for gold investors

nothing new in this but a good rehash of gold related fundamentals:

http://www.nytimes.com/2011/05/15/your-money/15stra.html?_r=1&ref=business

A  RICH man carrying a heavy bag of gold coins set sail on a voyage, but his ship ran into stormy weather. Before it capsized, he attached the bag of gold to his waist and jumped overboard. He sank with his fortune, never to be seen again.

Chris Ratcliffe/Bloomberg News
Investments in gold have a certain appeal in uncertain times. But this month, gold has looked more like just another commodity, full of volatility.
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“Now, as he was sinking, had he the gold? Or had the gold him?”

The English critic John Ruskin wrote this parable more than a century ago, but it raises a question that investors may wisely ask today. Many people have tied their portfolios, if not their very lives, to gold. Yet after the wrenching sell-off and burst of unusually high volatility in the commodity markets this month, should gold and other commodities even be a part of a typical investment portfolio?

Although gold is certainly alluring, the answer isn’t simple.

That gold has been wildly popular — at least until commodity markets plunged — is indisputable, and not just because of its gleaming beauty. It served, after all, as the immutable standard of the global monetary system until the 1970s, a status that has helped give it a certain appeal in an era of wildly fluctuating financial values.

As a measure of gold’s acceptance as a mainstream investment, a gold exchange-traded fund — SPDR Gold Shares, offered by State Street Global Advisors — was the second-most-popular E.T.F. in the United States on April 30, trailing only State Street’s flagship, the SPDR S.& P. 500 fund.

But despite the yellow metal’s sometimes mythic appeal — well documented in Peter L. Bernstein’s classic, “The Power of Gold,” which recounts the Ruskin parable — it is in many ways now just another commodity, like oil, silver, wheat or pork bellies, subject to the vagaries of the markets and, recently, to an extraordinary level of volatility.

It has been behaving much more sedately than its sister metal, silver, which has lost more than a quarter of its value this month, after rising nearly 400 percent since October 2008. But gold has not been a paragon of stable value. It has dropped more than 4 percent this month after more than doubling in value since October 2008.

Which brings us back to the question: Does it make sense for a long-term investor to join in this jolting race?

Leading asset management firms provide very different answers. T. Rowe Price and Fidelity, for example, include allocations of gold and other commodities in their target-date mutual funds — standard portfolios that are intended to be all an investor needs until retirement or later. “We think that in moderation, in a well-diversified portfolio, getting exposure to what we call ‘real assets’ is useful,” said Richard Fullmer, an asset allocation strategist at T. Rowe Price.

But Vanguard does not include gold or any other commodity in its target-date retirement funds or any other core funds. For a basic portfolio, it considers them superfluous and highly volatile.

“We recognize that some people may want an exposure to gold for their own reasons, and that’s fine if they do,” said Fran Kinniry, principal at Vanguard’s Investment Strategy Group. “But we’ve found that for the typical investor, you can get all the diversification you need without including any commodities at all.”

In a strict sense, commodities may not even be an investment asset class , because they don’t produce any cash flow or earnings or dividends. That’s the view of Gary P. Brinson, a scholar and veteran strategist based in Chicago.

“A bar of gold is just a bar of gold,” he said in a telephone interview last week. “It doesn’t do anything. There’s a market for it, sure, just as there is for, say, a work of fine art, and if you buy and sell at the right price, you’ll make a profit. But if there’s no cash flow, no dividend, no earnings, how do you calculate its intrinsic worth?” Answer: “You can’t. It’s not that kind of an asset.”

In the 1980s and ’90s, Mr. Brinson did path-breaking research on the effects of asset allocation on portfolios. In two papers in the Financial Analysts Journal, he and several colleagues found that broad decisions about asset classes — which to hold and in which proportions — accounted for more than 90 percent of a portfolio’s performance.

He concluded that eight asset classes — none of them gold or any other commodity — were all that an investor needed. For a model “moderate risk” portfolio under normal market conditions, he said in the interview, those eight and their allocations are: stocks from developed markets, 49 percent; emerging-market stocks, 6 percent; investment-grade bonds from developed markets, 25 percent; emerging-market bonds, 2 percent; high-yield bonds, 3 percent; commercial real estate, 10 percent; and private equity and venture capital combined, 5 percent.

All but the private equity and venture capital portions can be bought through low-cost index mutual funds or E.T.F.’s.

Is there any use for gold and other commodities in a diversified portfolio? There might be, he said, if you view them as a form of insurance against a specific risk and if the price is reasonable. Gold might be seen as a hedge against inflation, he said — although it has underperformed since 1980. It might also be viewed as a hedge against a decline in the value of the dollar, but at gold’s current level, he said, “you’re paying a very high price” for it.

Mr. Kinniry of Vanguard pointed out that stocks and gold had both been negatively correlated with the dollar — meaning they have tended to rise when the dollar has fallen. But since 1985, the negative correlation of stocks has been greater, and stocks have also provided a greater return. In short, an allocation to international stocks would have hedged better against a dollar decline, with much lower volatility.

ONE argument for putting up with the volatility of commodities like gold is that their long-term price trend is upward. That’s the case made by Joe Wickwire, who manages the Fidelity Global Commodity Stock fund and the Fidelity Select Gold Portfolio.

“Commodities and gold, from an asset-class standpoint, are in secular bull markets” because of the growth of resource-intensive emerging-market economies, he said. (Mr. Wickwire also said that over the long haul, exposure to commodities was worthwhile for portfolio diversification, regardless of price trends.)

Of course, it’s much easier to discern trends after the fact, and on that score the picture for gold isn’t entirely attractive. It peaked in price in 1980 at $850 a troy ounce. Factor in inflation, and that comes to more than $2,400. After more than 30 years, in other words, an investor in gold would still be operating at a loss, without even counting the cost of storing and protecting the gold.

It’s a beautiful metal, certainly. Is it worth holding? Maybe, but don’t bet your life on it.

great article. 2 take aways:

) gold is yet another commodity. if there has been a historical upward trend in the value of gold, so has been there for other commodities.

2)gold/commodity don’t produce any cash flow or earnings or dividends

3) it should be purchased as a hedge against fiat currency, not as a replacement for other asset classes that actually offer return on investments (dividends, rent...)

Propagandhi711 wrote:3) it should be purchased as a hedge against fiat currency, not as a replacement for other asset classes that actually offer return on investments (dividends, rent...)

There is an Asterix Comic in which Menhirs made by Gauls are sold by Romans. How do sell something worthless. Nobody has any use for it. So they sell it as something that would make Neighbours Envious. Everybody catches on the slick marketing, prices go sky high and then crash.

While there is not parallel to menhir and gold. Apart from Industrial uses, there is no direct repeated use for Gold among people, except as an ornament. So if somebody accumulates gold, it is unclear to me, how the value will always remain high, given the fact that Countries from US to China have tonnes of gold, releasing some of those stocks, can bring down the price quite fast.

When the price of gold is more than 2 times the cost of extracting gold, the value of the commodity is questionable. I think coming up with a formulae for a fair price value of gold would be interesting excersize.

this debate as to the intrinsic value of gold has been around for a long time. also, it is rather scarce, unlike silver, which partly explains why it holds it's value.

many say gold has some intrinsic value to it which i don't agree with at all. just because some people in the old days said so does not mean it is true. it's only a metal and not even as useful as copper or iron.

it has intrinsic value coz people are willing to barter in it. been that way for past few thousand years. the day humans get together around a camp fire and declare they wont accept gold in lieu of services provided, gold will cease to exist except as tooth fillings for eazy E.

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.

The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.

The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of society lose value in terms of goods.

When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds finance by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard. "

- Gold and Economic Freedom, Alan Greenspan

Propagandhi711 wrote:the day humans get together around a camp fire and declare they wont accept gold in lieu of services provided, gold will cease to exist except as tooth fillings for eazy E.

guess this man will be unhappy the day that happens. he is an MLA from pune. nobody told him that he has better prospects in bollywood as a villain and in tollywood as a hero.

Another Brick wrote:nobody told him that he has better prospects in bollywood as a villain and in tollywood as a hero.

ROFLMAO