Arthur Stein's  Instablog

I'm surprised that there are no Seeking Alpha articles about the March 15 report that the CFTC is investigating the London Gold Fix. According to the report, CFTC has evidence that banks colluded to "manipulate" the price of gold in a similar fashion to LIBOR.

I have no idea if this is true and wonder what the Seeking Alpha community thinks. Some questions:
 

• Is it possible? Wouldn't arbitragers force price to whatever the market price is in other countries?
• Do you think it was fixed?
• If fixed, was the price set artificially high or low?
• How could major buyers not have known? Should GLD and IAU have known and said something?
• How is New York price set?
• If Fix is manipulated, should gold be sold before other investors sell in disgust?

A Forbes contributor doesn't think it is important. Who does?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Your IRA is not an investment. Your mutual funds are not investments. Neither are your 401(k)s or ETFs.

Now before you start feeling like I just pulled the rug from under you, let me explain. Rather than actual investments, they function as ways to own investments.

For example, you own an IRA, the IRA is invested in a mutual fund, and that mutual fund purchases stocks. You are invested in stocks, even though you are several steps removed from those stocks.

So what are investments?

Investments fluctuate in value, generate income or both. Investments include:

• Stocks
• Bonds
• Bank accounts
• Money market funds
• CDs
• Real estate.

It's important to know how much of your portfolio is in each type of investment (stocks, bonds, etc.), regardless of how the investments are owned (directly or through a retirement account, mutual fund, etc.). That's why portfolio reviews are important. A review helps determine whether the portfolio is appropriate for you:

• Does it match your risk profile?
• How likely is it to generate the growth needed to fund financial goals?
• How volatile is it expected to be?
• Is the liquidity sufficient for your needs?

Portfolio reviews can also show:

• The percentage of stocks by size (large, medium and small companies), value or growth and international stocks by region;
• Bonds by type (US Treasury, municipal, corporate, foreign), default risk, maturity and interest rate risk;
• Overlap among different accounts, mutual funds and ETFs;
• Estimated historical performance;
• Expected volatility.

Since the review process can be difficult and time consuming, many individuals opt to hire a financial planner to do it. A financial planner can also recommend changes to the portfolio to better match your needs or current market conditions.

For example, a portfolio that I recently reviewed did not take into account the client's tax situation and lacked diversification. All the bond investments were municipals, which offered my client little or no advantage because of his low tax rate. The stocks also lacked diversification, with low percentages in small, mid-cap and international stocks and no real estate or commodity mutual funds or ETFs.

Arthur Stein is a certified financial advisor with over 20 years of experience in financial planning, investments and insurance. His firm offers a portfolio review service dedicated to helping consumers take a critical look at their existing investment portfolios.

For more information about portfolio reviews, click here or contact us directly (301-377-9407 or art@arthursteinfinancial.com).

Note:

The presentation is for educational purposes only. To learn more about the strategies mentioned and if they are suitable for you, consult the appropriate professional before implementing. Tax laws can change at any time.

Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.

Keep in mind that:

• Past performance is no guarantee of future performance;
• Investments involve the risk of loss of principal and earnings;
• Mutual funds, including money market funds, ETFs, etc. are not guaranteed in any way by the US Government, the FDIC, a bank or anyone else.
• "Average annual return" evens out variations in the actual year-to-year returns.
• Both stock and bond mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
• None of the information provided by Arthur Stein is necessarily relevant to anyone's particular situation. Situations differ among individuals and you should not assume that these generalizations or information apply to you.
• Investments mentioned may not be suitable for all investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Demand for gold has been declining worldwide, but prices haven't. What does this mean for someone investing in gold?

Gold demand declined 11 percent in the third quarter of 2012 compared to the third quarter of 2011, according to the World Gold Council (www.gold.org). Demand fell in every sector except for purchases by central banks.

But, surprisingly, the price of gold increased 9.6 percent from the end of September 2011 to the end of September 2012.

Quarter to quarter statistics confirm the trends.

Gold is unlike other commodities in many respects. For investors, one of the significant differences is that the supply of gold (called "above-ground gold") never decreases; it only increases. So declining demand should cause a decline in the price of gold, not an increase.

The gold supply never decreases for several reasons. First, gold is not used in the usual sense; it is not consumed. When gold bars are turned into jewelry or jewelry into gold bars, the supply of gold does not change. Nor does the gold supply change when one investor or central bank buys from another.

Compare that to oil. When a car burns a gallon of gas, the gas goes up in smoke. New oil must be pumped to be refined into more gas. If oil production declines, world supply declines.

Second, gold does not deteriorate over time. It doesn't go stale, soften, rust or lose potency as it ages. Special storage - freezers, airtight containers - is not needed. Thousand-year-old gold is just as valuable as new gold of the same purity.

The result? Mining is not needed to maintain the worldwide supply of above-ground gold. Mining only serves to increase that supply.

The individual sources of demand are another concern. Jewelry demand has been declining since at least 1997. Jewelry demand in 2011 was 40 percent lower than 1997 and demand in the first three quarters of 2012 was 9 percent lower than the same period in 2011.

Industrial and dental demand declined in 2011 and is on track to decline another 6 percent this year.

Investment demand (bars, coins, Exchange Traded Funds, etc.) declined 3% in the first three quarters of 2012 compared to 2011.

The bright spot for gold demand was official sector (central bank) purchases. Central bank activity went from net sales to net purchase in 2010, and net purchases continued to be positive in 2011 and the first three quarters of 2012.

Is this a bubble? It's possible. Investors purchase gold on the assumption that some future investor will buy at an even higher price. That's sometimes called the "greater fool theory," and it is a shaky assumption when demand is declining and supply and prices are increasing.

Gold investors need to be concerned.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.