Paul Pomfret, managing partner with PDP Capital, a Palm Beach, Fla.- based fund of hedge funds, does not like gold, particularly GLD. He says he can get better diversification by adjusting his positions in market neutral, long-short and arbitrage hedge funds.
"The recent crisis in Greece, coupled with coming out of the recession, drove people to buy gold out of fear-not fundamentals," says Pomfret, a former analyst at Goldman Sachs. "Although gold keeps rising, the demand from end users, such as jewelry stores and consumers, has not increased. Gold's substantial increase was related to gold investing being easier with the exchange-trade funds. But when the economy starts to pick up one day, there is a potential to see gold unwind as quickly as it went up."
"Will gold maintain its purchasing power value if inflation erodes the purchasing power of the dollar or the euro?" asks Martin Feldstein, Harvard University economics professor. "And will gold hold its value in euros or yen if the dollar continues to decline?"
In a recent article posted on the Web site of the National Bureau of Economic Research (www.nbr.com), Feldstein answers no. The dollar price of gold does not increase with the U.S. price level, he says. Plus, the value of gold does not increase in dollars to offset the fall in the value of the dollar relative to the euro or the yen.
For example, the price of an ounce of gold in 1980 was $400. Over the next ten years, inflation was up 60%, but gold remained $400 at the end of the volatile decade.
Consumer prices were twice as high as they were in 1980 by the end of 2000. But the price of gold was about $300 at year-end 2000. And even though the price of gold hit $800 an ounce in 2008, it did not keep pace with the rise in consumer prices since 1980.
Gold, Feldstein adds, didn't do much better as a currency hedge. For example, a dollar was worth 200 yen in 1980. Twenty-five years later, the exchange rate had strengthened to 110 yen per dollar. Since gold was $400 an ounce in both years, holding gold did nothing to offset the fall in the value of the dollar.
"There are better ways than gold to hedge inflation risk and exchange-rate risk," Feldstein says. "TIPS [Treasury Inflation Protection Securities] or their equivalent from other governments, provide safe inflation hedges, and explicit currency futures can offset exchange-rate risk."
On the plus side, Feldstein says that gold can sometimes be a good investment. Since 2005, the value of gold has tripled. And gold is a liquid asset that provides diversification in a portfolio of stocks, bonds and real estate.