New, Sober Book Gives Three Reasons For Buying Gold

Back in the late 1970s, the only gold-buying investment books around were by hardcore goldbugs. Only they had the background experience to put the case for gold down on paper, as virtually all mainstream financial analysts shunned it.

Those times have changed. The hardcore goldbugs are still around, of course, but they're being supplanted by a more moderate breed of gold boosters who recommend gold as portfolio insurance. One of the latter group is Shayne McGuire, who manages the gold investments of the Texas Teachers' Retirement Fund. The fund has only a small amount of gold as a percentage of its assets, 0.3%, but the dollar amount is substantial. McGuire's reasons for owning gold are summed up in a favorable review of his book by Scott Burns:

Talking over breakfast and reading his book, Hard Money: Taking Gold to a Higher Investment Level (Wiley & Sons, $35), McGuire makes a clear three-point case for why we should own some gold....

Gold has never been more under-owned as an asset. Historically, gold was money. It accounted for a substantial part of global assets. It was a universally recognized store of value and medium of exchange. Today, it is an asset only as a commodity.

The value of all the gold in the world, he points out, is about 0.6 percent of all financial assets. This is down from 2.5 percent as recently as 1980.

So gold is a rounding error. The value of the largest gold exchange-traded fund, at $57 billion, is less than the market capitalization of McDonald's ($79 billion) and only a fraction of the most valuable stocks, such as Exxon Mobil ($403 billion), Microsoft ($246 billion) or Apple ($316 billion).

After years of being net sellers, he points out, governments are now net buyers of gold. Moreover, institutions such as pension and endowment funds now have vehicles for investing in gold.

Long prohibited from owning physical gold, these funds can now own it through exchange-traded funds such as SPDR Gold Shares (ticker: GLD). Significantly, State Street Global Advisors' annual report on ETFs shows that GLD was the fifth-most-traded ETF in 2010.

With gold accounting for so little of global assets, McGuire says, only a small shift in asset preferences — from currencies to gold or bonds to gold - would cause a major price increase in gold.

It looks like McGuire has hung his hat on a a shift to gold by major institutions, and is positioning himself as ahead of the curve on that basis. He may well be right.