[miningmx.com] — IS IT too late to buy gold?
It soared to a record $1,700 an ounce Monday after the United States suffered its first-ever debt downgrade at the hands of Standard & Poor’s.
With gold rising 30% this year and nearly 400% over the past decade, it’s reasonable to ask when the fever might break.
In recent days it’s gone completely viral as the debt crisis plunged financial markets to the biggest losses in two years.
“People who weren’t talking about it even six months ago are heavily interested in gold today,” says Frank Trotter, president of EverBank Direct in Jacksonville, Florida, which holds nearly $500m worth of precious metals in the form of hard assets for clients.
Gold purchases leaped to more than 18 million ounces over the past month – from 8.4 million for the entire year up to July, according to data from the Commodity Futures Trading Commission.
People are betting gold will come through the present debt crisis shining. In the depths of the 2008 financial crisis, gold dropped by 20% – but the metal was hurt as the US dollar became the safe haven of choice. In the debt showdown this year, the dollar has suffered and gold leaped.
THE BULLISH CASE
Financial adviser Jeffrey Sica of Sica Wealth Management in Morristown, New Jersey, says it’s not too late to profit from gold fever – he sees 20% to 25% upside in the glittery stuff.
“What we are seeing is the tip of the iceberg in terms of the downgrade,” says Sica, a self-described stock market bear who forecast Standard & Poor’s downgrade in a blog post to clients back in March. He said gold’s value has grown due to central banks’ inability to contain the debt crisis.
“The fundamentals to invest in gold have not changed,” argues William Rhind, managing director of ETF Securities, which manages $4.2bn in exchange-traded fund assets. “The only thing that has changed is that investment case is stronger – the world’s best credit, the US government – has been downgraded. It’s no longer as safe as it was.”
Nor is gold overvalued at these levels, Rhind said, since it hit $873 in 1980. Adjusted for inflation, the equivalent would be just over $2,391 today. That’s about the level JP Morgan Chase told clients the spot gold prices could hit this year. It said in a note $2,500 per ounce is possible.
OTHERS ARE SKEPTICAL
Among doubters, though, are people like Pat Dorsey, Morningstar’s former director of equity research and now vice chairman of Sanibel Captiva Trust Company, which has $500m under management.
“I’ve never been a fan of gold. I am in the camp of that thinks it generates no income and has no utility (as opposed to copper), so the valuation is based on the opinions of other people,” Dorsey says.
Others cite its volatility as a negative factor, since the gold price is affected by fast-money traders lured by the leverage of commodities contracts. The price can tumble just as quickly as it rises.
Still, even some conservative managers recommend a small allocation in gold as part of a balanced portfolio. EverBank’s Trotter puts his own account at 5% to 10%.
