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Wednesday, April 19, 2006


Gold in Portfolio

Every US portfolio should be hedged for dollar’s value to a reasonable extent. This can be done by holding hard assets (precious metals, commodities, real estate); related instruments: PM stocks and funds, REITS; international stocks and bonds; and TIPS. Gold should play an important role in this dollar-hedge portion of the portfolio.

Gold has a long history. Let us pick up the thread in 2000. London fixings for gold in 2000 ranged from $263.80-312.70 (average $279.11; source http://www.kitco.com/ ). Silver was not doing well either—after a brief spike in early 1998, its London fixes in 2000 ranged from $4.5700-5.4475 (average $4.9506). Gold had been in relentless decline. Central bank sales, forward selling of production by mining companies, strengthening dollar, and the constant drumbeat of “gold is dead money” had depressed gold. Even the bursting of the internet bubble (2000-02) was not able to wake gold up from its slumber. In this extremely negative scenario, an interesting book on gold by a mainstream author (Peter Bernstein) and mainstream publisher (J. Wiley) came out in Fall 2000 (Peter L. Bernstein, The Power of Gold, J. Wiley, 2000). The following review that I wrote at the time can still be found online through Google or Yahoo search on my assumed name “yogibearbull.”

“From reader yogibearbull in IL, September 27, 2000; Reviewer: A reader

Bernstein's The Power of Gold has moved from #3732 (9/22/00)to #94 (9/27/00)in Amazon sales rank!--this is simply amazing for a book on the yellow metal which has supposedly lost its luster. Book's official publication date is just this month--September 2000. It may soon hit the bestseller list at this rate.

Bernstein tells a story which is shocking, gory, fascinating, and interesting. It has weak beginning and end, but great middle. Items are well referenced and footnoted. Bernstein does not have a pro or con view on gold as an investment in this book, but he seems skeptical of the current paper currency system and the gold situation. He does not believe that we have seen last of the gold story.

I think that any one reading the book will be motivated to have some exposure in gold as a hedge for the unknown future. Tales in the book describe the fate of those who failed to hedge and got caught up with the fads of their times.”

Now switch to 2006. At the time of this writing (April 2006), all negative factors in 2000 have turned around 180 degrees and there are several geopolitical concerns. Sentiment and press for gold and silver has become very positive. On April 19, 2006, a particularly wild day, London fixings were $624.75 for gold and $14.27 for silver, and spot gold and silver continued to dash past London fixings.

People should continue to follow the portfolio strategy of holding precious metal assets as part of the dollar-hedge portion of the portfolio although some adjustments may be necessary.

There are many ways now to have exposure to gold. Gold stocks and gold mining mutual funds are extremely volatile, but mutual funds at least reduce company specific risk. Some examples of open-end gold funds are BGEIX (American Century), FSAGX (Fidelity), UNWPX (US Global), VGPMX (Vanguard). Among exchange traded funds are GLD (gold), IAU (gold) and soon to be available SLV (silver). Closed-end funds include CEF (holds gold:silver in 1:50 ratio by weight) and GGN (holds stocks related to gold, energy and other natural resources). Futures and options markets offer many specialized tools, including index options on ^XAU. Several bullion dealers offer bullion accounts. There are few gold-based payment systems such as http://www.goldmoney.com/ and http://www.e-gold.com/. These vehicles, old and new, can now accommodate individual as well as institutional investors. They have brought ease of access and visibility to precious metal investments. So the demand is no longer limited to holdings by the gold bugs and individual holders in Asia and Middle East.

Other Tidbits:
12 Troy Ounces of gold make 1 Troy Pound of gold (unlike the usual 16 Oz of peanuts for 1 Lb of peanuts).
1 Troy Oz of gold has 31.1034768 grams of gold (1 Oz of sugar has 28.350 gm of sugar)
1 Tonne = 1,000 KG = 1,000,000 gms = 32,150.7465686 Troy Oz
1 Tola = 0.375 Troy Oz = 11.6638038 gm (definition varies)
Gold is 19.32 times heavier than water, silver is 10.49 times heavier (specific gravities)
1 cubic meter of gold is 19.32 Tonnes
24 Karat gold is 100% pure; 18 Karat gold is 75% pure (100x18/24 %)

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