With gold hovering around the psychologically significant $1,000-an-ounce mark and silver making its own impressive ascent this year, the theories naturally abound about whether now is the time to get in or out of precious metals.
With gold hovering around the psychologically significant $1,000-an-ounce mark and silver making its own impressive ascent this year, the theories naturally abound about whether now is the time to get in or out of precious metals.
Gold has long been considered a solid hedge against inflation, so that might justify an allocation. The adage might also help explain at least part of the rally, even though inflation is still more of a threat than a reality.
“Gold and paper currency tend to have an inverse relationship and everybody has some amount of dollars somewhere,” said Brian Schreiner, a vice president of Schreiner Capital Management Inc., which has $170 million under management.
He described gold as a “good long-term investment” but, as an active trader, he said he rarely takes a long-term outlook.
“We’re momentum investors and right now we own some gold because of the trend that involves speculation by people who are making bets on gold,” Mr. Schreiner said. “We have a short-term outlook, and that’s the way we’re looking at gold.”
The appetite for precious metals is illustrated by a couple of leading exchange-traded funds: SPDR Gold Shares (GLD) and iShares Silver Trust (SLV).
The SPDR fund is up 12.6% this year through Sept. 9, while the iShares fund is up 44.2%. The S&P 500 is up 13.5%.
The PowerShares DB Precious Metals Fund (DBP) offers exposure to a broader group of precious metals. The ETF gained 17% over the same period.
The Market Vectors Gold Miners ETF (GDX), which offers exposure to mining companies, is up 33% over the period.
Some analysts are suggesting that the recent activity in gold, the most closely watched of the precious metals, is a result of increased demand among the growing middle classes in several emerging-market countries.
“In some countries, as people move up to the middle class, they just like to own the precious metal for its security,” said Thomas Lydon, president of Global Investment Trends.
He added that some investors also view precious metals as a safe haven in times of stock market turmoil.
But gold as a safe haven doesn’t really add up, according to Sam Jones, president of All Season Financial Advisors Inc.
“If people are really scared, they buy Treasuries,” said Mr. Jones, whose firm has $115 million under management.
“Gold right now is a growth play, and the rally we’re seeing is just investors chasing performance,” he added.
It is true that, as a hedge against a stock market decline, gold won’t help much.
According to Mr. Jones, over the past five years the correlation between the performance of gold and the performance of the S&P 500 has been -1.4, which is virtually neutral.
The 20-year Treasury bond, by comparison, has a negative correlation to the S&P 500 of 30 over the same period.
But such hard data don’t necessarily negate the possibility that gold and silver prices are being driven in part due to a defensive posture by less sophisticated investors.
As Mr. Lydon pointed out, another factor that should be considered with regard to commodities in general is the increased exposure by way of a growing list of pure-play and exotic ETFs.
Many of these funds were not available as recently as five years ago.
But, as Mr. Jones pointed out, “trying to make sense of the day-to-day trends is a recipe for brain damage.”
The better strategy, he said, is to step back and take a macro view.
“Gold tends to spike with fanfare around it. That’s why buying it now might be buying it at the top,” Mr. Jones said. “I’m waiting for a continued breakout above $1,000 an ounce.”
At that point, he would start buying gold exposure on the price dips.
“Let the breakout go and buy on the first pullback,” Mr. Jones said.
A new Investment Insights column appears every Monday on Investmentnews.com.
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
