Byron Wien, vice chairman of Blackstone Advisory Partners is, for the first time, recommending gold in his model portfolio. His suggestion comes from the government's continued debasement of currencies and the need for an insurance investment.
By GERALDINE FABRIKANT- New York Times
November 22, 2011
Byron Wien, the investment strategist, has been forecasting the future for decades. But this is the first year that he has officially recommended gold in his model portfolio.
And at the beginning of this month, Mr. Wien, vice chairman of Blackstone Advisory Partners, said he was maintaining his 5 percent allocation to gold for next year.
The metal has become the insurance policy of choice for many sophisticated investors. Even among those who were never gold bugs, there is now a belief that it has its place in a portfolio.
Mr. Wien’s view comes despite the fact that gold, which was up 29.5 percent in 2010, was up an additional 20.7 percent at the end of October of this year, according to Mr. Wien’s most recent report — nearly double the increase for real estate, the second-highest increase among Mr. Wien’s recommended asset classes.
His decision to continue recommending gold comes even while some investors feel that after such a steep run, prices may fall. The returns reflect the hard reality that as governments print money, thereby debasing the value of their currencies, gold still looks like a sensible option.
“The money supply will be expanded in the major currencies in the developed world, and investors will seek the protection of hard assets: something real, and gold is perceived as real,” Mr. Wien said by telephone.
Is he expecting gold to continue its astonishing ascent? There are reasons to doubt that it will. For example, the dollar has rallied as fears of problems in the euro zone have grown. Often that increase forecasts a drop in gold value, since deterioration in currency values suggests higher gold prices.
That does not change Mr. Wien’s view. “You don’t buy insurance because you think you will have a fire or a flood,” he said. “You buy it and you hope you don’t collect on it.”
Even the Federal Reserve chairman, Ben S. Bernanke, has been watching the price of gold as an index of investor confidence in the future. “I think the reason people hold gold is as a protection against what we call ‘tail risk’ — really, really bad outcomes,” Mr. Bernanke said at a hearing in July before the U.S. Congress. “To the extent that the last few years have made people more worried abut the potential of a major crisis, then they have gold as a protection.”
Sounds logical, right? And yet gold is a controversial investment.
“Gold is even more speculative than real estate,” said Fran Kinniry, a principal in Vanguard’s Investment Strategy Group. “At least with housing, you have the income from rents. With gold there is no income at all. Gold does not pay dividends or interest, so the only thing you get is the price differential. It has benefited from many months of flight-to-safety flows that can crash at any moment.
“The fundamental underpinnings are so shaky that I have no confidence whatsoever that any so-called relationship between the price of gold and anything else is a stable relationship,” Mr. Kinniry said.
Even so, as the Italian and Greek governments fail to resolve their problems, gold looks particularly attractive because, with the dollar, it is considered a safe harbor in times of such uncertainty.
“Gold is a money that governments don’t print,” said Charles Stevenson, a private investor who first bought gold during the inflation of the 1970s and continues to own gold today, although he has traded in and out along the way.
“It’s a way to hold value when there is nothing to invest in because it stores value the way money is supposed to, ” he said. “If you hold your assets in money, inflation now exceeds interest rates, and the government is draining purchasing power.”
The situation is sufficiently volatile that Gary Brinson, a veteran strategist and scholar who runs the Brinson Foundation, agrees that gold, even at its currently high price, may have a small place as insurance.
“You can get into windows of time where gold will act as a counterweight in an otherwise asset-based portfolio,” he said. “The problem is that if you pay too much for it, its ability to offset the inflationary effect is diminished.”
As recently as a month ago, gold fell drastically, surprising and worrying investors. “There are caveats,” Mr. Stevenson said. “In a bad world, gold won’t necessarily maintain its value. If real estate drops in half and gold drops a quarter, for example, you can sell gold and buy twice as much real estate.”
What makes the situation particularly complicated today is that the easiest vehicle for average investors who want to hold gold are gold exchange-traded funds. They are volatile because you can buy them on margin, and that attracts speculative buyers.
There are wild cards, too. People who need money sell the assets that can be sold. “If you invested in John Corzine’s MF Global and you needed to sell those assets, you couldn’t do it,” Mr. Stevenson said. “There is always a bidder for gold, just like there are always bidders for top-quality real estate, but there might not be bidders for B-quality real estate.”
Certainly there were historical periods when gold was a bad bet. It was a disappointing holding between 1980 and 2000, when other assets were growing in value. As interest rates declined, any company in which one invested could refinance, making it a benign environment to use cash for other investments.
But James Grant, who has a newsletter, remains bullish despite the hiccups because he believes that the “central banks — north, south east and west — have gotten out of the central banking business and into the central planning business, meaning that they are devoted to raising up: if they can; economic growth and employment through the dubious means of suppressing interest rates and printing money. The nice thing about gold is that you can’t print it.”
Having said that, Mr. Grant acknowledges that when gold fell 50 percent in 2008, ‘it certainly tested confidence,” he said. But he simply does not believe that, for now, bankers can see into the future and improve things.
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