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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
Gold rush: It can glitter when stocks are tarnished
MORE THAN 150 years ago, U.S. pioneers piled into wagons and headed west to seek their fortunes in gold.
While much has changed since then, one thing remains the same: Many people are still turning to gold in their quest for riches.
Gold, which now sells for about $900 an ounce, rose nearly 30 percent last year, according to Blanchardonline.com. Conversely, the Standard & Poor’s 500 went up less than 8 percent.
A number of factors are pushing up gold prices.
Gold is bought and sold in U.S. dollars; recent declines in the dollar have therefore caused gold prices to rise. A jump in global wealth is creating more consumers for gold at a time when mine production is falling.
Investors are turning to gold to protect against inflation and stabilize portfolios in which stocks have tanked. Gold and stocks are not highly correlated, meaning that when one asset goes up the other often stagnates.
Investment professionals disagree about the virtues of adding gold and other precious metals such as silver and platinum to a diversified portfolio. Even if investors decide to allocate some assets to precious metals, a lot of questions remain.
What is the optimal percentage? Is it better to buy gold directly or from the companies that mine and sell it? When is a good time to buy?
A November 2007 study entitled "Can Precious Metals Make Your Portfolio Shine?" offers advice on each of these matters.
The study was done by three finance professors, including C. Mitchell Conover of the University of Richmond, as well as an executive at the Charlottesville-based Chartered Financial Analyst Institute.
The study tracks daily returns for U.S. stocks and precious metals from January 1973 through December 2006. Here are some of the major findings:
Adding a 25 percent allocation (which is far higher than most financial advisers typically recommend) for the stocks of precious metals companies improves overall investment returns.
It’s better to invest in precious metals indirectly through mining and related companies than to buy bullion directly.
Relative to platinum and silver, gold provides a better hedge against inflation.
Precious metals typically offer their best returns when the Federal Reserve is increasing interest rates.
Overall portfolio returns during the 34-year study were higher with precious metals, and investment risks were lower. A dollar invested in a U.S. stock market index at the start of the study period would have grown to $38 by the end. A portfolio with 75 percent in U.S. stock and 25 percent in the stock of global precious metals companies would have grown to $65.
"Overall, our evidence suggests that investors could improve portfolio performance considerably by adding a significant exposure to the equities of precious metals firms," the study concludes.
One thing to keep in mind if you decide to include precious metals in your portfolio: The Fed is now lowering interest rates, which often has led to stocks outshining metals.
Still, many people believe that continued demand from China, India and other growing economies will drive metal prices higher for years to come.
The recent study is at the very least something for investors to read and consider. It might even make you jump aboard the 21st-century gold rush.
And you won’t even need a Conestoga wagon this time around.