This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Should You Own Gold?

NEW YORK ( TheStreet) -- As a financial adviser, I recommend gold as part of a diversified investment plan. For Baby Boomers I tend to prescribe an extra dose of gold, about 10% and sometimes up to 20%.

Usually, it is not a problem getting investors to accept this prescription -- until the recent gold collapse that gave investors a "stock market crash" feeling.

As a result, I think it's time for investors to change their thinking.

Should gold be skyrocketing?

One very good reason it isn't is because of the bifurcation in the gold market. Specifically, now there are two markets and they are behaving in different ways. Moreover, speculation in one market is negatively impacting upon the other. The two markets I am referring to are the physical market -- gold bars and coins -- and the derivative market consisting of gold ETFs, gold funds, gold options and gold futures.

I interviewed Jim Rickards, lawyer, former investment banker, and the author of "Currency Wars: The Making of the Next Global Crisis," for my radio show, and he was unequivocal about the impacts of speculation through derivative products.

"Leverage gets into the system when people buy gold ETFs on margin, and suddenly there are margin calls because the market takes a hit," he said. "When that happens, like it did recently, the buy and sell decisions are no longer rational."

There are several challenges that come with this bifurcation that were not readily apparent until recently.

First, the number of derivative products betting on gold is now far larger than the gold supply itself. My speculation, and my worry, is that if all of the derivative products that have a claim on physical gold were put to central banks and other depositories, that physical delivery could not be made.

It would be the equivalent of having a cash redemption feature on all U.S. debt, where all the buyers suddenly wanted their money back at 100 cents on the dollar.

Second, the prices in the gold market are rather easy to manipulate in the futures market (See "Not Your Grandfather's Bank Holiday"), and once these prices are manipulated it creates an opportunity to arbitrage between the physical market for bars and coins and the derivative markets such as ETF, futures and options.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $124.01 -0.34%
FB $81.65 -0.69%
GOOG $543.58 -0.81%
TSLA $188.73 -0.02%
YHOO $44.22 -0.48%


DOW 17,674.09 -102.03 -0.57%
S&P 500 2,054.64 -13.25 -0.64%
NASDAQ 4,860.6690 -40.2160 -0.82%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs