Two sides of the same (gold) coin: Bears vs. bulls

Investors seeing the same set of data but making different bets

Feb 21, 2013 @ 1:03 pm

By Jeff Benjamin

The price of gold will continue to drop like a rock. Why?

“Because that's all it is — a rock,” said Doug Cote, chief market strategist at ING U.S. Investment Management.

Well, technically, gold is a metal. But Mr. Cote's point is clear: Gold's value as a currency or inflation hedge is waning.

A recent dip in the price of the precious metal to around $1,578 per ounce represented a 5% drop from the start of the year, which compares with an 8.7% gain last year.

While the market remains mixed on the near-term outlook for gold, investors and analysts supporting the price decline are following the logic that the overall economic environment is improving and gold is losing its luster as a defensive play.

“The trends have been in place for some time,” Mr. Cote said. “I've been bearish on gold for over a year, because it's a flippin' rock and it's way overpriced.”

The flip side of the “flippin' rock” argument is that the good news investors are embracing is flat-out wrong and an allocation to gold still makes sense.

“This [price decline] could turn around at any minute and we want to be there for the up moves,” said Joe Foster, manager of the $1.1 billion Van Eck International Investors Gold Fund (INIVX).

“Gold thrives on financial risk and we still have so much risk out there in the financial system,” he added. “We could be sitting here in the fourth quarter and looking at higher unemployment and more talk of quantitative easing.”

In fact, Thursday's report of higher-than-expected unemployment claims was credited with boosting the price of gold $2.30 in morning trading to more than $1,580 an ounce.

Essentially, while part of the market sees an improving U.S. economy, reduced sovereign-debt issues in Europe, an improving domestic housing market and some signs of progress coming out of Washington, investors such as Mr. Foster realize that gold remains highly sensitive to macroeconomic influences.

“All the reasons that people think we're returning to normal and don't need gold as a hedge are all the things we're still worried about,” he said. “We still have a high conviction that we're in the midst of an ongoing gold bull market.”

To be fair, that is exactly the sort of argument a portfolio manager such as Mr. Foster has to believe, since his fund is mandated by prospectus to have at least 80% of its assets invested in gold or gold-related vehicles.

Thus when the price of gold is falling, he tends to load up on bullion because it won't decline as much as gold-mining and producing companies.

Then there are advisers such as Roger Pine of Briaud Financial Advisors, who has a 10% allocation to gold and is planning to add more during the price pullback.

“We've been in gold in varying degrees since 2003 and we're seeing this pullback as a buying opportunity,” he said. “Gold is more than just an inflation hedge. It's the one currency that can't be manipulated by the central banks.”

Mr. Pine said his original and primary focus on gold relates to the emerging middle-class populations in places such as India and China.

“We see gold as a way to invest in that new wealth,” he said.

The volatility of the precious metal is part of the deal, he added, citing peak-to-trough periods in 2006 and 2008 when gold prices declined by 23% and 30%, respectively.

“Absolutely, this pullback is a buying opportunity,” he said.

Somewhere between the gold bugs and the gold bears there are also those who recognize gold as a simple hedging tool.

“I don't view gold as an investment because it doesn't pay a dividend or interest and, in fact, it cost you money to own it,” said Rex Macey, chief investment officer at Wilmington Trust Investment Advisors.

“I think of gold as insurance against the loss of value of paper currency,” he said. “But that's about it; it doesn't usually give you more than that.”

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