Monday, May 16, 2011

Thinking Of Gold As An Investment May Be Misleading

That's the opinion of Nick Barisheff, who says that gold is neither a good or bad investment because it's money. This take explains why gold pays no interest or dividends; nor does cash stored in a safety deposit box. Although all currencies are fiat, gold is still seen as money; Barisheff offers three pieces of evidence why:
• Gold, silver and platinum are traded on the currency desks of the major banks and brokerage houses, not the commodities desks. Traders understand that gold is money to be traded against paper currencies.

• The world's central banks hold about 30,000 tons of gold in reserves. Although there has been a lot of media attention given to central-bank sales in the past, gold holdings have declined only by about 2,000 tons since 1980. Central banks have become net buyers since 2009 and have been adding gold to their currency reserves.

• The turnover rate among members of The London Bullion Market Association is more than $20 billion per day, with volume estimated at five to seven times that amount. Clearly, this has nothing to do with jewelry sales and everything to do with the exchange of money.

Although it may be misleading to think of gold as an investment, it's useful to think of it as portfolio insurance - a kind of counter-investment.

Those who like to see gold as portfolio insurance should own a fixed percentage of their portfolio in gold, and rebalance recurrently. Rebalancing is especially indicated when gold goes nuts, although it does take an effort to sell some when it's rocketing up. Doing so is best thought of as cashing in some insurance when it pays off, and rolling the proceeds into regular investments. This approach meshes best with thinking of gold as an investment.

For those who think of gold as money, and wish to save, the best approach is an accumulation plan of physical coins or bars. It's best to dollar-cost average using this approach, as less is bought when the price goes nuts and more is bought when gold's driven down. Selling the accumulated savings when gold's gone manic is an option, but some (perhaps many) would prefer to leave their savings be. Of course, savings can be cashed in for this homely but still imporant reason: simply needing the money.

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