Is it too late to buy gold?
February 11th, 2008 by Grant in: Economics, InvestingIt’s been rather entertaining watching the fear spread over the stock markets for the last couple weeks, and I’ve been rampantly sifting through daily data and charts trying to come up with a diamond in the rough. That strong company whose stock price has been dragged down by the falling markets for no better reason than peer pressure.
I find it interesting that Microsoft (MSFT: chart, web, Y!) wrote up an unsolicited take-over offer for Yahoo (YHOO: chart, web, Y!) to the tune of $45 billion (that Yahoo has now rejected). Obviously they saw Yahoo as way undervalued, and made an effort to steal the company amid fear and frenzy that the world is coming to an end, at least financially. Quite honestly, I think it’s an appropriate move at this point, as many are subject to irrational logic in times of immense fear.
But I digress.
In the back of my mind, I’m also thinking I should be recession proofing my portfolio. The most obvious way to do that is with gold or commodities, the later of which I’m already over weight by virtue of my direct involvement in the oil and gas industry. Less direct is overseas funds which may be leveraged less by the US dollar.
Gold has seen a drastic spike in price over the last several months, and looking back, I was a fool for selling my StreetTracks Gold Trust (GLD: chart, web). At the time it seemed like a good idea, but I was a bit short sighted in my move. I even called it in that very post in May:
“I still like the prospects of Gold for a hedge against a falling economy, which readers of this blog will know that I’m preparing for.”
I knew the pressure was building against economy, but I sold the GLD with a bearish near term outlook, and then more or less forgot about the initial plan to use the trust to hedge my bets against the falling economy, fueled by a waning housing market and increasing gas prices…
So I’ve learned a lesson. Stick with the game plan so long as you still believe in the game, and more importantly, timing is everything.
Enough with the cliches.
I’m still eying Gold as a hedge against a falling dollar, but the question remains: Am I now too late? I’d hate to fall into the trap of buying high and selling low.
Gold is flirting with a significant psychological barrier of $1,000 per ounce, and I’m not sure it has the strength to break through that resistance point or not. On the other hand, I don’t believe the economy has hit rock bottom yet, so there may be some fundamental upside left to GLD.
My gut tells me I’m too late, but my brain says buy.
Any thoughts?
Tags: Economics | GLD | gold | precious metals | recession
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February 11th, 2008 at 12:32 pm
You are obviously more sophisticated than I in the topics covered in this post. However, at the highest level, I cannot help but think you are trying to “out time” the market and the results speak for themselves. Isn’t it likely that companies have people smarter than either of us–with substantially more time to dedicate to thought and research–that are always going to be two steps ahead? FWIW.
February 11th, 2008 at 9:20 pm
Grant, I agree with ’someguy’. When it comes to ‘trading’, yes, timing becomes more important. But when it comes to my more macro ‘investments’, I could really care less if I’m off on my move by a few percent. If you use an allocation approach to managing your portfolio than you should be less concerned with timing and more concerned with weighting and longer term cycles.
Concerning the question of whether it’s too late for gold? $1k is an obvious magnet, but with it trading currently around $925, you’re only looking at a $75 move. Granted that’s a healthy move, but if/when it gets there what are you going to do? Sell, hold, buy more if it blows through? This is something you should think about, otherwise I think you should look at buying up small portions of good companies, maybe some emerging market exposure. I know some of the bigger players are using some ratio spreads with gold, i.e. long gold futures/short S&P futures, long gold/short S&P’s/long yen/short silver…..but that takes a good chunk of capital, just something to think about.
February 12th, 2008 at 6:43 pm
Add some gold if you haven’t already, but you probably won’t be able to time it right. No one knows what the future holds. A recent article on Yahoo finance talks about Buffett getting bullish on US markets, which would bode poorly for gold. Is Buffett right? Are you smarter than him?
Rather than guess, just add a small percentage to your portfolio. It has a negative correlation to US stocks and bonds so it is a nice insurance policy. But, it could hurt the portfolio if the US rebounds.
February 12th, 2008 at 8:33 pm
Yes
That is the answer to your question.
February 12th, 2008 at 11:12 pm
Sorry, I heard the name ‘Buffett’ in Kirk’s post and couldn’t help but comment……
It really irks me that the general public views Warren Buffett as a good old investor with a modest personality and simple investing approach. I think Buffett is the biggest socialist/two-faced billionaire we have. He’s one of the biggest capitalists America has ever seen, yet he’s putting himself on every political and news campaign as being a proponent for higher taxes? And his ’simple’ investing approach?!?! People need to understand that Buffett doesn’t ‘invest’ like you and I. He has unlimited resources and power that dramtically decrease the margin of error in his approach. First, take the LTCM debacle in ‘98. He was called in to help bail out LTCM by the Fed and banks. Before saying he wouldn’t help out, he was allowed to examine the books of LTCM and see all of their trades, all of their exposure, etc. Do you think he didn’t directly, or indirectly, use any of that information? Second, take todays news, he applied capital towards the bond insurers safest assets, municipal bonds. This is no bailout, this is a normal opportunity for Buffett, one where he’s taking very little risk. Yet everyone wakes up this moring to headlines of Buffett “bailing out” the bond insurers. Markets rally and then finally realize that Buffett’s not really doing anything for the economy with this deal.
This reply may seem like I’m bitter or jealous, I’m not. Buffett is brilliant. But I hate it when he speaks in interviews or the news about simply “investing in good companies”, or, “investing in good people”. That’s crap, he can squeeze any resource he has for information that will make or break a deal for his bottom line.
February 13th, 2008 at 7:09 am
If you can reliably time the purchase of an asset like gold, you’re one in a million. As others have said, you may be better getting some exposure for asset allocation reasons, but keeping it to less than 5% or so of your portfolio. Gold is after all an unproductive asset, so its eroding in value over time if it doesn’t go up in price. I wouldn’t want too much of that in my portfolio.
In terms of the ’sticker price’ shock of gold though, you may want to consider it in inflation-adjusted terms. It’s still well off its real high in the early 80s (which would be more like $2000 in today’s money, roughly).
February 15th, 2008 at 6:50 pm
@ Monevator
I’m really not trying to time the purchase of gold per se, but I am trying make sure I don’t buy at the top either.
I’m a little peeved at myself for selling off GLD when I saw the obvious downside to the economy coming and everyone else was in denial.
@ Winston
I agree, GLD would be a more macro investment, but there’s no sense in buying high and selling low, regardless of how long you hold.
I think I’ll wait till gold pulls back significantly, and that move may have to wait till the economy starts thriving again.