Biz
Analysts say gold not a long-term hedge
2009-Dec-14 08:02:20

Gold's best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought gold during the last peak in January 1980.

Investors who paid $850 an ounce back then earned 44 percent as gold reached a record $1,226.56 on Dec 3 in London.

Meanwhile, the Standard & Poor's 500 stock index produced a 22-fold return with dividends reinvested. Treasuries rose 11-fold, and cash in the average US checking account rose at least 92 percent. On an inflation-adjusted basis, gold investors are still 79 percent away from getting their money back.

"You give up a lot of return for the privilege of sleeping well at night," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, Minnesota.

"If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. From my experience, the world has not ended yet," Paulsen said.

Still, gold's nine-year bull market is attracting more investors. The accumulation of gold is part of a record $60 billion that Barclays PLC estimates will flow into commodities this year.

The SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has amassed more metal than Switzerland's central bank.

The US Mint suspended production last month of most American Eagle coins made from precious metals because of depleted inventories.

The UK's Royal Mint more than quadrupled production of gold coins in the third quarter.

Long winning streak

A weakening dollar also contributed to bullion's longest winning streak since at least 1948.

The US Dollar Index, a measure against six counterparts, dropped in six of the last eight years, including a 6.6 percent decline in 2009, bolstering demand for a hedge.

Buy-and-hold investors may not have done so well. One dollar put into a US checking account in 1983 would be worth at least $1.92 today, based on annual average interest rates from Bankrate.com.

The Federal Reserve target rate from 1980 to 1982 was 8.5 percent to 20 percent. Banks were paying 5 percent on the accounts in January 1981, according to a report in the New York Times.

The S&P 500 returned 2,182 percent from the beginning of 1980 through the end of the third quarter this year, according to data compiled by Bloomberg. The calculation assumes dividends reinvested on a gross basis. Treasuries returned 1,089 percent through the beginning of this month, according to Merrill Lynch's Treasury Master Index.

Short-term asset

"Gold is a useless asset to hold long term," said Charles Morris, who manages more than $2 billion at HSBC Global Asset Management's Absolute Return fund in London.

"I'm not a gold bug who believes that you want to own this thing in your portfolio at all times. We should own it when the going is good, and the going right now is great," Morris said.

Buying bullion at $35 when US President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.

Gold will average $1,070 next year, according to the median in a Bloomberg survey of 19 analysts.

"Our sense is that this bubble is more at the beginning stages than on the brink of collapse," said Thomas Wilson, head of the institutional and private client group at Brinker Capital in Berwyn, Pennsylvania, which manages about $8.5 billion.

Central banks will become net buyers of gold this year for the first time since 1988, according to New York-based researcher CPM Group. India, China, Russia, Sri Lanka and Mauritius have all added to their reserves.

Knee-jerk reactions

Gold should be held when governments cease to function and currencies are worthless, or when inflation is surging, said Brian Nick, a New York-based investment strategist at Barclays Wealth, which manages $221 billion. He did not recommend increasing gold holdings, which are a "very small" part of commodity allocations.

Inflation has yet to accelerate. US consumer prices will rise 2 percent next year, the smallest expansion since 2002, according to the median estimate of 63 economists surveyed by Bloomberg.

[Jump to ]
Nation | Biz | Comment | World | Celebrity | Odds | Sports | Travel | Health
ChinaDaily Mobile News
m.chinadaily.com.cn
To subscribe to China Daily, call 010-64918763 or email to circu@chinadaily.com.cn