Money Week: Gold is a Bargain

Article by Marina Gerner on Money Week

Gold has a bad reputation among some investors. It yields nothing, and in the words of Warren Buffett, it just “looks at you”. It has certainly fallen out of favour this year. The price has fallen by 11.2% since 22 January to just under $1,200 an ounce – that’s more than 35% below its peak of $1,900 in 2011.

As a result, however, gold looks “inexpensive”. This may prove a good time to top up your holdings in this out-of-favour asset class. Investors should hold 5%-10% of their portfolio in gold.

Hedge against higher prices

For one thing, inflation is beginning to pick up around the world. The yellow metal has served as hedge against inflation, eroding the value of stocks and bonds. “Gold was $20.67 an ounce 100 years ago and that bought a good men’s suit,” as Bary points out. “At $1,200 an ounce, the same is true today.”

It has also done well in times of crisis – used as a safe haven for centuries, it’s an asset that tends to thrive on bad news. Gold rallied by 17% in the six months after Lehman Brothers collapsed – a time period when the S&P 500 fell by more than 40%.

Gold is rare – all the gold mined in the world would fit into two Olympic-sized swimming pools – and that makes it valuable. Annual new mined supply adds less than 2% to the global total, so it’s not easy to boost supplies of gold quickly.

With paper money, on the other hand, the printing presses can produce more in minutes. That’s why “people have historically viewed [gold] as a hedge against government depreciation of local currency”, Keith Trauner of the GoodHaven fund management group told Barron’s.

Prices are set to rise as labor markets tighten, and central banks are poor at containing inflation. There are also still plenty of investors scarred by the 1970s, which bodes well for demand. Time to stock up!

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