Summer is here, the birds and the bees have arrived, and must have brought their Barry White mixed tape, because my best friend’s sister is pregnant again with her third child. The due date is January 15, 2012. She already has a son and a daughter, so she has no preference on the sex of this most recent installment. What she does have a preference on, is how she wants to invest in its future. (Yes, we’re referring to the unborn child as “It” in this article.)
Her other two children (which I’ll refer to here as Bonnie and Clyde for depressingly accurate reasons) are the ages of 2 and 4, respectably. Bonnie is 4 and Clyde is 2. That means that Bonnie was born in mid-2007 and Clyde, mid-2009. My friend's sister was diligent in starting a 529 account for each child when born, and began putting $100 per month, planning on raising that amount by $100 every two years, eyes set on Stanford.
If you weren’t in a coma between now and 2007 (although I bet some of you wished you were), it’s obvious that with the downturn of 2008, Bonnie’s 529 account doesn’t have quite the head start on Clyde’s that their mother expected.
His sister wanted to take long-term, glamorous-as-Windex type of investment strategy, hoping for market-like returns with low fees for the next 18 years. But as a casual investor herself, she couldn’t help noticing how gold has compared with her index funds over the past few years.
Like Dorothy on a mushroom-induced journey to Oz, his sister has all but convinced herself that taking the golden path is the best way to insure she can afford to send Bonnie, Clyde, and It to top tier colleges. She’s done a bit of research and is convinced that moving the majority of their allocations to the SPDR Gold ETF (NYSE:GLD) and Barrick Gold Corporation (NYSE:ABX). She expects that with all of the issues still facing the markets, globally and domestically, that gold will be her savior. But before pulling the trigger, she reached out to me, the family investment guru, and asked my advice. This is was what we I told her.
Recommendation, now and later
Gold has been on a tear and some pundits swear it will go on forever, while others expect the ball to drop any day. I told his sister that increasing her exposure to gold right now wouldn’t be a horrible idea. In fact gold might perform better versus the volatility I expect out of the broad indexes for the remainder of the year, however, by the time It is born in mid-January of 2012, things could change dramatically, and gold could plummet. Gold has had an amazing run over the years, and some people have made a killing holding it. But gold has also had long runs of terrible years as well and the idea that perhaps now gold is the “perfect” investment just isn’t true because no investment is perfect.
Gold is all about timing. If you consider yourself a good timer of markets, then investing in gold can be very fruitful for you. However, for the more casual investors, like my friend's sister, who are looking for an asset allocation to put on cruise control for large chunks of time, I wouldn’t recommend much gold in the portfolio.
I told her unless she wants her children to live up to their made-up nicknames of Bonnie and Clyde and have to rob a few banks when they’re 18 to afford college, that she should remove her visions of gold growing more and consider a different path. When gold is put under the spot light it gleams but the idea of buying near the decade highs just doesn’t seem like a sound idea. That's why we've rated names such as GLD PASS in the past and why we still hold to that position today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.