I don’t take much solace from being right about gold prices last week; it really wasn’t that hard to see coming.
Gold reached a low last week of $1,728.59 and then went on a tear all the way to $1,787.15 before ending the week in the $1,770 range. At this point it’s quite likely gold will continue upward next week, to somewhere near the $1,800 mark. If you need the cash or want to convert some of your gold to durable goods, the next couple weeks will be prime time to make your sales.
This week hedge fund manager John Paulson is taking a victory lap for his gold fund, which he says will outperform other investments over the next five years. I’m a little concerned about agreeing with someone whose funds suffered record losses in 2011.
It does point out why I tend to be less excited about gold ETFs as an investment option for precious metals. With ETFs you’re mixed in with people moving billions of dollars around for their clients and they usually have better information and can pay people a lot of money to keep an eye on their investments. If someone is going to end up holding the bag, it’s not going to be hedge fund managers.
I do have to agree about the five year outlook for gold, but your play should be small, with regular purchases of bullion-priced physical gold instead of ETFs. You’re still subject to the same price gyrations and it will make anyone sad when the gold you bought at $1,800 drops to the mid-$1,500 range. But when that gold is mixed in with the gold you bought at $1,100 in 2010, at $800 in 2009 and $600 in 2007 then it becomes a matter of perspective.
Don’t forget about silver when you’re allocating precious metals purchases. Right now the gold/silver ratio, the number of ounces of silver it takes to buy an ounce of gold stands at 50. That figure is low by historical standards and makes me think silver is due for a technical retreat.
The best part about silver right now is there don’t seem to be any hedge fund managers mucking around in the market. If silver drops below $32 in the near future you might consider diverting some of your hard asset allocation from gold to silver until the hedge fund managers find a reason to roll back into risk on investments.
Like my retired Marine buddy used to say, when the elephants are dancing, don’t cut in. When the John Paulsons of the world are driving up gold prices, like they almost certainly will again next week, then use the opportunity to lay on some silver or convert some of your gold to that new refrigerator you’ve been wanting.
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