Posts Tagged ‘gold’
One sector is the loneliest number when it comes to investing
Will all the gold that glitters glitter less?
My last post, One stock is the loneliest number when it comes to investing, made the case for why you shouldn’t own one stock as an investor. Diversification is an important part of your investment planning.
Similarly, today’s activity in the gold market, and really, the last few years, has demonstrated why single sectors present significant dangers to investors who overweight them.
Gold is having a massive down day. It’s dropped nearly 10 per cent as of this writing — in one day — the most since the early 1980s.
The writing was on the wall a long time ago. In Gold riot, I discussed why gold had much risk built into it for investors, especially when few were talking about this risk.
Here’s a quote from Warren Buffett as posted on my blog from a few years ago:
Buffet on gold:
“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Ah, the Ziggy Stardust gold analysis …
In Fortune, Buffett recently said:
“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States,” Buffett said. “Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
A very, very interesting illustration …
Anyone who paid attention to the wisdom above, to the valuations that Buffett drew attention to, would have known that there was huge risk in gold.
Forget all the reasons you’ve heard over the last few years for why gold was a great buy. History has proven that reasoning wrong.
The movement of gold as reflected by the SPDR GOLD TRUST (GLD)
As in many things, now that the stratospheric valuation in gold has been beaten down badly, gold is cheaper (down almost 18 per cent year-over-year). What the future holds is unknown. But what hasn’t changed is the following:
- Single sectors expose you to great risk if you haven’t built a well-diversified portfolio
- “Hot money” moves fast and takes few prisoners when it leaves a sector
Gold may be much cheaper now than it was a few years ago, but gold is only a compelling buy if the future shows it to have been cheap. Meanwhile, are there other companies out there that are actively engaged in producing goods or services that will have a better chance of creating value in the future?
By way of comparison, from gold’s peak a few years ago, the returns on dividend-payers in the U.S., Canada and globally look spectacular. The “fear trade” (buying gold) has been a poor investment.
Markets will correct. It’s inevitable. You can do your part protecting yourself by making sure you have a diversified portfolio.
Do you?
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Related articles
- One stock is the loneliest number when it comes to investing (johnrondina.wordpress.com)
- Hedge Fund Billionaires John Paulson And David Einhorn Lost $640M In Gold Market Collapse
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Flash in the pan or long-lasting hedge? Buffett speaks out on gold, again
Will all the gold that glitters glitter less?
Warren Buffett tossed some nuggets of wisdown into the stream again.
In “Gold Riot”, I discussed gold bullion, gold stocks and Buffett’s opinion on the metal.
Despite gold’s excellent performance of the last ten years, it’s been one heck of a ride. Soaring and then plummeting, gold has shown investors that when it corrects, it corrects with a vengeance.
Buffett sees gold as an unproductive asset. He believes stocks are the more “productive” assets and will “prove to be the runaway winner” trumping bonds or gold over an “extended period of time”.
He also says stocks will be “by far the safest” of assets.
Bonds, says Buffett, need a “warning label”. He believes they’ll fall victim to inflation and taxes.
Risk is a slippery slope. While many investors don’t realize it, so-called “safe” investments like GICs or U.S. Treasuries have risks, too. At the moment, Buffett sees bonds (including other currency-based assets) as “dangerous”.
Still, portfolios need some bonds depending on the investor’s risk tolerance. Buffett’s company, Berkshire Hathaway, holds bonds for liquidity issues.
Investors who have been heavy in bonds have had a great year, but such returns may be harder to come by in the future.
Buffett says:
… owners [of gold] are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future … bubbles blown large enough eventually pop.
To see Buffett’s interesting metaphor on gold, see my blog from last December, “Gold Riot”. Famously, Buffett compared gold to stocks and farmland.
Fondling the cube
Buffett again emphasizes his position on gold:
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
If you didn’t check the link above, do it now for a more complete picture of Buffett’s philosophy.
Buffett highlighted the mania in gold near it’s peak. Gold has recovered since it dropped, but Buffett’s still not a big fan.
In “Gold Riot”, I pointed out, agreeing with Buffett, that it would be wise to be cautious.
The new boss different from the old boss?
Buffett called the tech bubble early over ten years ago. Many made light of his opinion then, saying the “new economy” no longer needed to play by the old rules.
But the “new bosses” turned out to be wrong and the “old boss” turned out to be right.
Hype and speculation eventually led to a blow out. Buffett was early, but he was right.
With respect to gold, if an investor interested in gold had held off during its spike last year and waited for the correction, they would have:
- Had a great buying opportunity
and/or
- Avoided a big downturn
Gold has its place in a portfolio, but there are some great points to remember about investing in bullion or gold stocks.
As with any other investment – perhaps even more because of its volatility – hype and value are part of the equation.
Gold will play its part in the next few years, but do investors understand the risks associated with investing in gold?
See Buffett’s article in Fortune
Sprott diversifies:
Click here for more about bonds and fixed income investments
Click below for more about asset allocation and reallocation strategies:
A simple way to arrive at the right asset allocation for your portfolio
Plan like a pension fund manager when it comes to your investment portfolio
Don’t panic
In the face of the typhoon (market correction), bend like bamboo
What is it about market corrections? Wise, rational people can become wide-eyed pessimists and conduits of fear in the face of steep market drops. Can you remember a time when you sold investments during a market correction and it turned out to be a wise move?
Investors ruled by a forest fire of emotions, fanned by the media looking to report the latest, most sensational story, rarely make wise decisions. Often, when the market is hitting new record after new record, they’re buying. But when the market turns the other way, and suddenly high quality companies are on sale and can be bought at excellent discounts, emotion-ridden investors are running for the hills or putting their heads in the sand.
Here are some facts that you’d do well to pay attention to. The study tells the sad tale of how investors, suffering from a bad dose of “Oh, no! The world’s going to end!”, make some classic mistakes while investing. In fact, what may be the most important aspect of your investment plan, after asset allocation, is dealing with the forces of rampant negativity that rear their ugly heads every time there’s a market correction.
Glued to the media, wide-eyed and beset with your worst fears for the economic future? It’s time to go for a walk. Fund managers wait for corrections to go out bargain hunting. Wouldn’t you be happy if the suit or new pair of shoes you wanted to buy were now on sale? Because that’s exactly what’s going on now: high quality, dividend-paying companies are on sale.
Investors need to do themselves a favour:
- Develop a thicker skin
- Stop dwelling on the investment media during corrections
- Stop chasing investment returns
- Ask yourself: since everybody’s talking about gold bullion (or whatever the flavour of the month is) right now, do I really want to buy it?
- Get a sound investment plan
- Stick to your plan
- Buy or sell investments when your asset allocation veers away from your planned allocation, and do it regularly
- Remind yourself that great, stable companies are not going to disappear
Further considerations that you should bear in mind:
- Remind yourself that Warren Buffett (and other smart money managers) are looking for bargains rather than making rash, panic-fuelled decisions
- Aren’t all the companies you wanted to buy when they were more expensive, cheaper now?
- The economy’s gone through corrections dozens of times before – this won’t be the last time (e.g., Latin American bonds, the Asian Crisis, the Tech bubble, 9/11, [Remember when people were talking about the Canadian peso?], the financial crisis, etc.)
- If you’re buying in the midst of this correction, or any, remember, you don’t need to throw all your money in at one time – you can also buy gradually, giving you a cushion and better prices should the market go down further
- There’s a place in your portfolio for bonds – do you have any?
- Revisit your plan yearly
If you’re still spooked after a hard, meditative look at your investments, maybe your asset allocation is too aggressive. Should you reduce your equity holdings somewhat? Reducing stock holdings amidst any correction is tricky. You’re probably going to be selling at the worst of possible times – maybe you should revisit your asset allocation model when things calm down a bit? (Have I mentioned stick with your plan and re-evaluate your plan regularly?)
The time for strategic thinking is before a correction and during one. When it seems that investment losses are falling out of the sky, too many investors forget their planning. Many have heard Warren Buffett’s “Be greedy when others are fearful” philosophy – slowing down and taking a breath during the bad news feeding frenzy will help give you some perspective on where you’ve been, where you’re at now and where you want to be.
Gold riot
Warren Buffett’s thoughts on gold or how looking at the return on gold might reduce the glitter
The riot over gold has calmed down a little, however, there is still significant interest in the metal. An interesting perspective on gold comes by way of value investor par excellence, Warren Buffet.
Will all the gold that glitters glitter less?
There is no denying gold has had a great run. What people forget when gold performs spectacularly is that it has often caused investors an enormous amount of pain as well. Gold is volatile. It soars, but it has also come down very hard throughout its history – part of the reason that most recommendations limit gold to about 5 per cent of a portfolio (in order to smooth out volatility).
Gold has performed very well this year and over the last few. The S&P/TSX Global Gold Index has doubled the S&P/TSX 60 this year. But gold’s performance comes with a lot more volatility. The fact that gold is such a big sector within the Canadian stock market has been advantageous this year. Gold often kept the Canadian market buoyant when other stocks turned downward. It acted as kind of a built in hedge. However, should gold turn south in a significant way, it will also hold the Canadian market back because of its large weighting. In fact, by just holding an index fund or ETF tracking the S&P/TSX 60, you have about 20 per cent exposure to the materials sector, and, a large portion of that is in gold. The broad Canadian market has a lot of gold exposure already.
Unfortunately, gold is on everyone’s tongue lately.
But what does Buffett say about gold?
Gold just sits there
Buffet has become wealthy by being a value investor. He believes in goods and services and buying the undervalued companies that deal in them.
If you don’t listen to Warren Buffett at some level, you’re odd. Whether pundits agree with him or not, his opinion is focused on and respected. Buffett says there is no place for gold in his portfolio – intriguing, because, unlike Canadian investors who have seen appreciation in their currency, Americans have been dealing with a declining dollar, resulting in the rush to gold as a hedge against devaluation. Throw in the troubles in the world economy, the devaluation of the Euro, etcetera, etcetera, and the rush to gold isn’t exactly surprising.
Buffett’s logic on the metal is definitely interesting. He thinks gold is useless.
That’s right. Useless.
Buffet on gold:
“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Ah, the Ziggy Stardust gold analysis …
In Fortune, Buffett recently said:
“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States,” Buffett said. “Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
A very, very interesting illustration …
Buffett has stayed consistent with his messaging on gold.
- Expensive to store
- Has no practical use
- Doesn’t generate income
Of course, some of the large players that mine gold do generate income, but Buffet’s talking more about buying the metal itself.
The S&P/TSX Gold Index has done very well in the last ten years. It has returned about four times the S&P/TSX 60. However, during the dog days of the financial crisis, it collapsed along with everything else, and that collapse wiped out all gains since about 2002. Gold has recovered spectacularly since then though not without some equally spectacular volatility. Without a doubt, placing a big bet on gold increases risk immensely. If you’re looking to steer away from volatility, putting more than 5% of your portfolio into gold could leave you with a nasty surprise.
Gold stocks, because of their leveraged positions with respect to gold perform even better than the metal, generally, yet that outperformance goes the other way in a hurry at times. So, gold stocks can be a great hedge, but they also have some explosive volatility built into them – volatility which can go either way faster than most people can monitor.
The big question is which way will gold go in the near future? And, how much has the risk premium for holding gold increased?
For Canadian investors, this question doesn’t hinge on a declining currency. Our market has a huge piece of gold already. If you own the broad market, you’re already exposed to gold. That can be a good thing or a bad thing. In the last ten years, it’s been a great thing, but all good things come to an end. Are we closer to the end of gold’s aggressive increases or is there still room to shine?
For the average Canadian investor, if you just own the broad market you have exposure to gold and its advantages. At the same time, should gold have a significant correction, you’ll feel it.
Buffett’s comments on holding gold bullion (even though it’s easier to do with ETFs now) bear some thought. Expensive to store. No practical use. No income.
Looking for value makes one a big fan of dividend-paying investments. Canadians already have exposure to gold. Would you take a flyer on gold at these prices? Such an idea may have lost its sheen.
If you are a trader, that’s one thing, but if you are an investor, polishing gold may leave less of a glimmer lately.
Now, if there were a significant correction in gold, that would change things, but right now gold looks like its bumping its head on a ceiling. Whether that will be temporary or longer lasting depends on many different interconnected moving parts within the economy.
The questions it’s prudent to ask yourself with every investment are:
- Am I likely to get the same return on my investment next year?
- Will I get even half of that return?
- Am I using sensible portfolio approaches regarding the construction of my investment portfolio?
A portfolio of gold stocks I was looking at recently has returned over 70 per cent year-over-year. The broad market has returned less than a third of that. Over 50 per cent of that return has come in the last six months. Recently, this portfolio has pulled back 6 per cent – and it is a broad portfolio that has increased over 800 per cent over the last ten years.
Is it cheap? Does a correction of 6 per cent add much value? …
Not exactly a huge pullback.
Every Canadian investor who holds the broad market holds gold. Loading up on gold may not be the best of all portfolio moves. At this point in time, Canadian investors find themselves in a different situation compared to their American counterparts.
The gold rush may not be over but there certainly are a lot of people panning in the stream.
For an update on gold stocks, gold bullion and dividend-paying stocks click here.
JohnBlog 