Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Wednesday, June 2, 2010

Differing Views on Gold

When the market has been down sharply and the economy has been in a funk, as it has for the last couple of years, it’s understandable that everyone begins to ask themselves if their isn’t a better vehicle to invest in. We’ve been warning time and time again of the dangers of searching for that silver bullet. Yet, it’s human nature for investors to be drawn to the latest hot asset in hopes of recovering from their losses.

It is pretty hard to escape the advertisements for gold on TV unless your leave your set turned off. It always seems that whatever investment has been hot recently gets the most ad dollars. So that brings us to the question: Is gold a good investment at this time? Recent articles in the Wall Street Journal chronicled two opposing views.

The first article was by Liam Pleven and Carolyn Cui and was titled “A Billionaire Goes All-In on Gold” (Saturday, May 22, 2010). It discussed the investment focus of Tigris Financial’s Thomas Kaplan who was quoted to have said “I feel the only asset I have confidence in is gold.” Kaplan, a billionaire, was reported to have invested the majority of his wealth on gold and other precious metals. The article said: “Mr. Kaplan’s views are shaped by a concern, shared by many investors, that heavy government spending hasn’t contained the woes facing the financial system.”

The second article by Jason Zweig, titled “Why One Legendary Investor Is More Worried Than Ever” was published the same day in the Wall Street Journal. Mr. Zweig explained how Seth Klarman (president of Baupost Group, a firm in Boston that manages $22 billion of investors’ money) views the current market situation. Mr. Zweig stated in the article that “Mr. Klarman specializes in buying securities that nauseate other investors….” Mr. Zweig pointed out how worried Seth is about the world economy, in general.

And how does Seth feel about gold as a hedge against the problems of the future? According to Mr. Zweig, Seth believes that all the obvious hedges are already extremely expensive, including gold. Seth was quoted as saying that gold is “Near its all-time high, it’s a very hard moment to recommend gold.”

So who’s right? Is it Thomas Kaplan or Set Klarman? Although there still may be room for gold to rise, we tend to ascribe to Seth Klarman’s views. A chart of gold’s ten-year run in the article about Thomas Kaplan has an eerie similarity to charts we’ve seen of past asset bubbles, at least in the pre-burst stages. Perhaps Mr. Kaplan will be smart enough to get out before any potential bubble might burst.

If you have been tempted yourself to jump on the gold bandwagon, we urge you to limit your stake to a small percentage of your portfolio and establish prices at which you will sell if gold continues to rise or if it suddenly loses its luster. The reason many investors get caught in bubbles is they never sell. They assume the party will go on forever.

While we may have missed an opportunity with gold, we do not recommend that the average investor buy individual commodities, countries, stocks or bonds. We believe they are better served by investing in professionally managed low-cost, tax efficient, broadly diversified funds (and in some cases, passively managed indexes). We too are concerned about high inflation in the future. We prefer to take the route of investing in TIPs and broadly diversified commodity-based funds.


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