Money Markets Academy

Over the past decade investors have poured billions into exchange-traded funds that track the price of gold. Now with gold prices falling, many are yanking some of that money back out — a move investing pros say misses the whole point of owning the shiny metal in the first place.
Gold’s recent slump — down 4% so far this year — has turned many former gold bulls into bears. In the first two weeks of March, investors pulled $1.6 billion from gold ETFs, according to data compiled by BlackRock, the largest ETF provider. That follows outflows of more than $5.6 billion from the funds in February, the largest monthly outflow ever.

Many of these investors are simply seeking better returns: The decade-long gold rally may have stalled (or be over), but stocks are on a tear. So far this year, the Dow Jones Industrial Average has returned 11% and is hovering near an all-time high. “Some people chase momentum,” says Russ Koesterich, BlackRock’s global chief investment strategist.

But some advisers say that strategy could backfire. For starters, they point out that gold could bounce back if there’s a sudden jump in inflation, a flare-up of the European debt crisis (perhaps tied to the Cyprus crisis) or a stock-market correction at home. But more importantly, they say owning gold isn’t about buying low and selling high, but about owning an insurance policy for the long term: Investors that aren’t willing to swallow losses in good times won’t be in a position to reap the offsetting profits gold can deliver during a crisis, says Herb Morgan, chief executive of Efficient Market Advisors, an investment firm that specializes in ETFs. “Nine times out of 10 you should lose money” on gold, he says. “It’s like any other form of insurance.”

In recent years, however, gold investors have been able to have their cake and eat it, too, in large part because the financial crisis sent investors scrambling to safe havens. The SPDR Gold Shares—the oldest and largest U.S. gold ETF, with $63 billion in assets—posted gains in each of its first eight years on the market, including 2008, when it returned 3% while stocks lost more than a third of their value. An investor who bought $10,000 worth of SPDR Gold Shares in late 2004, when it first appeared, would have a stake worth nearly $34,800 today. In contrast, an investment in the S&P 500 would have grown to just $15,200.

The price of gold has nearly doubled in five years. Although gold is currently under some pressure, there is still room for savvy investments. BullionVault CEO Paul Tustain discusses on Markets Hub.

It wasn’t necessarily supposed to be this way. Investing in gold was once the province of speculators and conspiracy theorists, but gold ETFs came with a seductive sales pitch that broadened the customer base. Fund marketers pointed to academic studies showing that a small amount of commodities like gold can smooth returns of a stock-and-bond portfolio over time. “It’s the ultimate diversifier,” says Jason Toussaint, managing director at the World Gold Council, the gold industry trade group behind SPDR Gold Shares.

And this year’s gold slump shouldn’t alter that thesis, say advisers. After all, an investor who owned a small amount of gold alongside a larger portfolio of stocks would still see overall returns smoothed, just as advertised. But it remains to be seen whether investors will stick around when gold provides a drag, rather than a boost, to performance. “It’s easier to buy into the story when you see an asset go up every year,” says BlackRock’s Koesterich.

Buffett invested $5 billion into Goldman before the government eventually stepped in to shore up the firm’s capital. The terms, even at the time, looked sweet for Buffett. He was paid $1.4 million in dividends — a day.

Today, Buffett, as part of an option deal granted to him along with the investment, will receive 9.2 million Goldman shares worth roughly $282 million based on Monday’s closing price. He will become one of the 10 biggest Goldman owners.

Warren Buffett's Berkshire Hathaway is on pace to get nearly 2% of Goldman shares, making it a top shareholder in the bank.

Don’t feel sorry for Goldman. That Buffett opted to invest rather than cash out is part of the deal. The bank needs Buffett’s squeaky clean reputation and market influence to lift its own.

The trick for Goldman will be for it to produce the sort of profits it used to and shed its scandal-plagued past. In turn, the stock price should rise and benefit Buffett. If it doesn’t, you can bet he will leave. For as beloved as he is, Buffett can be ruthless.