Self-declared "smartest" investors say the Gold Price can't rise from here...
HEATED ARGUMENTS continue between eminent global investors, economists and analysts on the skyrocketing price of the hottest commodity in the world – Gold Bullion, writes David Lew for Commodity Online.
The big rise in Gold Prices from $800 an ounce in Jan. 2009 to $1227 an ounce in early Dec. has made gold the centre of debate. Gold bugs have been hailing the whopping Gold Price boom, saying that the precious yellow metal is set to break further records by hitting $2000, $3000 and even $5000 in the coming years.
Amidst this Gold Price rise frenzy, central banks across the world have also been trying to amass gold reserves to replace their US bonds and Dollar holdings. India's central bank – the Reserve Bank of India (RBI) – bought 200 tonnes of gold from the International Monetary Fund (IMF) in November, adding to the frenzy in Gold Bullion markets.
This unprecedented Gold Price boom has led to a heated exchange of words between the proponents and opponents of gold. They beg to differ on the yellow metal as money, currency and an investment asset. Those who continue to support the boom in Gold Prices include leading global commodities investors like Jim Rogers and Jim Sinclair. They say the Gold Price is zooming thanks to solid fundamentals in the commodities and stock market, and the yellow metal will hit $2000 per ounce.
The main opponent to the Gold Price boom has been global economist Nouriel Roubini, who has been arguing that gold is sitting on a bubble. Its fundamentals do not support gold going above $1000 per ounce, he says, and Roubini ridiculed Jim Rogers' prediction that Gold Price will boom to $2000 per ounce saying Rogers has frightened the bullion market with "utter nonsense."
Jim Rogers retaliated by slamming Roubini, saying that the latter does not know the basic fundamentals of the gold and commodities market.
As these arguments and counter-arguments continue, I happened to read an interesting article on gold by an eminent fund advisor and investor. Daniel Solin. Solin is a senior vice-president of Index Funds Advisors and the author of books like The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read.
Solin says he is gripped by the big rise in Gold Price, but agrees with Roubini, not with Jim Rogers in the Gold Price forecast game...
"Is this the right time to buy? Before you jump on the gold bandwagon, consider these facts.
"Investors tend to buy and sell at the wrong times, driven by emotion and incompetent advice from their 'financial professionals'. Burton Malkiel, the author of A Random Walk Down Wall Street, recently noted in an article in the Journal of Indexes that more money entered the market at the height of the internet bubble in late 1999 and early 2000 than had even done so ever before. More money left the market before the recovery in 2002. This pattern repeated itself in 2008 and 2009.
"Malkiel also made the surprising observation that institutional investors fall into the same pattern. Their market timing skills are no better than those of amateur investors.
"This information should give you pause about timing your entry into the gold sweepstakes. And there are other reasons to be cautious.
"The big selling points for gold and other commodities is that they offer excess returns, increase diversification and are a great hedge against inflation. Sounds good. Unfortunately, the reality contradicts the hype. A comprehensive study (still behind a subscriber wall) published in 2004 titled Commodity Futures in Portfolios by Truman A. Clark, former professor of finance at the University of Southern California, concluded:
- The addition of commodities to a portfolio did not provide returns in excess of the Treasury bill return;
- The addition of commodities to a portfolio did not improve diversification for stock and bond portfolios; and
- Commodity futures do not appear to be effective inflation hedges for stock and bond portfolios.
Clark concluded: "The evidence indicates that the purported benefits of commodity futures are exaggerated'..." while at a recent conference, John Bogle – founder of the Vanguard Group of mutual funds – set forth his views on this subject with typical candor: "I for one, have no conviction that commodities belong in anybody's portfolio, at any time, under any circumstances. Did I make that clear?"
"I am not suggesting that you can't make money speculating in gold or other commodities," says Solin. "You can do so by buying low and selling high. If that's your plan, remember there's no evidence that anyone has market-timing skill (Glenn Beck included).
"If you want to gamble in commodities, and understand the risks, go ahead. However, if you decide to do so, remember that 'fool's gold' can refer to the speculator as well as the commodity."
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