MW Whoops! You missed the gold boom.
By Brett Arends
If you think your stocks have been doing well this year, look at gold.
Bullion (GC00) just hit a fresh all-time record high of $2,550 an ounce, for a gain of 23% since Jan. 1.
Over the same period, the S&P 500 SPX and Nasdaq Composite COMP stock-market indexes have risen 18%. Gold has done better than either over one year (by a couple of percentage points) and three years. Since this time in 2021, gold has earned you a 41% return, compared to 21% on the Nasdaq and 30% on the S&P 500.
There's only one group who've missed out on this fabulous boom.
You.
Well, maybe not you personally, but regular investors like you (and me). Industry data show that there has been no big surge of private-investor money flowing into the gold bullion exchange-traded funds this year or in recent years.
The reverse, actually - clients have been cashing out. The big five bullion funds - State Street's SPDR Gold Shares GLD and SPDR MiniShares GLDM, iShares Gold Trust IAU, Abrdn Physical Gold Shares SGOL and VanEck Merk Gold Trust OUNZ - have seen $2.2 billion in net redemptions so far this year and $12.4 billion over the past three years.
The World Gold Council, the trade organization that represents the gold industry, estimates that sales of gold bars and coins fell in the second quarter due to weak demand across Western markets, including the U.S.
It was a different story during the last gold boom, just four years ago. Fund data show that investors poured money into gold funds in 2020 in response to the pandemic, the lockdowns and the sudden surge in government debt. But they sold off again as the price fell back over the next two years.
Same old, same old. Net buying and selling by the public isn't an infallible guide to market timing, but it isn't entirely wrong either. As a general rule, the public buys and sells at the wrong times. As Morningstar and others have shown, the public ends up earning less over time through buying and selling at the wrong points than they would have made if they'd just left their account alone.
But if Joe Sixpack and Jane Winebox aren't driving the gold price, who is?
That would be the central banks of key emerging-market countries, in particular Turkey, India, China and Poland.
Central banks bought a record 483 metric tons in the first half of this year, according to WGC. At current prices each metric ton is worth about $81 million.
They may have a long way to go. World Gold Council data show that right now gold accounts for just 5% of China's reported foreign exchange reserves and about 10% of India's. Meanwhile gold accounts for 72% of the U.S. foreign exchange reserves, and around 70% of certain other rich western countries including Germany, Italy and France.
Analysts remain divided over whether gold really belongs in an investment portfolio.
Conventional opinion pretty much says, no. Gold, to borrow a phrase from Winston Churchill, is a riddle wrapped in a mystery inside an enigma. It has little use beyond jewelry. You cannot value it based on any modern financial metrics, such as the net present value of discounted cash flows, because it has none. Any attempt to put an exact figure on its value is simply a guess.
It's not even very effective protection against inflation. It fell during 2022 when inflation took off. It boomed in 2020 (and 2011, going back a while) when inflation collapsed.
But it has its champions, and its rationales as well.
The most obvious is that it is still the only currency around that is not controlled by any government-including the U.S., the European Union, or China. Its independence of the U.S. dollar may be especially important given the disastrous deterioration in U.S. government finances. Already Uncle Sam is paying more on debt interest than on almost any other budget item. And the budget forecasts for the years ahead are much worse.
Gold fans can say the U.S. government is following Ernest Hemingway's description of the path to bankruptcy: Slowly, then suddenly.
And gold typically does well when interest rates are falling, because the metal pays no dividends or interest at all. The more you can earn elsewhere, the less appealing it becomes. So expectations that interest rates will fall in the months ahead may be helping lift the price.
But how can you invest in something you can't value?
If I wanted some exposure to gold in my 401(k), IRA or similar I'd target a small allocation and stick to it.
Doug Ramsey, chief investment strategist of the Leuthold Group in Minneapolis, includes gold among the seven assets in his notional, but marvelous, "All Asset No Authority" forever portfolio. That means the portfolio would hold a steady 14% of its account in bullion.
Dedicated gold bull Josh Strauss, money manager at Pekin Hardy Strauss in Chicago and co-manager of the Appleseed Fund APPLX, recommended owning 5% to 10% when I interviewed him about the subject here early during the Covid crisis. (He is still bullish on gold)
But whether gold is going to double, halve or just hang around is anyone's guess. At least if you own some you won't kick yourself too hard no matter what happens.
-Brett Arends
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
August 23, 2024 13:19 ET (17:19 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments