the decreasing dollar, the trade deficit, the unstable situation in the Middle East, the war on terrorism, the overall feeling of instability and the need for safety – these are all things that move people toward gold,” Cuggino said. “And recent numbers suggest inflation may perk up in the near future. I’m not one to focus on one statistic … but when you start looking at a lot of statistics put together over a multi-month period, you develop a sense.”
But not everyone on Wall Street is convinced. Investors who are just now waking up to gold’s rising price should think twice before leaping in, because chances are “they’ve already missed the boat,” said Milton Ezrati, senior economic and market strategist at money management firm Lord Abbett. Ezrati is very skeptical about how much higher the price of gold will climb, and is equally dubious about how much more the dollar will fall.
The best way to get exposure to precious metals, or commodities in general, Ezrati said, is to hold related stocks, such as gold mining companies. These will benefit when the price of the underlying commodity rises, but tend to see less precipitous declines when it falls. And if you do decide to add some glitter, he suggests taking a close look at your portfolio to make sure you’re not already hedged against inflation or the declining dollar.