Is this gold rally for real? Gold bugs have often been burned By Jonathan Chevreau Financial Post, Canada www.NationalPost.com September 14, 2001 Gold bugs must feel a bit like Charlie Brown in the long-running scene where Lucy keeps grabbing the football just as he's about to kick it. Gold is always poised to explode once it gets past US$300, we're told. Then, wham, Lucy grabs the ball and the yellow metal sags back below US$275. In the wake of Tuesday's tragic attacks, gold took a predictable bounce up, with stocks like Barrick Gold Corp. up almost 10 percent. But yesterday, the price of bullion had given back most of those gains. It's the possibility of unforeseeable events like these that created the once popular investment axiom that investors should put 5 to 10 percent of their portfolio in gold or precious metals funds -- not so much as an investment but as disaster insurance. Most investment professionals today view gold as a "barbarous relic." For example, Allen Clarke, chairman of Opus2Direct.com, a fund wrap program, says, "I don't understand why people go to gold during such times. This concept of owning gold is outdated." But even if you believe gold is coming back, you should sort out the difference between holding the actual physical bullion or coins, and gold funds and stocks. In the former case, you actually own something of value; in the latter, just like other stocks and funds, you only own paper claims on the assets. Most gold funds own precious metals stocks, not bullion. If and when gold finally starts to move, an amplifier effect will move gold stocks that much faster, the believers say. If bullion rises 10 percent, for example, the funds owning gold exploration and mining stocks might soar 30 percent or so. Gold funds have been rising most of the year, even before this week. According to Morningstar.ca, topping the one-year numbers with a 36.5 percent return to Aug. 31 is Mackenzie's Universal Precious Metals. The three-year number is just 8.8 percent and the five-year number a loss of 7.6 percent. Most of the bank-owned gold funds are up 13 to 36 percent the past year (TD's being the 36 percent) . Barclay's new iUnits S&P/TSE Canadian Gold exchange-traded fund (XGD/TSE) is too new for a one-year number but is up 3 percent over the last quarter. So the first question to ask yourself and your adviser is whether you're buying a contrarian investment play, or absolute insurance should the financial system be brought to its knees by more terrorist actions. If the latter, you may want to investigate the Millennium Bullion Fund, which may be available in mid-October, pending approval from the Ontario Securities Commission. Managed by Toronto-based Bullion Management Services, the fund will be invested one third in physical gold, one third in silver and one third in platinum, according to president Nick Barisheff. The actual physical precious metals will be delivered if requested. Minimum investments may be about $1,000, he says. Long before the terrorist attacks, Barisheff was personally heavily weighted in precious metals directly and through gold stocks. He was already pessimistic about the U.S. stock market and the U.S. dollar but believes the huge U.S. trade deficit can't continue for much longer without a major flight of foreign capital from the U.S. dollar to gold. If you want to see the arguments for gold, most of them associated with the collapse of the world economy and the U.S. stock market, set your Web browser to www.gold-eagle.com, and find the essays in the editorials section. One of them is the perennial "Gold ready to explode?" piece, which, if I'm not mistaken, has been running for several years now. While there, read the essay "The Golden Age of Paper," by long-time gold dealer Bill Haynes. He points out that after adjusting for inflation, gold and silver are currently trading at near record lows. That means "they hold little downside risk but great upside potential." Given the vested interests at the site, it's hard to assess their conclusions. Oh, I buy some of the arguments about supply and demand, trade deficits, how the Fed is propping up the U.S. stock market (not too well lately), how they keep inflating the money supply and printing fiat currency unbacked by anything but politicians' promises. Real assets like gold are an anathema in such an environment. It may not be true that the Fed, the Bank for International Settlements, and Wall Street investment houses are involved in some widespread conspiracy to suppress bullion's price, as the Gold Anti-Trust Action Committee argues. But with powerful enemies like these, why hitch your wagon to such an ill-fated star? Stephen Gadsden, an Aurora, Ont., financial planner, sees an argument for some gold exposure but warns investors not to go overboard. The better safe haven is cash or bonds. Barisheff and others figure if bullion can break past the US$300 level and then on to US$320, the fireworks will really begin. I'm not yet a gold believer personally but am tempted to move the 5 percent position to a 10 percent one. Lucy, come back and line up the ball one more time. -END- ------------------------ Yahoo! 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