These have been heady days for Donald W. Doyle Jr., chief executive of Blanchard & Co.--one of the nation's largest precious metals dealers.
Despite the fact that most financial experts now eschew investments in gold, silver, platinum and other precious metals, Blanchard's customers have been on a buying spree since March, picking up gold coins and bars by the ton.
Just last week, the company sold a whopping $3 million in precious metals, a company spokeswoman says. To put that in perspective, that's roughly double Blanchard's sales in an ordinary summer month . The company has rung up $70 million in bullion sales this year. That amount will buy you nearly five tons of gold in today's market--and it compares with sales of $55 million for all of 1994.
"A lot of the buying we are seeing now is people taking out an insurance policy against the stock market hitting a top and coming down sharply," Doyle says. "If you are thinking about buying low and selling high, this is a good time to buy."
Doyle's bullish bullion analysis is based on a technical reading of how gold prices relate to the price of stocks and bonds. However, not everyone agrees with it.
"Theory says that precious metals have a small place in every portfolio," says Tim Kochis, president of the San Francisco-based financial planning firm of Kochis Fitz Tracy & Gorman and chairman of the Certified Financial Planners Board of Standards. "But I don't recommend it, and I don't know anyone who does."
Indeed, financial experts, who used to say that a small amount of gold belonged in every investment portfolio, have largely abandoned the metal.
Why? Traditional buy-side arguments have been that gold retains its value over time, making it a good inflation hedge. Some also lauded it for its ability to diversify an investment portfolio for the simple reason that its price is rarely in sync with swings--up or down--in the stock and bond markets. There are also disaster theorists who recommend stockpiling gold in back yard bomb shelters because they're certain that gold will be the only viable currency once their predicted worldwide economic meltdown comes to pass.
But gold's performance proves all those optimistic theories wrong, says Derek Sasveld, a consultant with Ibbotson Associates, a Chicago-based financial research and consulting firm.
The metal became available for sale in the United States during the early 1970s. And the next decade was clearly the metal's brightest moment. Gold raked in an average annual return of 34% between 1971 and 1979--a time when inflation was high and the stock market was languishing. But after that, gold prices began to slide. Now, gold sells for somewhat less than $400 an ounce--less than half its peak price 15 years ago. Or, to put it another way, the average annual return on gold investments from 1980 to the present has been a negative 1.74%, according to Ibbotson. Inflation has been creeping forward at a 3% to 5% annual rate during the same period.
"If gold really is an inflation hedge, there are other things that do what gold does better," Sasveld says.
Real estate, short-term bank deposits and Treasury bills have tracked the rate of inflation much more closely, he notes. And although real estate prices have dropped sharply in recent years, they are far less volatile than gold. Indeed, gold prices swing as widely as the prices of small stocks--as much as 26% per year.
The only good thing you can say about gold's performance in the past decade, in fact, is that it's at least done better than silver. Since 1980, silver's price has declined by 10.4% annually.
Does it help diversify your investment portfolio? The idea of diversification is to find assets that move in different directions at the same time. That way, your portfolio won't be ravaged even when one particular investment class has a bad year. And gold certainly moves independently of all other types of financial assets. The problem is, that's because it has generally been moving down while other assets have been gaining value.
As for stockpiling gold in your bomb shelter, Sasveld shrugs. Even the "lunatic fringe" would be better served buying a farm than bullion, he says. You can't eat gold.
Adds Kochis: "In that sort of situation, it's not who has the gold, it's who has the guns."
Practically speaking, there's also another downside to buying gold. You have to store it. People who don't have bomb shelters usually store their gold in safe deposit boxes at banks, which can cost upward of $50 a year. If you own gold bars, you'll need to have them "assayed" before you resell them, too. That's to determine that you haven't tampered with their gold content. Assaying fees will cost you about 1% to 2% of the value of the bar, Doyle notes. However, gold coins can be traded fairly easily--without re-evaluating their metallic content.
Still, gold enthusiasts such as Doyle are undeterred. Doyle, who says that between 50% and 60% of his own investment portfolio is now in precious metals, acknowledges that the metal has fared poorly over the past decade. But, "markets work in cycles. Eventually, we are going to see a nasty drop in financial assets [stocks and bonds] and a real rise in hard assets [precious metals]."
In fact, some savvy professionals maintain that it's always best to buy assets when they're unpopular--and there's no argument that precious metals are the saddest wallflowers at the investing ball.
"The more bearish the mentality of the general public, the better time to buy," Doyle says. "That's probably why our business has remained so strong despite the fact that the external indicators say the business should be weak."