stolwyk - here's that article

Take care when investing in precious metals and stones
Noel Whittaker, Sunday Times 18th September

TURBULENT times spook investors and the doomsayers are having a field day with forecasts of the dreadful things that may happen as a consequence of hurricane Katrina.

Many investors — who no longer want property and who are scared of the stock market — are wondering if it’s time to take a position in gold. I appreciate there are many who offer good reasons to get involved in it, but I am not one. Gold is often touted as a “store of value”, but most would be hard- pressed to deflne what that term means.

If a massive crisis came along, items such as antibiotics and long- life milk may be just as good a “store of value” as bullion. They will tell you how useful it will be when times get tough. But if we suffered a nuclear war and the country was devastated, how far would a starving group of people let a person get who tried to cash in a gold bar?

In Germany, during the hyperinflation of the 1920s, prices rose every hour. There is a story of a man pushing a wheelbarrow full of banknotes down the street looking to buy a loaf of bread. Nobody wanted his money, but he had no trouble trading the wheelbarrow.

Probably the greatest problem is that the price depends mainly on investor expectations. If most tratraders think the price will rise and they all start to buy, the price will rise. Conversely, a pessimistic mood in the market will cause prices to fall. Gold reached $US641 an ounce in 1980 on expectations that it would rise to $US2000. But then it crashed to $US350 when those expectations were not realised. By the end of 2000, it was just $US272.

Confused? That is the dilemma — gold prices seem to defy logic and do the opposite of what has been predicted. Another problem for Australian investors is that gold is universally priced in US dollars, so you have to factor in currency risk as well.

If you buy physical gold, you have the cost of storage and the risk of loss or theft. It is why I have long suggested that anybody who is desperate to get into gold buys shares in established, profitable gold mines.
Doing it this way means you won’t have any worries about storage. And you can also enjoy the franked dividends while you are waiting to see what the market is going to do.

There are others who prefer to have their money in diamonds and gemstones. But I have encountered so many people in trouble with these investments that I am loath to recommend them to anybody who is not highly experienced in the field.

I remember the day a woman rang to say she had $70,000 in opals and wanted to use them to buy a house. She said that a dealer-valuer had given her a written valuation of $70,000, but she would let them go for $35,000 as a part deposit on a house. Knowing that sellers of properties are extremely wary of taking anything but cash, I suggested she sell them to the dealer for $35,000 — and be in a much stronger position to make an offer on a property.

Her reply staggered me: “I have already tried that, but all he will offer is $8000.” Sure, buying precious metals and stones can spice up your life, and give you some excitement while awaiting the outcome. They may be fine for a small part of a portfolio, but my grey hairs tell me it’s better to stick with property and shares. At least if you choose them well and stay in for the long-term, you are almost guaranteed of doing well.

Noel Whittaker is joint managing director of Whittaker Macnaught Pty Ltd, AFSL NO.246519. Email [email protected].
Information in this column is for general interest only. Always seek professional advice before making any financial decision.