Thursday, September 29, 2011

Are There Safer 'Safe Havens' Than Gold?

Gold is a lot like politics.
Very knowledgeable people have very different views on how good an investment it is. And as the price has run up and the stakes have gotten higher, those views seem to be getting increasingly polarized.
Frankly, I'm skeptical of anyone who claims he knows with some amount of certainty whether it is or it's not.
Still, it remains an intriguing option to keep in my portfolio.
Gold, to me and many other investors, has allure as a hedge. Ideally, it's a place where our cash can continue to grow if the market sours.
But that's where my concern comes in.
As a safe haven, gold at these levels does not strike me as particularly safe.
That's why I'm looking elsewhere before I reconsider putting a dime into the GLD or a miner.
The obvious place to turn first is another precious metal, so that's what this piece's focus will be.

Poor man's gold
A year ago, silver looked mighty reasonable, trailing gold's march upward, despite having actual uses other than jewelry.
Silver has many industrial uses, although one of its largest -- photography -- has been shrinking rapidly with the rise of digital imaging.
Still, it seemed that a precious metal with industrial demand is better than a metal with none.
But silver caught fire last year. It gained 162 percent over just 10 months, trouncing gold.
No longer was it the poor man's gold. It was a bubble waiting to burst, and it did, taking two huge drops since May.
Some say it may have fallen too far. I'm more than willing to wait to find out.

Other pricey metals
Two other precious metal, platinum and palladium, also have industrial demand. Your car's catalytic converter (the device in your exhaust system that converts toxic gases into carbon dioxide and water) has at least one of them inside -- usually platinum.
Demand for these metals only increases as emission standards ramp higher.
Platinum is also used in fuel cells and in the refining of petroleum.
Palladium has even more industrial uses.
Both have ETFs which track their price.
But when you look at how the metals have traded historically, it gives pause.
They are far from stable.
Take a look at this chart for platinum that I pulled from kitco.com:

Notice that price drop from the 2007 peak near $2,200 an ounce to the floor, at $800 at the end of 2008.
By the time platinum (ETF: PPLT) was recovering to serve as a hedge to falling stocks, those stocks were nearing their lows and getting ready for their own march back up.

Here's a palladium price chart:

Notice the parabolic peaks, especially the one in 2000. How'd you like to have been a buyer of palladium (ETF: PALL) then, watching your hedge tank from nearly $1,100 to just over $300?


I don't think either of these metals is really a better option to gold right now.

The chart for gold is much different:


An impressive march upward, with only some moderate pullbacks, the most notable coming during the latter part of 2008.

But that may be what bothers me most about this chart. Each of the other precious metals has endured breathtaking drops after any fast runs upward the way gold has run up over the past couple years.
And it seems to me to be a buyer of gold right now, you have to believe it won't have a drop like that.
When I look at what's happened with silver, platinum and palladium, I just cannot convince myself of that.

That will leave me exploring other possibilities for my portfolio protection for now. If you have an idea, feel free to let me know. Otherwise, I'm still searching.

See my portfolio here.

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