Gold’s big rise has lead to many heated debates on where gold prices are headed in the future. Some proponents are predicting that gold will hit $2000 or higher, and others are warning that the current run up is a bubble waiting to burst. While gold proponents point to gold and other commodities as a strong hedge against inflation, a means for investors to diversify their portfolios and achieve excess returns, a comprehensive academic study demonstrates that the addition of commodities — like gold — in the long run do not provide excess returns, improve diversification or provide an effective hedge against inflation. For more on this, see the following article from Commodity Online.
There have been lots of heated arguments and exchanges of words between eminent global investors, economists and analysts on the skyrocketing price of the hottest commodity in the world–gold.
The big rise in gold price from $800 an ounce in January 2009 to $1,227 an ounce in November 2009 has been the center of bullion discussions all these days. Gold bugs have been hailing the whopping gold price boom, saying that the precious yellow metal is set to break many records by hitting $2,000, $3,000 and $5,000 in the coming years.
Amidst this gold price rise frenzy, central banks across the world have been feverishly trying to amass gold reserves to replace the value-decreasing US bonds and dollar that several countries have so far been holding as foreign exchange reserves. India’s central bank—the Reserve Bank of India (RBI)—bought 200 tonnes of gold from the International Monetary Fund (IMF) in November, 2009, adding to the frenzy in bullion market.
This unprecedented gold price boom has led to a heated exchange of words between the proponents and opponents of gold who bet and beg to differ on the yellow metal as money, currency and investment asset. Those who continue to support the boom in gold price include leading global commodities and bullion investors like Jim Rogers and Jim Sinclair. They say gold price is zooming thanks to solid fundamentals in the commodities and stock market, and the yellow metal will hit $2,000 per ounce.
The main opponent to the gold price boom has been global economist Nouriel Roubini, who has been arguing that gold is sitting on a bubble as commodities fundamentals do not support gold going above $1,000 per ounce. Roubini ridiculed Jim Rogers’ prediction that gold price will boom to $2,000 per ounce saying Rogers has frightened the bullion market with “utter nonsense.” Jim Rogers retaliated by slamming Roubini saying that the latter does not know the basic fundamentals of the gold and commodities market.
As these arguments and counter-arguments continue, I happened to read an interesting article on gold by an eminent fund advisor and investor–Daniel Solin. Solin is a Senior Vice-President of Index Funds Advisors and the author of noted books like The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read.
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Solin says he is gripped by the big rise in gold price. It looks Solin agrees with Roubini, not with Jim Rogers in the gold price forecast game. In the following article, Solin hints that gold price has a bubble like symptom these days and the hottest commodity may be an asset only for fools!
Read Solin’s fine arguments here:
“I am fascinated by the hype about gold. Is this the right time to buy? Before you jump on the gold bandwagon, consider these facts.
Investors tend to buy and sell at the wrong times, driven by emotion and incompetent advice from their “financial professionals.” Burton Malkiel, the author of A Random Walk Down Wall Street, recently noted in an article in the Journal of Indexes that more money entered the market at the height of the internet bubble in late 1999 and early 2000 than had even done so ever before. More money left the market before the recovery in 2002. This pattern repeated itself in 2008 and 2009.
Malkiel also made the surprising observation that institutional investors fall into the same pattern. Their market timing skills are no better than those of amateur investors.
This information should give you pause about timing your entry into the gold sweepstakes. And there are other reasons to be cautious.
The big selling points for gold and other commodities is that they offer excess returns, increase diversification and are a great hedge against inflation. Sounds good. Unfortunately, the reality contradicts the hype.
A comprehensive study (still behind a subscriber wall) published in 2004 titled Commodity Futures in Portfolios by Truman A. Clark, former professor of finance at the University of Southern California, concluded:
1. The addition of commodities to a portfolio did not provide returns in excess of the Treasury bill return;
2. The addition of commodities to a portfolio did not improve diversification for stock and bond portfolios; and
3. “Commodity futures do not appear to be effective inflation hedges for stock and bond portfolios.”
Clark concluded: “The evidence indicates that the purported benefits of commodity futures are exaggerated.”
At a recent conference, Vanguard Group founder John Bogle set forth his views on this subjectwith typical candor: “I for one, have no conviction that commodities belong in anybody’s portfolio, at any time, under any circumstances. Did I make that clear?”
I am not suggesting that you can’t make money speculating in gold or other commodities. You can do so by buying low and selling high. If that’s your plan, remember there’s no evidence that anyone has market-timing skill (Glenn Beck included).
If you want to gamble in commodities, and understand the risks, go ahead. However, if you decide to do so, remember that “fool’s gold” can refer to the speculator as well as the commodity.”
This article has been republished from Commodity Online. You can also view this article at Commodity Online, a commodity news and analysis site.