Wealth – Going for the Gold

Why some investors are putting stock in precious metals

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Local marketing executive Scott Kiner divested equities from his 401K plan and invested in gold (at around $1,200 per ounce) this summer. “It’s my only investment that’s making me any money these days,” he says. In October, gold reached a historic high of $1,330 per ounce. “With so much uncertainty in the market, I’m actually thinking of shifting more of my equities into gold,” Kiner says.

Pundits continue to warn that another major economic shoe will drop, further weakening the dollar’s buying power against major currencies. If that happens, the price of gold will continue its rise.

Jim Casey, president and CEO of Integrated Wealth Management in Palm Springs, cautions on allotting too much of your portfolio to gold. “Today gold is seen as a good inflation hedge with great prices. However, it’s easy to make the mistake of not understanding the position gold should play in the overall balance of your portfolio,” he says. “If your primary goal is generating income, then gold isn’t for you. It’s a growth vehicle.” As a specialty asset class, gold should only account for 5 to 10 percent of your total portfolio.

Massachusetts-based Cabot Money Management holds significant positions in gold and has for the last five years. “Investors today have a chance to protect their portfolios from the coming destruction of purchasing power with gold,” says Rob Lutts, president and CIO. “It’s the only asset class that is not part of the contaminated credit system.” If inflation increases as predicted in the next two to three years, Lutts is betting gold will continue to shine. “It’s an insurance policy against inflation,” he says.

There are several ways to hold gold, including gold bullion, gold coins, exchange traded funds, mining stocks, and mutual funds. Les Satlow, portfolio manager at Cabot, likes the ETF GLD-Street Tracks Gold Trust. “We recommend that product for our clients, because it actually holds gold bullion in a vault,” he says. “One share of GLD represents a 10th of an ounce of gold. That’s how they get exposure to bullion. We don’t want clients buying bullion and holding it in a lock box.”

Satlow also likes exposure to gold mining companies through the ETF GDX-Market Vectors Gold Miners, which represents direct ownership in about 35 companies. “With this, you are not betting on one individual mining company,” he says. Since market timing is impossible to call, Satlow suggests acquiring a position in gold gradually, with long-term allocation as the goal.

Satlow started investing in gold six years ago. Depending on the client, he recommends a 5 to 15 percent asset allocation for gold. “In today’s market, you should have some allocation for gold,” he says. “How much depends on your objectives.”

Exchange traded funds are a simple way to hold gold, according to Wayne Atwell, managing director of Casmir Capital in New York. “They are the easiest way to own gold. You don’t have to store it, and you can call your broker and trade it.”

These days, Jim Estes, vice president of investments at Wedbush Securities in Palm Desert, prefers silver to gold. “If inflation returns, gold will run up even higher. Yet if inflation doesn’t return, then prices will level out,” he says. “I think silver has strong potential for sizable returns.” He points to silver’s value increasing 25 percent over the third quarter of 2010. He also likes exchange traded funds that hold both gold and silver.

James DiGeorgia, publisher of the Gold and Energy Advisor industry newsletter and author of the book The Trader’s Great Gold Rush, predicts precious metals will end the year between $1,400 and $1,500 and that gold could reach as high as $2,500 in the next few years.

“Would you buy a stock at its all-time high?” poses Christina Deniel of Stein Whittington Deniel Investment Advisors of Palm Desert. “I’ve bought gold for clients in the past, but I am not buying at this time.”

If you are invested now in gold, the word is to hold onto it. If you are just thinking of jumping in, consult your wealth manager on what investment strategy works for you both today and tomorrow. An excellent resource for unbiased information on gold is the nonprofit World Gold Council (www.gold.org).

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