"Bartender, I'll Have The Gold ETF -- And Make It A Double!"

Friday I established a new portfolio position -- gold in the form of the SPDR Gold Trust ETF (GLD). And it accounts for just over 10% of the portfolio. That's twice the normal 4% to 5% position I usually devote to new buys.

Long-time readers know I bought gold earlier this decade, before launching Controlled Greed. That was when gold was around $270 and my vehicle was the Central Fund of Canada (CEF), the closed-end fund holding gold and silver bullion, which was then trading at a discount. CEF would have been my buy this time, but it trades at a premium. So I went with the gold ETF.

I paid $91.89 and it ended the day at $93.35.

I'm torn about gold as part of an investment portfolio. Two people I admire greatly, the late John Templeton and Seth Klarman, have never been big on gold, or not for the most part. I'm sure Sir John owned mining stocks at times, even gold ones, but I've never read any comments from him liking the metal itself. In fact, he once said it just sits there and doesn't pay any dividends. Klarman said a while back that gold tied up a lot of money and that he was using another hedge (which he wouldn't reveal).

But two other gentlemen I also admire tend to be favorable to gold: Jim Grant and Jean-Marie Eveillard. If you've read them at all, you know why and I won't repeat them here. I'll just make a few points about my purchase:

• I'm residing in the US, and there's no doubt we could see potentially drastic inflation at some point. If I lived in Canada or Australia, I might be content to keep my cash in cash.

• I'd rather buy stocks of companies. Most all are fairly priced. I might make a buy or two here or there. Still, I'd rather not leave more than a quarter of the portfolio in cash while this bear-market rally rages on.

• Gold bullion pays no dividend or interest. Yet cash pays virtually nothing -- and even a negative rate when existing inflation gets factored in. So I'm getting protection -- I think -- against any "US dollar crisis" for nothing.

• Of course, this assumes the price of gold doesn't implode. That is THE risk with this portfolio move. I don't believe that will happen, but anything is possible.

• If gold falls a bit in price -- I'll probably buy more.

• The bull market in gold started earlier this decade -- 2001 or 2002. Yet the "crazy" blow-off period hasn't happened yet. Maybe it will never happen this time, but I think likely we will see this phase sooner or later.

• That said, the purchase is more of an "insurance" play that a "get rich" play.

That's it. Remember as I always say, do your own due diligence before making any moves with your own investments.

Comments

[Alex]

Did you look at buying coins/physical gold instead of the ETF? I have been hearing several funds using bulluion instead of the ETF.....

[John]

@Alex: No, I didn't. I'm aware of the argument in favor of owning the physical metal. But I don't want the hassle of storing it, etc. For me the simplest, best way is the ETF (with CEF trading at a premium).

[Toni Straka]

GLD and SLV ETFs have a fundamental problem as the prospectus leaves lots of room for finger pointing just in case things go bad with one of their trading counterparties/suppliers. The best PM ETFs are managed by Swiss Zuercher Kantonalbank who store all bullion in their own vaults.
http://prudentinvestor.blogspot.com/2009/06/safest-way-to-own-physically-allocated.html

[David]

Wow, that is a pretty big step especially considering all the gold related discussions we've seen here. Kudos to you for making the move back into gold, John.

I do not own any of the gold or silver ETFs, but Toni beat me to the punch on issues with GLD & SLV. I have not studied their prospectuses as closely as some others have, but I understand that there were some real questions over whether the gold or silver is actually in the vault & allocated. From what I heard in the past CEF & GTU.TO in Canada were more reliable in this respect - anyone know if that's still true & if that accounts for persistent premium in CEF?

Gold pays no dividend, but it's really not supposed to. It has historically served as a store of value & purchasing power (as you well know!).

[Zach]

I have to admit this position surprises me a bit. I understand the move for gold as insurance, but it just doesn't appear to be that cheap, and it never collapsed like the other metals. It almost seems to have too much buzz lately. Are there any other hedges you are considering?

[Metolius]

I sometimes wonder why TIPs don't get the love when everyone is buying gold. After all, your principal is protected (you get back the greater of your original investment or the upwardly revised principal based on CPI) and you get a very modest yield while you wait.

Granted, CPI is a crummy measure of inflation. But is it worse than gold? I can understand buying gold based on supply/demand fundamentals, or even on technicals, though that isn't my preferred method of investing.

It just seems that with the inflation/deflation debate so compelling (it feels like something big is going to happen, but I don't know if it is up or down) one should appreciate the put option attached to a TIP.

My gut is that if inflation gets out of control, gold may perform better. But if we stay deflationary for long, TIP will win hands down, and gold will likely collapse.

Your thoughts?

[Daniel M. Ryan]

I have a little silver myself, but not in a sufficient amount for it to be considered an investment position. I think we're going to see a lot of action in gold once it hits four digits and stays there, although I don't see that surge-up happening until sometime in 2010. It'll occur to more and more people that there were only two asset classes that were up in the 2008 calender year: U.S T-bonds and gold. If the former goes into a bear market, it's probably for the same reasons that would push the latter up.

In fact, gold has the potential to go into a bubble for the first time in 30-odd years if inflation gets out of hand and/or the U.S dollar keeps sinking.

[John]

@Toni: Thanks for the info. Fred Hickey reports having most of his metals exposure in the GLD. Good enough for Fred, good enough for me.

@David: No question, if CEF was trading at a discount I would have bought it.

@Zach: I thought about putting some money into SLV (because CEF has mostly gold, but some silver), and some into gold miners. But just decided to keep it simple, and that means GLD for me.

@Met: I actually own an inflation-protected bond fund in my HSA (has TIPS, but not exclusively). That's not part of the scope of this blog.

Daniel: Nothing would make me happier than for gold to break the $1,000 USD barrier and skyrocket. Though I'm not banking on that.

[Jay]

I think your gold investment will probably pay off in the long run.

America has enjoyed a period of disinflation for the past 2 decades. This was driven by a variety of factors, notably anti-inflation oriented fed chairmen but most importantly increased globalization that brought many workers into the world market, which depressed wages and prices.

I think the financial crisis of 07-08 marked an end to this period and now we are entering a period of high inflation. This would be driven by continued pressure on energy prices and other inputs, an end to the trend of globalization (at least temporarily), and huge fiscal deficits. It's only a matter of time before inflation rears its ugly head.

Anyways, I'm a new reader and am enjoying reading your thoughts.

[John]

@Jay: Thanks for your comments, and I hope this blog continues to be worthy of your interest. And, of course I hope you're right about my gold investment!

[Gold Trading Tips]

hey, love the blog - i will try and keep up with it!