When the Glitter Is Gone From Your Gold

BOSTON (MainStreet) -- Months ago, amid global economic uncertainties, the question asked by all levels of investors was "How do I buy gold?" Now, with prices of the precious metal stabilizing and falling, the question they may start to ask is: "Should I sell it?"

With both hard assets and specialized funds to choose from, the answer to the first question was simple enough. When and how to exit that position is the trickier part.
Many experts are expecting the gold bubble to burst. But knowing exactly when, and how, to sell your investments before that happens isn't always easy.

Despite the recent spikes, gold has traditionally maintained steady pricing. From 1833 through 1968, it never broke beyond $39 an ounce (not adjusted for inflation). For the 25 years between 1981 and 2005, it ranged from $271 an ounce at its lowest to a high just shy of $445. The average price then rose from $603 in 2006 to $872 in 2008 and $1,224 last year.

In May, Mike McGervey, president of McGervey Wealth Management in North Canton, Ohio, shifted investments out of gold. His strategy is to treat gold, in whatever investible form it may take, the same as any other security -- having a solid buy-and-sell discipline based on technical analysis.

The price stability gold has had in previous decades enhances the possibility of a bubble burst, with gold reverting quickly back to a more traditional price point.

"What's uncertain is if it has any more room left to grow," McGervey says.

Based on his analysis, McGervey saw the need for a post-gold strategy. For many investors, however, there is something -- for want of a better tern -- magical about gold, a thought that it's a magic bullet to protect you from uncertainty, inflation or even economic apocalypse.

An investor might buy gold for all the right reasons, but a certain hoarding mentality can take hold. The European debt crisis is worsening by the day and, in the U.S., there have been no real moves to rein in the deficit, so there may still be room to grow -- which makes it psychologically harder to exit a position that it might be with a typical stock or bond.

"The questions I get around gold are more in the sense of, 'Should we get into gold and how should we own it,'" McGervey says. "I don't come across a lot of folks that have safes full of the hard asset. Even so, I do think that they look at gold as special, whether it is in an ETF or some other instrument, rather than the hard asset itself. I think the whole idea of the old gold standard is still something that resonates as a good, quality thing that can never go bad."

The problem, he says, is that even if there is still room to grow, faith in gold may prove damaging if the price does drop back to the price points (even adjusted for inflation) it held for the quarter-century before the recent run-up.

"You've got these counter trend traders coming in and you don't want to make an investment and 30 days later have it drop against you by 15% or 20%. It would be like buying high and hoping to sell higher. The risk with doing that is it is an extremely volatile ride," McGervey says.

"If you are asking the question should I sell my gold, then you didn't buy it with a plan and you probably should go ahead and sell it," says Mickey Cargile, president of Texas-based WNB Private Client Investments. "If it is part of your portfolio and you have a discipline that you'll have 5% or 10% of your money in gold, then that is a different thing. But if you just bought gold on speculation, then you probably shouldn't own it, because it has extreme risk. If you bought it for the end of the world, well, that's not here yet, so you probably should hold it."

The hazard in trying to sell gold, is that "you can't value it," Cargile says.

"The value of it totally depends on someone else being willing to pay more than you paid," he explains. "You can't value it by its cash flow, because it has no cash flow. You can't value it by its replacement cost, because miners are constantly driving that replacement cost down by mining for more gold. It completely depends on someone else's perception of what that value is."

"You are up 30% plus for the last 12 months, that's a pretty good profit for most people, especially in today's market," Cargile says. "That's 30 years of CD rate. So my advice would be unless you had a specific reason for holding gold, and a specific strategy, take your profits ... To speculate on the price of gold because you think it is going to go higher doesn't give you an exit strategy. When it goes down you don't sell because you think it might go back up, but when it goes up you want to buy more because you think you'll miss out."

Kevin Mahn, president and CIO of New Jersey-based Hennion & Walsh Asset Management, also thinks gold is due for a correction.

The problem, he says, is that such an argument was already made and "if you believed that you missed out on one of the most incredible commodity runs in history." Making the case to investors enjoying the current run, or still fearful of the economic future, is a hard sell.

"Many prospects and clients continue to ask about gold, 'I want to diversify ... I'm concerned about the markets, I want to be in gold,'" Mahn says. "The risk in this whole process is that they assume their portfolio can be diversified with either gold or in cash. The media isn't helping, and neither is all the commercials touting gold. People think of it as the ultraconservative safe trade, and it certainly is far from that."

Those who invest in gold through a fund will find it easier to exit or reduce their holdings than those tied up with bars or bullion, Mahn says.

"You have to remember that if you are buying the hard commodity it is less liquid than investing in an ETF or an ETN, which you could just dispose of in the markets at any point in the trading day," he adds. "People think because they hold gold bars or coins that it is easy to dispose of, and they find that is not the case. You can get taken advantage of and in many cases have to discount the price to actually get a buyer to emerge. Then, if you add up all the custodial costs to actually holding the commodity, that is going to eat into any potential returns you have. Investors would be wise to do their due diligence whether they are buying the ETF or the physical commodity."

Beyond portfolio holdings, many Americans may feel pressured -- especially by buyers -- to cash in on their gold jewelry while prices remain high. Sellers need to be wary, according to the Better Business Bureau.

"Many of the complaints BBB receives against gold buyers claim buyers are paying less than what's expected and in some cases, with mail-in options, consumers report never receiving payment after mailing," it advises. "With so many options available for selling gold -- online stores, local jewelry stores, etc. -- it is important to take time and do the proper research."

Among the bureau's recommendations:
  • Get at least two or three appraisals to ensure the buyer is offering a fair price for each piece being sold.
  • Separate your gold. All gold is not created equal. A 14-karat necklace will not have the same value as an identical piece in 24-karat gold. The higher the karat number, the higher the monetary value.
  • Evaluate gems separately. Some jewels are too small and the cost to remove them can exceed their value. But engagement ring diamonds, for example, should be given a value separate from the gold.
  • Make a list of items included in the package you mail, keep a copy and put a copy in the envelope. Take a picture of items you send, including any identifying marks.
  • Insure your items when shipping them, so you can recover the value if they are lost.
  • Read the fine print. Before mailing items, find out what happens if you don't agree with the amount offered by the company, and check the company's policy on lost or stolen items; many limit liability.

-- Written by Joe Mont in Boston.

>To contact the writer of this article, click here: Joe Mont.

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