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Gold

Birth of a Gold Bug

I bought gold for insurance and because I saw fear of a financial holocaust spreading wildy.

To paraphrase Kafka: As Auric Feinberg awoke one morning from uneasy dreams, he found himself transformed in his bed into a gigantic gold bug. Never before had I been an insect -- especially not a gold bug. In fact, I have publicly ridiculed gold bugs ever since the metal reached its inflation-adjusted peak price of $2,100 in 1980. During the great stock and bond bull markets of the '80s and '90s (remember those days?), gold cost its acolytes money year after year.

Despite the drubbing, the gold bugs who remained solvent kept proclaiming that their time would come. And that's when I learned something: You may use dozens of cans of Raid, but you can never kill a true gold bug.

Poor track record. Two facts made me recoil from gold, as I would from a cockroach-infested room. First, compared with buying a fund that tracked Standard & Poor's 500-stock index, gold had been a lousy investment for decades. As someone who respects history, I don't find such a flaw insignificant. Second, the gleaming metal's promoters almost always felt that gold's future meteoric rise would coincide with a global financial crisis of biblical proportions.

Well aware that those who had prophesied the end of the world in the past had seldom been correct, I rejected such end-of-days-style financial planning. Until the past year, that is, when the occurrence of financial apocalypse -- a notion I had always pooh-poohed -- began to seem plausible. On some days, in fact, it appeared downright imminent.

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When I began buying gold last September at about $840 an ounce, it wasn't because I feared doomsday. I bought gold for insurance and because I saw fear of a financial holocaust spreading wildly. Fear itself, as FDR termed it, is a dangerous thing, and last fall growing fear was causing investors to alter long-standing behaviors. If a cynic like me was willing to put 18% of my hedge fund into gold (that was at the peak; my allocation in early March was 6%, but the weighting is likely to go higher), then maybe others who could pass standard sanity checks might do so as well.

Besides, gold has been "working" in a market in which virtually nothing else has. Given that academics have shown that momentum tends to benefit investments -- until it doesn't -- I found that encouraging. I confess that I also enjoyed seeing at least something green on my screen almost every day, especially when the market swooned.

But, above all, I was bearish on stocks, and owning gold dovetailed with my market view. With almost every central bank in the world running its printing presses 24/7, I thought that most investors would eventually become a little more skeptical of the value of paper money. My view of inflation was that it may or may not increase -- hey, I run a hedge fund -- but that lots of people would assume it would increase and that, as a result, they would buy gold. Plus, many hedge-fund investors I respect, including David Einhorn, of Greenlight Capital, have been loading up on gold. That makes me feel a bit better.(Incidentally, I'm buying the metal through SPDR Gold Shares, an exchange-traded fund that trades under the symbol GLD.)

But am I a happy gold bug? Heck no. First, I feel kind of slimy owning an investment that has been blessed by so many certifiable crackpots over the years. As a rule, I tend to follow investors who have trounced the market, not those who have been humiliated by it. This helps explain why I have so little faith in what I own.

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At a deep level, I don't consider gold a legitimate investment, something that is supposed to grow in value for reasons short of nuclear war. Some days I buy, some days I sell. Try as I might, I can't seem to become a true believer, someone who intends to hold on to the yellow stuff until a desperate man steals my stash of canned food, AK-47s and gold bars at gunpoint.

Columnist Andrew Feinberg writes about the choices and challenges facing individual investors.