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Gold’s Glimmer In Shadow, But No Cause for Panic

My latest from Philly.com: Gold loses a little of its glimmer, but no cause for panic

Warren Buffett and Brazilian financier Jorge Paulo Lemann teamed up to buy H.J. Heinz for $23.2 billion last week.
KEITH SRAKOCIC / Associated Press

Gold’s glimmer took a dusting Friday after the yellow metal’s price dropped $26, to just over $1,609 an ounce.

Before you sell what’s in your portfolio, consider data just released from industry trade group World Gold Council: Last year, China accounted for about 25 percent of consumer gold demand and narrowed the gap with its rival, top gold buyer India.

The London-based council said consumption from both countries could rise an additional 11 percent in 2013.

Granted, the World Gold Council has a bias. But there’s no denying that, price fluctuations aside, central banks from Brazil to Portugal to Russia continued buying more gold last year to diversify their currency holdings. In fact, the council says, central banks globally bought more gold in 2012 than they have in the last 48 years (see the report at www.gold.org).

Central banks added 534.6 tons to their reserves last year, 17 percent more than in 2011. That helped make up for the first annual drop in total demand in three years, as investment demand slid 9.8 percent and jewelry demand fell 3.2 percent.

In the short term, the price drop has been painful.

“It’s been in a straight decline since the start of the year, no doubt about it,” says Matt Gohd, senior managing director and strategist at the brokerage firm WallachBeth Capital.

The most liquid of the gold exchange-traded funds, SPDR Gold Trust (GLD), closed at $155.76 Friday, down from its all-time high in August 2011 of $184.59, but still up sharply from $95.77, where it was exactly four years ago.

“But after a decline is when it starts getting interesting again, especially from a trading standpoint,” Gohd adds. “It could bounce.”

He tells investors to stay away from leveraged gold ETFs such as Market Vectors’ Gold Miners (GDX), “which has been a disaster,” and stick with the most liquid vehicles when investing in gold. GDX is just one of many exchange-traded funds that use leverage to boost the price move – both up and down – and they can wreak havoc on a portfolio.

“The leveraged ETFs make money for Wall Street, but not for investors,” Gohd says.

Heavy buying in put options. Speaking of declines, investors have been buying put options by the boatload – in particular, puts that would make money betting on a sharp market decline in March.

Joe DiGiammo, of Mischler Financial, said he’s seen “heaps of investors buying protection” for their portfolios in the form of put options on the iShares Russell 2000 Index Fund (IWM) and the SPDR S&P 500 exchange-traded fund (SPY). In particular, he has seen heavy buying of March-dated quarterly puts on these indexes, meaning they expire after the contentious “sequestration” budget-cuts deadline.

Put options can serve as a hedge, or a type of insurance, making money when the markets or a particular stock fall in price.

Heavy buying in index put options may also signal some pessimism about the direction of stocks amid Congress’ dithering over budget cuts. You have been warned.

Why Heinz? Safety. DiGiammo was kind enough to share David P. Goldman’s latest Macrostrategy, and the former Bank of America strategist had an interesting take on Warren Buffett’s decision to buy H.J. Heinz last week.

Buffett and Brazilian financier Jorge Paulo Lemann teamed up to buy the ketchup maker for $23.2 billion.

“The attractiveness of Heinz was not valuation (Buffett and the Brazilians bought at a forward price-to-earnings [multiple] of 18, at double the January 2006 price for the stock). It was stability.

If the best a Brazilian billionaire can do is buy into an American ketchup company, it’s hard to get excited about the growth prospects of Brazil. In fact, it’s hard to get excited about Heinz at a pre-acquisition P/E of 18. What is the upside of a stodgy food processor whose equity price had already run from $35 to $60 between January 2002 and the present? The acquirers are not looking for a capital gain, but for the capacity to apply cheap leverage to bond-like cash flows.”

 


Contact Erin Arvedlund at 646-797-0759 or erinarvedlund@yahoo.com. Previous columns are at philly.com/arvedlund.

 

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