Gold How Much To Own and Which ETF Is Best

Gmail - Gold: How much to own and which ETF is best.
https://mail.google.com/mail/?ui=2&ik=70f86405ce&view=pt&search=inbox&th=13ead4d5add...
Sundar Ramanathan <ambasyapare1@gmail.com>
Gold: How much to own and which ETF is best.

1 message Morningstar ETFInvestor <mailing1@mail.morningstar.net> Reply-To: Morningstar Unsubscribe <adhocmarketing@morningstar.com> To: ambasyapare1@gmail.com Thu, May 16, 2013 at 8:06 AM
Dear Investor, I don't identify as a gold bug or a gold hater, and I don't quite understand the passion surrounding gold's merits or lack thereof. In my opinion, gold is just like any other asset: There are good and bad times to own it. This article is my attempt to understand gold and whether it has any merit in ETFInvestor's model portfolios. What Moves Gold, the Shadow Currency? Paper money used to derive its value from the fact that it could be converted to gold. And that's really how to best think of gold: as a kind of currency that can't be readily printed and whose supply is
Interested in hearing more from me?
relatively fixed. Gold's price, then, is simply the exchange rate between the dollar and gold. Valuing gold is roughly analogous to
1 of 5
5/16/2013 5:36 PM
Start a subscription to Morningstar ETFInvestor for only $189 and get 12 months of unique insights, exclusive buy/sell alerts, and robust online resources.
valuing the euro versus the dollar, or any other currency pair. Three big factors control exchange rates: 1) Differences in yields 2) The market's perception of a currency's safety 3) The real exchange rate Relative yields are the main driver of exchange rates. Higheryielding currencies tend to appreciate against lower-yielding ones. Carry strategies own higher-yielding currencies and short-sell lower-yielding ones. Of course, gold has no yield. The only time it has a yield advantage is when paper currencies have negative real interest rates. Many investors lose sight of this fact when they cite inflation as the main driver of gold's returns, noting gold's spike during the inflationary 1970s. The problem is that when you run the numbers, gold's price is not well-explained by inflation and quite well-explained by changes in the real interest rate. Consider the recent runup in gold prices: Inflation has remained muted for most of the time. Investor perceptions of a currency's stability also exert a powerful influence on its exchange rate. When the market questions the safety of a currency, investors often demand a hefty risk premium (higher real interest rate) to own it. However, gold is perceived as being ultrasafe because no central bank can mint it with abandon, so there is no risk premium for gold. The more investors question the future purchasing power of paper currencies such as the dollar, the greater the demand for gold and the greater its price. Right now the main players in the gold market are central banks and institutional investors, in that order. Since 2008, emergingmarkets central banks have begun diversifying their foreign exchange reserves by buying gold. Meanwhile, developed-markets central banks have slowed selling their gold reserves. Some institutional investors such as pension funds and sovereign wealth funds have begun implementing strategic allocations to gold. The net effect has been to raise the demand for gold.
2 of 5
5/16/2013 5:36 PM
Finally, exchange rates over the long run tend to gravitate toward purchasing power parity, or PPP, the exchange rate that would equalize one's ability to buy a basket of goods and services in either country. If, for instance, you convert $10,000 to Chinese renminbi to buy goods in China, you will be able to buy more goods than you could in the United States. According to PPP, this would mean that the U.S. dollar is overvalued and the yuan is undervalued. Gold's PPP analog is the ratio between its price and the Consumer Price Index compared with the ratio's historical average. Currently, gold's real exchange rate is at historically high levels last touched in the 1970s. Over the long run, gold's price will probably converge toward its historical ratio. How Do You Value Gold? Gold's valuations versus real goods are stretched to extreme levels. Over the long run, gold's real value will likely converge to its historical average. In other words, if you hold gold for the next few decades, you should fully expect to lose your shirt. However, in the short and medium run, gold's price is supported by the lowest real interest rates in history and emerging-markets central bank purchases. Curiously, gold's price has, over the past year, been oddly unreactive to falling real interest rates. This could either reflect a slowdown in central bank purchases/increase in central bank sales, or reduced fears of currency debasement. I don't believe fears of currency debasement have fallen noticeably, so I suspect central banks may have slowed purchases of gold. How Much Gold Should One Own? Gold should be considered insurance against the collapse of the fiat money system. Right now, a lot of investors are clamoring for protection, and low real interest rates are taking the sting off of owning the metal. As a general rule, insurance policies are not supposed to make you rich. Despite my long-term bearishness on gold's price, I think owning some in a strategic allocation makes sense--5% of your portfolio is
3 of 5
5/16/2013 5:36 PM
a reasonable figure at today's valuations, perhaps 10% if youre confident that central banks will buy more or you're very risk-averse. The biggest and most liquid gold exchange-traded fund right now is SPDR Gold Shares GLD. It's a great choice if you intend to trade frequently. Buy-and-hold investors should consider iShares Gold Trust IAU because its 0.25% expense ratio is lower than GLD's 0.40%. Looking for a fresh, down-to-earth approach to using ETFs in your portfolio? I invite you to subscribe to my monthly newsletter today. If you're not completely satisfied with what I have to say, cancel within 30 days for a full refund or anytime thereafter for a prompt prorated refund. Subscribe now! Best regards,
Samuel Lee ETF Strategist Editor, Morningstar ETFInvestor
About Our Email If you want to unsubscribe from future marketing email, please click "reply" and "send." All subscription changes will take effect within five business days. To manage all of your Morningstar.com email subscriptions, please click here to visit our Email Subscription Center (login may be required). This message was sent by an automatic mail-sending program. If you have questions about Morningstar.com or your membership, send a note to joe@morningstar.com. Please click here to learn about Morningstar's privacy policy. Morningstar.com is compliant with the U.S. CAN-SPAM Act of
4 of 5
5/16/2013 5:36 PM
2008. Copyright 2013. All rights reserved. Morningstar, Inc. | 22 West Washington Street | Chicago, Illinois 60602
5 of 5
5/16/2013 5:36 PM

Gold How Much To Own and Which ETF Is Best

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Gold How Much To Own and Which ETF Is Best

Enviado por

Direitos autorais:

Formatos disponíveis

Gmail - Gold: How much to own and which ETF is best.

Sundar Ramanathan <ambasyapare1@gmail.com>