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Fool’s Gold

(Tim’s note: I am pleased to kick off the new Bizzy Life with Ray Link’s first column on buying gold. A little about Ray…

Ray Link has been a frequent contributor to The Bizzy Life for the last couple years, rendering sane financial advice during insane financial times. He tempers The Bizzy Life’s frequent liberal lefty leanings with a compassionate, mostly Republican perspective, which means he likes low taxes, reasonably low levels of government intervention, is unreasonably wistful about life in the 50’s and 60’s, but he also likes to drive on good freeways, and he’s not too keen on invading other countries.

The Bizzy Life particularly loves self-made men, and Ray fits that profile. From his humble beginnings in Buffalo, NY where he and his friends hunted rats in the garbage dump next to his house, Ray has gone onto complete his MBA from Wharton, complete his CPA, been elected to political office in the scary political morass called Florida, and more recently travels the globe as CFO of a publically-traded technology company.

He now serves as Executive VP and CFO of FEI Company (FEI is a global manufacturer of tools for nanotechnology with annual revenues of approximately $600 million and over 1,800 employees worldwide). Before joining FEI, Ray was the CFO at TriQuint Semiconductor and has been gainfully employed as a CFO of large companies for over 23 years. So, he knows a lot about money.

He is also a bit of a car nut with a particular penchant towards Porsches. He is married to Jill Taylor a former advertising executive, has two grown sons and lives in Portland, Oregon and vacations in Santa Barbara, California.)

We have recently seen a nice upward movement in the overall markets but the asset class that has risen the most gives me the greatest concern. Gold has just passed $1,300 per troy ounce and is at its all-time high. Investors are flocking to this “safe haven” in droves and the growth of gold ETFs (exchange traded funds) and gold mutual funds should trigger caution to investors.

Gold for millennium has been the investment of choice and the place to go when all else fails. Why is that? Gold pays no dividend, has no inherent earnings growth prospect, and only about 20% is consumed in manufacturing (the balance is either stored by governments and individuals or used in jewelry). It continues to be mined at an ever-increasing rate adding to the supply. It is expensive to buy and sell and difficult to store if owned outright. It only goes up in value because someone else thinks it will go up. And up it has moved, from $800 per ounce 3 years ago to $1,300 now up about 30% over the past 12 months. Yes people in India love gold and yes that population is getting wealthier so there is some pent-up demand. And yes there is a real concern that the Fed will flood the market by printing more money de-valuing the dollar pushing up the price of commodities. But the real reason gold has gone up so much is the insatiable demand and the proliferation of gold mutual funds, ETFs and dealers hawking its virtues. There’s at least 25 gold ETFs and well over 50 gold mutual funds, all chasing the same thing. What is particularly disturbing is that some funds don’t even own the bullion but rather invest in futures contracts, essentially a bet that the price will continue to rise, or use leverage, or buy stocks of gold mining companies. To me this makes the so called CMO investments that crashed and burned in late 2008 seem like treasury bills. As investors see the price of gold going up they want a piece of the action and Wall Street has accommodated by creating more funds. These funds must buy gold or worse, futures in equal amounts as investors send money their way. The rationale is that gold is a safe harbor and a hedge against inflation. Well we seemed to have weathered the financial crisis and inflation is near zero so what is going to happen when people stop thinking of gold as a great investment? It will plummet faster than the stock market did 2 years ago as all of these funds unwind their positions to meet redemptions. Remember that gold was over $1,000 in 1980 and dropped to under $500 in less than 2 years and continued to fall to $250 by 1998, and that was before we had all of these virtual ways to invest.

Congratulations to those of you who mined some big gains on gold but take your gains now and be happy. I view the current fever over gold as the “greater fool theory” and caution anyone with gold in their portfolios or thinking about investing in gold to do a lot of homework and to understand the severe risks.

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One Response to Fool’s Gold

  1. And how in that case it is necessary to act?

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