Gold, cash seen benefiting from wrangling in D.C.

Nov 11, 2012 @ 12:01 am

With the U.S. elections fading from view, the market has rightfully turned its focus toward the fiscal cliff, which means there will be some tax-avoidance selling and larger allocations to cash and gold as investors wait for Washington to sort things out.

Financial advisers should be mindful of the fact that not all gold strategies are created equal.

As market watchers and political pundits begin speculating on how much, if any, work gets done on the fiscal cliff before the end of the year, a case is being made for conservative investments during this lame-duck period.


“It seems to me, the one beneficiary at this point is gold,” said Adrian Day, president of Adrian Day Asset Management.

Now that the presidential election has been settled, he and other market watchers assume that the Federal Reserve will keep in place Chairman Ben S. Bernanke's monetary policy to keep interest rates near zero until at least 2015.

“Low rates are always good for gold,” Mr. Day said.

Gold also tends to hold up well as a hedge against a weaker dollar, which he thinks is a likely result of “protracted Washington wrangling.”

And let's not forget Europe, where more support from the European Central Bank to help Greece and Spain maintain some semblance of solvency also represents a boost for gold.

Jeffrey Kleintop, chief market strategist at LPL Financial LLC, has been adjusting investor portfolios to hold between 10% and 15% in gold, and the same amount in cash.

“The time to re-engage the market is when we get close to a deal [on the fiscal cliff], and we think a deal could come during the lame-duck session,” he said.

Of course, for gold to be attractive, a lot of bad events and factors have to be in place.

“That's the role of gold, because it is a crisis hedge,” Mr. Day said. “So be careful what you wish for.”

However, if gold is the play, one still needs to consider the smartest course of action.

For a lot of investors, the go-to move has been the $75 billion SPDR Gold Shares ETF (GLD).

The popular exchange-traded fund owns the underlying commodity, making it a solid proxy for gold bullion.

But in seeking ways to allocate to gold, advisers and investors should be wary of the gold-mining companies, which on average are trading at historic lows relative to bullion, even though some stocks have experienced tremendous rallies.

Shares of Yamaha Gold Inc. (AUY), for example, have gained more than 38% from the start of the year, and Agnico-Eagle Mines (AEM) has spiked more than 55%.

That compares with a gain of 9.5% for GLD and 13% for the S&P 500 over the same period.

“Right now, I would buy the gold itself over the mining stocks,” Mr. Day said. “The reason is, the gold stocks have had the big run and mining is incredibly difficult, and companies can make huge missteps.”

Strong performance not withstanding, gold-mining operations also are considered more vulnerable during periods when investors become more risk-averse.


For examples of how events can turn in the mining space, look at the recent travails of Barrick Gold Corp. (ABX), down almost 19% from the start of the year, and Newmont Mining Corp. (NEM), down 17%.

One other strategy in the gold category that could make sense for some investors is to buy companies that own royalty interests in development projects that explore for precious metals.

Franco-Nevada Corp. (FNV) and Royal Gold Inc. (RGLD) are shining examples of the potential of royalty companies.

Franco-Nevada shares, which have gained an average of 28% over the past four years, are up more than 56% this year.

Royal Gold shares, which have been slightly more volatile, with an average gain of 25% over the past four years, are up more than 31% since the start of the year.

The downside of royalty stocks is that they aren't cheap, and the risk is that they don't have any control over the actual exploration and production projects that they are financing.

“If the mines produce the gold, the royalty company gets its money,” Mr. Day said. “It doesn't matter if it produces at a gain or a loss, and if taxes go up, that doesn't matter either.” Twitter: @jeff_benjamin


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