Despite last week's sudden pullback in the price of gold, most financial advisers and market watchers aren't ready to abandon the precious metal just yet.
“We think there's still potential for good upside in the price of gold, especially if there's more bad news out of Europe,” said David Carter, chief investment officer at Lenox Advisors Inc., which has $1.5 billion under management.
Gold topped $1,917 an ounce Tuesday, representing a two-week rally of more than 16%, but the commodity had fallen by more than 9% by Thursday morning. At the close of trading Friday, gold was priced at $1,821.90 an ounce, down 2%for the week.
Mr. Carter said he stopped buying gold exposure for his clients during the spring when it reached the $1,200 mark, but he is not selling now.
“We know it's a very volatile asset class, and we're still letting it run,” he said.
In a move to dampen volatility, CME Group Inc., the primary gold futures exchange, announced last Wednesday that it had raised margin requirements by 27%, making it more costly for speculators to trade in their margin accounts.
UNCERTAINTY
Much of the rally in gold, which has gained nearly 60% from the start of the year, has been attributed to the growing uncertainty surrounding global sovereign debt and the corresponding devaluation of currencies.
Since those macro issues have not been resolved, the case for gold remains strong, according to Nick Barisheff, president and chief executive of Bullion Management Group Inc., a global gold bullion dealer that also has $670 million under management in precious-metals funds.
“To believe gold is in a bubble is to believe there has been a meaningful resolution to global sovereign-debt issues,” he said. “When investors lose faith in monetary management, there's no place else to go but gold, silver and platinum.”
Ted Wright, director of portfolio management at Genworth Financial Asset Management Inc., concurred. The fundamentals for high gold prices are in place and have been so for a long time, he said.
INFLATION GOOD FOR GOLD
“We think easy-money policies will fuel inflation, and that's good for gold,” Mr. Wright said. “As far as how high the price of gold could go, well, that's a question I've been asking myself since it was at $400 an ounce.”
While analysts and pundits have questioned the upside limits of the price of gold over the past several months, the abrupt pullback in the precious metal has introduced a new line of second guessing.
“We think gold got very, very overbought and we don't think the correction is over,” said Leo Larkin, an equity metals analyst at Standard & Poor's Equity Research Services.
Mr. Larkin said S&P's technical analysis has gold priced in the $1,450 to $1,550 range “in the coming months.”
“Long-term, we're still bullish, but short-term, it has gotten frothy,” he added.
Concerns over the spiking price have led some advisers to trim exposure in client portfolios.
“Over the past few months, we've actually been reducing some positions as we've seen prices go up and up,” said Clinton Struthers, owner of Struthers Financial Services, a $100 million advisory firm.
“I seriously question how much more upside there can be at this point, and I do worry about a bubble in that sector,” he added.
But like S&P's outlook, some advisers are telling clients to embrace the volatility or avoid gold altogether.
“Gold is in a primary bull market, and if you own it, you need to be able to tolerate the pending 20% to 30% decline, but if you don't own it, then one would wait for the same event to potentially buy,” said Sam Jones, president of All Season Financial Advisors Inc., which manages $110 million.
“Generally, gold and silver are too volatile for most investors to own in any size for long periods of time and through the natural declines,” he added. “They would like to think they can handle it, but I know they cannot.”
Even as Mr. Jones sees gold in a bull market cycle, he has identified technical indicators suggesting that “the train of pain is coming for lots of gold bugs.”
By his analysis, gold could fall another 5% to the $1,650 range as part of the current pullback. That price range would still leave the price of gold up more than 49% from the start of the year.
DOMESTIC ETF INFLOWS
According to Morningstar Inc., domestic exchange-traded funds investing in precious metals had net inflows of $257 million in July, preceded by $314 million in June, $21 million in May and $500 million in April.
Domestic mutual funds investing in precious metals saw net inflows of $130 million in July, preceded by three months of net outflows totaling more than $870 million. Mr. Barisheff believes that individual investors are only superficially allocating to gold at this point, and that much of the price rally can be linked to global sovereign-debt issues.
“Gold has been rising equally in all currencies, which means currencies are declining in value rather than gold rising in value,” he said.
Of the estimated $3 trillion worth of “above the ground” mined gold, Mr. Barisheff said, half is held by the world's central banks, and most of the remaining $1.5 trillion is held by the world's wealthiest families.
Gold's volatility, he added, can be attributed to the fact it is a thin market relative to the $200 trillion worth of global financial assets, including paper assets such as stocks, bonds and mortgages.
“I would say that about 1% of people's portfolios are currently held in gold,” he said. “The public is not yet in, so most of this recent decline is just hedge funds and professional traders taking some profits.”
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