New gold bugs are young and restless

A new generation of investors in their 20s and 30s have found gold to be their investment of choice in trying times. Gold has become popular among young investors recently because gold has become an impressive store of wealth to many.

Nov. 11, 2011, 12:01 a.m. EST
By Claudia Assis
MarketWatch

SAN FRANCISCO (MarketWatch) — The allure of gold is thousands of years old, but nowadays the precious metal has a youthful look.

Gold’s spectacular, decade-long run, coupled with the sovereign-debt crisis in Europe, an uncertain outlook for the U.S. dollar, and worries of worldwide recession, has minted a new vein of investors in their 20s and 30s.

The popularity of gold among young investors speaks to the metal’s impressive role as a storer of wealth — and says a great deal about a generation that has seen its share of stock market booms-and-busts, a housing market collapse, and, over the past few weeks, government debt of Greece and Italy trading at yields more akin to junk bonds.

Generation Au

Accordingly, many of these gold buyers have little faith in equities and, unlike older investors, are more inclined to consider alternative investments. Others seek tangible, hard assets as a counterweight to stocks, bonds and cash in the aftermath of the 2008 U.S. financial crisis.

“It was only a matter of time,” said Divnain Malik, head of retail sales at Gold Bullion International, a seller of physical gold in New York. While around half of his clients are baby boomers and more established gold investors, the “younger demographic seems to be catching on.”

Indeed, the 25-to-35 year-old age bracket is the firm’s fastest growing segment of buyers, he said. Over the past two months, about half of the hundreds of new accounts opened at his firm were from people in their 20s and 30s, he noted, adding that younger investors are increasingly sophisticated, do not want to repeat others’ mistakes, and are protective of their investments.

Said Malik: For them, “it’s not about the risk in gold, it’s the risk anywhere else.”

Gold’s strong track record, of course, is clearly a big draw. Gold has enjoyed a string of nominal record highs for the better part of two years, as investors have fretted about currency debasement, potential for inflation, and unbridled government spending.

Recently, though, the deepening of the euro-zone crisis has skewed gold’s generally inverse relationship with stocks, with gold losing some of its allure as a safe haven. Some large investors, pressured by steep tumbles in global equity markets, have sought refuge only in cash.

But gold is still comfortably ahead this year. For example, SPDR Gold Shares GLD +1.26% , an exchange-traded fund that is a proxy for the metal, was up 23% for the year through Nov. 10, according to investment researcher Morningstar Inc.

Wizards of oz

For U.S. investors, there’s a sense with gold of better late than never. Unlike Europeans and Asians, Americans don’t have a long tradition of owning gold.

Yet contrary to stereotype, most U.S. gold investors are not guns-and-bunker renegades, hoarding physical gold to fend off the collapse of civilization. Read more: Gold and bonds are all that's left.

Demographic studies on precious-metals investing done in the 1970s and 1980s actually showed a large percentage of college-educated buyers, with only a small portion owning gold for “doomsday scenarios,” said Jeffrey Christian, managing director of CPM Group in New York.

Studies in the 1990s offered similar findings, he added, and also detected rising participation of women in gold investing, consistent with broader trends of women taking the lead in family investing decisions.

These days, young buyers’ interest in gold is hampered by the metal’s high price, Christian said.Student loans, the financial pressures of a young family and other obligations, leave little money for investing or speculation, he noted. An ounce of gold currently fetches around $1,800.

Yet despite such obstacles, the financial crisis three years ago was severe enough to make the younger generation re-evaluate their investments, Christian said.

Kurt Brouwer, chairman of Brouwer & Janachowski, LLC in Tiburon, Calif., and a contributor to MarketWatch’s Trading Deck commentary, added that he’s noticed greater interest in gold across all age brackets.

“Anytime you have something doing well people get interested in it,” he said. Read more: Gold shares may begin to lead.

With clients who are thinking about gold, Brouwer walks through three main avenues of investing, depending on an investor’s beliefs.

If you want to speculate, a good alternative is to buy one of the several exchange-traded funds backed by gold. It’s easier and more liquid, he said.

Gold mining companies is another alternative, since these stocks “have not soared nearly so much as gold” futures, Brouwer said. Read more: The trouble with gold miner stocks.

For those who believe in gold as an alternative to currencies, then bullion coins could be a long-term holding. Brouwer favors coins over gold bars, and bullion coins over numismatic coins, because it’s easier to determine the value of bullion. Read more: Can gold miners offer a safe haven?

“Those who make the argument that gold has some room to grow could be right,” Brouwer said, particularly considering that most financial institutions have been slow in adding gold- or commodities-oriented funds to their investment offerings. Despite the enthusiasm for gold, he noted, “it has not hit mainstream yet.” Read more: Why gold is a bad investment.

Against that backdrop, here’s how three retail investors have been using gold in their portfolios:

The speculator

“I started being curious about things that had tangible value” during a stint in the real-estate business, said Brendan Miller, 37, a green-energy consultant in Santa Fe, New Mexico. The U.S. has been “printing lots and lots of money” not linked to anything of real value, he added.

“My experience is that we do not have an efficient market,” Miller said. Coming out of college in the late 1990s, he endured the dot.com boom-and-bust only to run headlong into the real estate boom-and-bust.

Meanwhile, he derides stock investing as a never-ending cycle where people chase returns only to create more bubbles, he said.

Miller has set aside some of his investment money, which he likes to call his “risky money pool,” to speculate in gold futures. Although he has held on to some physical gold and silver, “I’m not a buy-and-hold person ... I believe you are going to see a boom and bust in gold too.”

Miller estimated he has multiplied his initial investment in gold futures fourfold since he first started, about six years ago. He began with physical gold and tried options before switching mostly to futures contracts.

As part of an effort to diversify his holdings, he tried his hand at currency trading. “That I lost sleep over,” he said.

With gold he trusts his own basic technical analysis, Miller said. He recently took profits when gold futures neared $1,830 an ounce in mid-September, on its way down from a record $1,891.90 an ounce in August.

Miller bought back into gold at around $1,745 an ounce. Gold futures currently reflect about 5% of his portfolio, which also includes some stocks and retirement savings.

“In inflation-adjusted terms we’re not where (gold) should be,” Miller said. “Gold is likely to go higher.” Some of his friends wish they’d followed his advice earlier, he added. Said Miller: “Obviously my credibility has increased over time.”

The physical gold buyer

For Rich Wilson, 32, an account manager at an energy firm in Louisville, Ky., gold is about confidence.

His first stock investment was in a mining company; an uncle bought the shares for him when he was born, he said. After college, Wilson become more involved with gold. He and his wife wanted something that would not lose value or evaporate in an instant.

“We want to make sure we have assets to leave behind,” Wilson said. “With one son and another on the way, we want to be able to help them out in later stages in their lives.”

So Wilson has bought physical gold. “I am not expecting a return necessarily,” he said, “but preservation of wealth.”

Before 2008 and the height of the financial crisis, less than 10% of his portfolio was in gold-backed exchange-traded funds and mining stocks.

He then switched to physical gold out of fear of losing purchasing power. “I wanted a hedge in my own portfolio,” he said. Physical gold makes up about a quarter of his assets.

The trader

The financial crisis also put Ryan Prinz firmly on the path of gold ownership, although eventually he fell out of love with the metal.

Prinz, 24, works at a small startup company in Chicago and was a finance major in college. He became intrigued with gold for its proven ability to protect against inflation and hyperinflation.

Even though he doesn’t necessarily believe the global economy is on such a dangerous course, “I don’t want to live in a world where gold is more than $5,000 an ounce,” he said.

Some analysts have called for gold to hit $5,000 and beyond in a matter of months, although such views mostly come from a small group of vocal gold supporters.

Prinz invested in gold in 2009, and eventually it comprised 10% of his portfolio. But by October he’d sold his last ounce.

“I’m at peace with it,” Prinz said. After making and losing money in gold, he said he’s realized his main interests are not return-centric or motivated by performance.

Instead, he describes his relationship with gold as mostly an intellectual pursuit. “It was academic,” he said, “in the sense that I saw a lot of underpinning in the gold market, the debate engrossed me, and I saw it as a way to learn more about markets and the political and monetary issues surrounding them.”

Prinz has moved most of his money to cash and short- and medium-term Treasurys.

“I would say (investing in gold) is completely off the table,” he said. “I have recently used the proceeds to buy an amazing upright piano. So you could say I’ve shifted my portfolio from gold to ivory.”

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