What Glitters Isn’t Always Gold

Gold fever seems to be on the decline as the precious metal fell $90 an ounce in just two days after the commodity reached a high of $1,226 an ounce in early December.  The lion’s share of the blame for the decline was placed on newbie investors, who got skittish in their belief that gold is an investment safety net.  Gold isn’t down and out yet.  According to Goldman Sachs’ precious metals group, if the Federal Reserve keeps interest rates at current low levels, the price of an ounce could climb as high as $1,350 next year.

Dennis Gartman, a trader and publisher of the Gartman Letter investment newsletter, said “Too many naïve investors got involved in gold.  They must be taken out and given a good caning.”  Professional investors are likely to stay away from gold for a while, a move that will “inflict pain on the people who came late to the market” in coming months.

A somewhat different viewpoint is offered by Jim Paulsen, chief investment strategist with Wells Capital Management, who believes that the tumult makes it unclear why gold prices are acting erratically.  “Gold has been the answer to inflation; gold has been the answer to disinflation; gold has been the answer to too much debt and to the China bubble.  But I have never known an asset that was the answer to everything,” Paulsen said.  He believes that gold is currently overpriced and vulnerable to fluctuations.

Ibbotson Associates notes that someone who invested in gold in 1980 would have seen an average annual yield of 2.6 percent.  As attractive as gold looks now, compare that with stocks which averaged an 11.2 percent return despite last year’s slump.