The Gold Mania That Never Was

Sometime in 2010, gold fever became gold mania and then a gold panic.  Now comes word from Brett Arends of the Wall Street Journal that that many investors are sitting on the sidelines.

In his column today,  Arends says that individual investors poured $3.7 billion into exchange-traded funds from the start of the year through the end of July,  about half the total amount invested.  Investors also snapped up 45 metric tons of gold bars and coins, less than last year. He calculates people’s total net investment in gold at $2.7 billion.

That ain’t much.

“Through the end of July, …  investors poured $22 billion into emerging markets mutual funds.  And a remarkable $155 billion into bond funds,” Arends says. ” Compared to these figures, the amount invested into gold is chicken feed.”

Arends’ hypothesis, which is pretty compelling, runs counter to the conventional wisdom that investors are storing gold coins in their mattresses to await the financial apocalypse.  Some people believe the rhetoric they hear on Tb commercials and by gold bugs regularly quoted by the media.  To be sure, many experts argue that gold prices will rise but what many people fail to consider are the downside risks, and there are plenty, of investing in the precious metal.

Many investors are continuing to avoid gold even as headlines continue to trumpet the metal hitting record highs, like the $1,366 an ounce level futures hit today. Morgan Stanley recently hiked its 2011 forecast for gold to $1,315 an ounce, 14 percent higher than an earlier projection.  Citigroup also raised its short- and medium-term forecast to $1,450 an ounce, “citing quantitative easing that may reduce currency values,” according to Bloomberg News.

But as Forbes’ William Baldwin argues, investing in gold may not be for everyone and historically has a poor track record.

“A position in gold can take the edge off daily volatility in a portfolio of stocks and bonds,” he writes “But it does a poor job of lowering the risk that you will retire poor….Over the past century (gold) has delivered a return, net of inflation, of a percentage point a year. Subtract holding costs and you get half a point.”

There’s also the risk that the gold market can return to its bearish ways that lasted from 1980 to 2000.  Investors who ignore these caveats should invest in the yellow metal through ETFs and avoid coins all together, according to experts.  For his part,  Arends recommends “out of the money” call options.  Regardless of the strategy,  it’s important for investors to remain skeptical about any news when it comes to gold, either positive or negative.

“I keep hearing everyone tell me gold is so over,”  he writes.  ” But I don’t know many people who actually hold much in their own portfolio. I’d find it easier to believe gold was totally over if no one was saying it and everyone was bragging about all the gold coins they held.”

Good point.

–Jonathan Berr