Gold Remains Volatile But Worth Modest Gleam in Portfolio
Andrew Leckey

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The concept "good as gold" is polished to a fine shine from time to time by negative factors such as volatile currencies, weak financial markets, bank failures and instability due to political, economic and financial unrest.

Historically considered a safe haven, gold's performance in recent years has benefitted from all those forms of global financial pestilence:

Gold-oriented mutual funds, which usually invest in gold-mining stocks, have gained 82 percent over the past 12 months and have provided a five-year annualized return of 20 percent, according to Lipper Inc.

The precious metal itself started 2009 at $800 an ounce, ended the year at nearly $1,100 and has been trading above that higher price level in early 2010.

Impressive results explain why this unpredictable investment once mostly associated with wild-eyed doomsayers and slick operators has made its way into the respectable portfolios of trust companies and diversified mutual funds. The Reserve Bank of India gave the precious metal an unexpected boost when it purchased 200 tons of gold from the International Monetary Fund last November.

Despite becoming more mainstream, gold remains volatile and the opinions about its future price often vary markedly among the experts. That's why it should never be considered for more than a modest portion of an individual's portfolio, mostly as a hedge in difficult times.

"By yearend, I think gold will be near $1,300 an ounce," predicted Leo Larkin, equity metals analyst with Standard & Poor's Corp. in New York. "Gold competes against riskless assets such as Treasury bills, which are yielding next to nothing."

There's also concern over currencies, he added, with investors using gold to hedge against fluctuations. While gold's price spikes are unlikely to be as frequent or pronounced as last year, prices will continue higher and investors still have opportunity to make gains, Larkin believes.

"In the first half of this year we're still going to have people wringing their hands about economic chaos and inflation," said Jeffrey Christian, managing director of CPM Group in New York. "So I wouldn't be surprised to see gold spike to $1,300 or $1,400 an ounce."

As the year progresses, Christian expects the signs of economic recovery to become more definitive and investors to relocate their money into stocks and other assets. After it hits its high in the first half of the year, gold is likely to settle back down to the $1,100-an-ounce level where it ended last year, he said.

"Six months from now, gold is likely to be somewhat higher than it is right now because the trend of the last several years has been to move from the lower left of the price charts to the upper right side," said Dennis Gartman, editor and publisher of The Gartman Letter (www.thegartmanletter.com) in Suffolk, Va. "And I want you to know up front that I'm not a 'gold bug' who is into conspiracies or anything of that sort."

The best way to own gold, in Gartman's opinion, is through the exchange-traded fund SPDR Gold Trust (GLD) because it invests in the actual commodity rather than gold-mining stocks.

You're taking on more risk when you own a gold-mining share--unless you own one of the very biggest ones, Gartman said. Among the big companies, he likes Barrick Gold Corp. (ABX) and Newmont Mining Corp. (NEM), two stocks he thinks will perform quite similarly. With the smaller mining companies, it is often difficult to ascertain who's behind them financially and when exploration is going to become production.

"The whole idea of being in gold in the first place is safety and preservation of capital, so to accomplish that an individual investor is far better off buying a fund than buying just one stock," said Larkin. "It is harder to benefit from an investment after it has moved up in price as gold has, but investors who don't have it in their portfolios should still have some exposure to it."

Besides gold coins or an ETF such as SPDR Gold Trust, a good investment choice would be a gold mutual fund such as Tocqueville Gold Fund (TGLDX), capably run since 1998 by lead manager John Hathaway, said Larkin. Hathaway follows the industry closely and writes a lot of commentary about it, he noted.

"Generally speaking, I look to have 5 to 10 percent of an individual's assets in gold, which is a good range," said Christian. "However, I also have some investors who have anywhere from 20 to 40 percent of their assets in gold--which is probably too high."

Gold bars and coins are traditional ways of purchasing gold, though you'll pay more of a premium to buy coins than you will for bars, said Christian, who expects investors to start shifting from gold bullion into gold-mining stocks this year.

The spot price of gold is the price of raw gold coming out of the ground. But prices of gold coins minted by various countries range from 1 percent to 8 percent higher than the spot price due to a supply chain that includes a mint, wholesalers and retailers, with various manufacturing, distribution and administrative costs contributing to the markup. The availability and demand associated with a coin can also influence its price.

Timeless Investment Principles More Valuable Than Stock Picks
Humberto Cruz

Rather than waste your time with useless lists, I'll emphasize timeless investment principles for 2010 and beyond. But I can hear you now. You also want specifics, not just concepts. I'll give you specifics, too.