New York Times...Wealth Matters
The Crowd Around the Gold CounterBy PAUL SULLIVAN
Published: October 8, 2010
Gold evokes emotions from investors like few other investable assets. Whether it is increasing or decreasing in value, people usually have an interest in it beyond its intrinsic value as an investment.
Have you been buying gold, or steering clear?
.“If I went outside and talked about gold, everyone would have an opinion on it, including the taxi drivers,” said Jason Toussaint, managing director of the World Gold Council, a group whose mission is to stimulate demand for gold. “Anyone past the age of 4 knows about gold. It brings out a lot of people of opinions.”
While emotional attachment like this is fine with sports teams, it can make rational decision-making around investments more difficult.
So what should we make of this current moment for gold? It is trading at more than $1,300 an ounce. Last year, the gold exchange-traded fund marketed by State Street Global Advisors was up 25 percent. And it has continued that surge this year, up 18 percent in the first nine months.
But the question many skeptics are asking is why investors are still flocking to it after such a run-up in value. Are they contributing to a gold bubble? Or has something fundamental happened in the way gold is held in portfolios? Not surprisingly, the emotional divide remains strong.
Positives: The pro-gold camp is not just pointing to the metal’s long, steady growth over the last two years. They’re now talking about its permanent role in a diversified portfolio.
“The case that has really resonated with the largest private wealth firms is the strategic long-term case,” said Jim Ross, senior managing director at State Street Global Advisors. “Gold is not always going to go up, but the focus of advisers has been the noncorrelation of the price of gold” to other assets in a portfolio.
Mr. Ross, who oversees the exchange-traded funds business at State Street, said their gold E.T.F. had grown from $17 billion in June 2008 to almost $55 billion today, second in size only to its E.T.F. tracking the Standard & Poor’s 500-stock index.
Fear, as it has historically done, initially drove the buying — fear of inflation and a vulnerable dollar. What surprised Mr. Ross earlier this year, though, was how investors’ attitudes toward gold were no longer being driven by fear. Even as last year’s concerns have subsided, he said, “buying hasn’t diminished.”
Diversification could give gold a long-term respectability in portfolios. But now there is also the argument that a lack of other investment opportunities keeps it going. The other historic safe haven, United States Treasury bonds, has short-term yields close to zero.
“The cost of owning gold has been mitigated because interest rates are so low,” said Alan Zafran, partner at Luminous Capital, which manages $3.5 billion. “The opportunity cost of sitting in cash is no longer 3 to 4 percent; it’s zero.”
Still, Mr. Zafran is mindful of a future decline in the price of gold.
Negatives: The history of gold is replete with surges and crashes.
“Gold is worth what you think it’s worth,” said Bill Stone, chief investment strategist at PNC Wealth Management. “It’s very difficult to value. There are no cash flows, so it has no intrinsic value. There is very little commercial use for it. It’s more of a trading vehicle.”
And even if you invest in gold through an E.T.F. — as opposed to buying bullion — it has two significant costs. The first is that it does not pay a dividend, so there will not be a stream of income from it.
Selling it is easy, particularly with an E.T.F., but this leads to the second problem: gold is taxed at a much higher capital-gains rate. The Internal Revenue Service considers it a collectible and taxes gains at a rate of 28 percent, as opposed to the 15 percent capital gains tax for other securities. This means gold has to appreciate more than other securities to make up for a tax rate on gains that is almost double.
More alarming is the talk of a gold bubble. Mr. Stone said it fitted his three criteria for any inflated asset set to crash: high valuations, excess returns and speculation. “If nothing else, you ought to be mindful of the risks,” he said.
Still, there are people who continue to buy gold as a hedge against the world falling apart. Tony Guernsey, head of national wealth management at Wilmington Trust, cited one client, a dentist, who was very proud of all the gold he was accumulating.
“I understand why people go there,” Mr. Guernsey said. “It’s a lack of anything else that’s solid. But if you’re going to have a problem, you can be just about anywhere in the world and someone will take a dollar bill.”
Future: Like so many things, the future of gold’s value may lie in India and China. Mr. Toussaint said that is where the biggest demand for gold in the form of jewelry is coming. “The U.S. does not drive the gold price, nor does the investment segment,” he said, pointing out that gold E.T.F.’s own only about 8 percent of the world’s physical gold.
On the other hand, another group says it believes gold’s strong returns will last only as long as governments from the United States to Britain and Japan continue to suppress interest rates. The one certainty is that the debate over investing in gold will continue.
“Ask people and you’ll get five views of why it’s going to go to $750 and five views of why it’s going to $2,000,” Mr. Ross said. In that debate, an E.T.F. is neutral: it can be used to short gold just as easily as to invest in it.
