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Investing

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.

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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.

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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.

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.

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