Fund Watch
The High Price of Precious Metals
Gold, silver and platinum have surged lately. If your portfolio has funds that invest in them, it might be time to sell and lock in some gains.
By Thomas M. Anderson, Associate Editor, Kiplinger's Personal Finance
February 22, 2008
Precious metals prices are like the weather. There are plenty of forecasts and only a few accurate predictions.
But even the most oblivious investor can tell which way the wind has been blowing lately. Prices of gold, silver and platinum have soared for more than seven years. Since 2001, gold has risen 248%, from $271 per ounce to $945 on February 22; silver has gained 290%, from $5 per ounce to $18; and platinum has jumped 256%, from $610 per ounce to $2,165. Since January, gold and platinum have regularly been setting new highs, surpassing prices last seen in 1980.
There are explanations aplenty for the boom. The decline of the U.S. dollar, geopolitical uncertainty and the growing demand for bling from residents of increasingly prosperous emerging markets are the obvious culprits. Investors perceive gold and, to a lesser extent, other precious metals to have inherent value against the devaluation of paper money. Gold is bought and sold in dollars, so any decline in the value of the dollar causes the gold prices to rise.
Fear feeds into precious metals prices, particularly moves in gold. The international credit crisis, worries of stagflation and a slide in U.S. consumer spending and home prices have frightened many investors. Concerns about developments in places like Afghanistan, Iran and Venezuela also weigh on investors.
"In this environment, investors have put a very high risk premium on to precious metals," says Jeffrey Christian, managing director of CPM Group, a commodities research firm. "At some point, they will grow less fearsome of the financial, economic and political world around them. At that point, precious metals prices will decline."
That said, Christian says prices will remain high for some time and possibly move higher. But he worries about the large sums of borrowed money used by institutional investors, such as hedge funds, to buy precious metals. If those positions unwind, that could cause a steep decline in prices.
Recent hiccups in the platinum supply have caused prices to spike. Platinum prices surpassed $2,000 an ounce for the first time in February after news of mining disruptions in South Africa because of electric power shortages.
A small breakdown in supply can have major repercussions because it takes ten tons of ore and a five-month process to produce a single ounce of platinum. But Frank Holmes, co-manager of the U.S. Global Investors Gold and Precious Metals fund (symbol USERX), thinks those high platinum prices are temporary and will fall as South Africa quickly resolves its power problems.
The continued weakening of the dollar and signs that inflation is accelerating create an environment in which gold tends to perform well, says Charles Ober, manager of the T. Rowe Price New Era (PRNEX), one of our favorite natural-resources funds. "If you look at the history, gold has been a very dramatically under-performing asset class," Ober says. "You can make the argument that gold has got a lot of room to catch up."
Precious metals are prone to wild price swings. Historically, they have been subject to long cycles of boom and bust. Precious metals reached previous highs in 1980, then plunged and languished at low levels for two decades, with only brief periods of gains.
Don't put more than 5% of your portfolio in precious metals. And forget buying bars, bullion and coins of gold, silver and platinum. Such a setup means you need a safe place to store the metals and to insure your stash.
Exchange-traded funds offer the best way to invest in precious metals. StreetTracks Gold Shares (GLD) and iShares Comex Gold Trust (IAU) trade for about one-tenth the price of gold bullion per share. Because ETFs trade like stocks, it's best to go with StreetTracks, which has 35 times the average trading volume of iShares.
If you want silver, too, buy iShares Silver Trust (SLV). The shares trade for ten times the price of silver. The shares of these ETFs represent a stake in gold or silver bullion held in a vault, so you can skip building your own Fort Knox.
Investing in platinum is trickier. You won't find a platinum ETF on any U.S. stock exchange. However, ETF Securities offers a platinum exchange-traded fund that trades under the symbol PHPT on the London Stock Exchange.
The truly adventurous can buy shares of the two largest platinum producers, Anglo Platinum and Impala Platinum. American depositary receipts of Anglo (AGPPY) and Impala (IMPUY) are quoted on the Pink Sheets.
But the stock appreciation of the producers has lagged the gains from platinum itself. You're better off just sticking with gold and silver than going through the trouble of messing with platinum.
It's best to buy precious-metals stocks and funds and the metals themselves on dips. Christian expects a short, severe dip in prices in early March as metals traders roll forward their futures contracts. He also says precious metals will have a period of relative tranquility from May through August if no major geopolitical event affects supply.
If you already own a stake in precious metals, check your portfolio and lock in some gains. The price run-ups may mean it's time to rebalance. See if your precious metals holdings have strayed from your original allocations by a few percentage points or more. If so, trim your precious-metals positions and deploy the proceeds elsewhere.
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Reader Comments (12)
Posted by: Marcus at 02/24/2008 03:22:47 AM
...wanted to let you know how much I appreciate your writing and overall work. I have been reading your work for a while now and I have learned so much and have forwarded to many associates and friends...All the best and keep up the amazing work.
Posted by: marvin gutlo at 02/24/2008 03:38:28 AM
...I've been putting every $ I don't need to live on into gold and silver since 2003, physical coins and bars, and have beat every conventionally oriented investment adviser...Gold and silver are real money, not the politically managed debt instruments that masquerade as money....Holding physical metals means your investment can't be sold short against your interests, as the etf's can. It means you really know what you have and where it is...So, go ahead, invest in mutual funds and bonds, and watch your purchasing power evaporate to the ravages of inflation, and inflation that cannot be stopped except by default, which means deflation, which means depression.
Posted by: stockmarketimplode at 02/24/2008 03:58:49 AM
Why do you recommend against storing physical gold and silver, but suggest that someone hold IAU and SLV both of which are owned by Barclay's...I just paint my bars and park my house trailer on top of 'em...the FDIC backs my stacks every bit as much as it does your ETFs.
Posted by: Peter at 02/24/2008 09:54:46 AM
I recommend that any reader of this piece also read Jim Rogers' book "Hot Commodities." The periodicity of bull and bear markets in commodities are very long, between 15 and 20 years. If this holds true in the current secular bull market for commodities, then we are barely 1/3 of the way through the current bull market in precious metals. I would allocate far more than the 5% that this author recommends..If you do exceed 5% you have to pay attention on a daily basis, but the rewards are more than worth it.
Posted by: Kevin at 02/24/2008 10:30:36 PM
Plt. is going to $4,000 do not sell you're holding in it, Kevin
Posted by: Gravas Sporkin at 02/25/2008 09:42:21 AM
If PM's have a 'short, severe' dip in March, I will be backing up the truck to buy. Precious metals bull markets have a long life, and we are not even half way through this one. As to the suggestion to limit gold to 5% of your portfolio, I say rubbish. Gold and silver are the only two things you can own that do not have counter-party risk. This is the sad lesson many are learning now as their 401K plans evaporate. It is also good to keep in mind that all fiat currencies return to their intrinsic value, i.e., zero.
Posted by: alex at 02/25/2008 10:06:19 AM
Gold and silver to the mainstream, money printing, purveyors of "faith based currenc"y are the same as the concept of evolution is to fundamentalist Christianity. The gld and slv etf's may be playing games with their reserves (as I read). The big shots do not want you to see Dow and S&P charts which have been normalized to the dollar's value. There will be a ton of fat cats looking for real jobs when the public finally (but too late)realizes that nothing beats owning physical PM's.
Posted by: goldfever at 02/25/2008 03:26:08 PM
Holding dividend paying gold stocks and funds allows the best of both worlds in stocks and precious metal run-ups. Here's the list: ABX, GDX, GG, IIGCX, FSAGX, AUY, and PRPFX. IIGCX, FSAGX and PRPFX are mutual funds that invest in precious metal stocks and issue dividends and capital gains semi-annually. GDX, a gold ETF with a mutual fund counterpart, IIGCX, pays dividends semi-annually. PRPFX and IIGCX invest a percentage of fund assets in gold and silver. GG pays monthly dividends; AUY pays dividends quarterly.
Posted by: Knaug60 at 02/25/2008 03:46:26 PM
To hear some people talk, I might note that tulip bulbs are a real asset. Gold and precious metals may continue to go up for a period of time, but I would NEVER put all my eggs in any basket. I have 5% in a gold fund, and I am fine with that. But I don't want to beat the pants off the market at the possible risk of having to retire during a gold bear market. I'm the most boring guy at the party. 30% bonds, 5% gold, 5% cash (including Euro, Aussie $$, Peso and such), 45% US stocks, and 15% international stocks. Year in and year out somebody beats me handily, so why an I so happy?
Posted by: Jerry Stockdale at 02/25/2008 09:30:19 PM
If you factor in the price of gold and silver in 1980.....when Gold hit $800 and silver $50......using a 2007 dollar value......the price of gold would be $2200 and silver well over $100.
Posted by: Justin Case at 02/27/2008 08:08:20 PM
Gold is real money and can't be printed up instantly like every paper IOU all governments now issue. In all the history of mankind, all paper money not backed by gold and silver went to zero in value....Banks and the super rich keep plenty of gold and for good reason. They too know what a paper promise is really worth. It isn't that gold is going up in price, so much as it's the paper avalanche of printed money that is quickly losing value due to bad government and bank policies...Gold and silver will probably not go down significantly until governments quit printing up money to spend. That's not going to happen until crisis forces it.
Posted by: anti-citigroup at 03/14/2008 06:03:42 PM
...it does not matter if a company mines gold. So what, it is the same deal with stocks, it does not matter anymore how the company is doing. You can’t go by earnings per share, or by their asset holdings, or the company profile...Own gold, gold, gold, and more gold. Trade all your paper assets for gold. Buy hard assets, land, anything tangible that can’t be manipulated. cash is king. keep the cash patiently waiting for a dip in the price of gold. use that money to pay off little bills you were going to pay anyway. if you are in Texas or Florida, pay off your house and don't every get a home equity loan. if worse comes to worse you keep your house.