Wednesday, September 21, 2011

A Fool To Buy Gold, Or A Fool Not To?

A more experienced investor had a gander at my portfolio and was struck by one thing.
"I notice you have no exposure to the precious metals," he said.
I don't.
In fact, the only time I've even thought about touching a precious metal investment was a short-lived plan to bet against silver after a crazy run this spring. It was short-lived only because silver promptly started to plummet before I funded my brokerage account.
There's a good reason why I have yet to touch silver and gold.
I have no idea how to evaluate how much I should be paying for gold or silver or any other precious metal -- not a clue about how one would go about determining the value of the gold ETFs (GLD, IAU).
Gold doesn't have earnings. It makes no sales. It has no margins.
What's more, gold has no industrial uses like copper, iron, or even silver and platinum, have.
Its price seems primarily driven by fear. There's been no shortage of that over the past few years as the price ran up.
Frankly, that makes me fearful of buying gold.

Not at the party
But still, as an investor, I can't help but feel like I'm missing out on an important opportunity to diversify and protect myself from more economic turmoil by having a little precious metals exposure.
Under most circumstances, I turn to more knowledgeable folks for advice. But on this subject, it seems like there are just as many smart money people calling gold a bubble as there are saying it's still under-priced.

Maybe a miner?
That more informed investor also suggested I look at gold-mining stocks.
This was something a little more up my alley: Companies whose fundamentals I could take a closer look at.
Admittedly, miners like Barrick Gold (ABX), and Yamana Gold (AUY) looked quite reasonably priced based on earnings. And that's after most enjoyed a nice appreciation in price over the past six months or so.
But those earnings are based on the rising prices of gold. If gold were to be a bubble, the miners' profits would burst right along with it.
So, the idea of owning a gold miner offered little consolation.
I also considered a more diversified miner, Freeport-McMoran (FCX), figuring that would be a better hedge. But FCX mines copper as well, and many feel that copper's prices are due a fall.

Only time will tell who's the fool
That's all left me just as skeptical about gold as I was when I started taking a closer look at it. Which makes me think I should avoid it altogether.
If the price continues to rise, I'll miss out, and maybe I'll feel stupid for not taking the risk.
But as I once read, the price of gold is determined only by what the next fool is willing to pay for it.
And I just don't want to be that fool who buys just before a bubble bursts.

What do you think? Am I making a mistake?

See my portfolio here.

1 comment:

  1. Perhaps gold would be a bubble if it had no underlying fundamentals driving the priced up. Fear? maybe in part but those fears are valid due the massive printing of the the greenback and the rest world struggling. I believe the US is in an economic bubble. Meaning everything is on the brink of popping, stocks, housing, credit,spending.... Theres a book i recommend its called : Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown
    The authors correctly predicted the financial crash of 08 way before it happened. and they are predicting the next crash soon.
    So to answers your question. Yes I think you are putting yourself at risk if you dont have some hedge against the market because as you said gold isnt based on earnings its based on economic turmoil that isnt going to improve with the government printing and keeping interests low. Its only making it worse.