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Don’t go for the gold when seeking an investment

Dear Mr. Berko: We have a joint brokerage account valued at $482,000, almost all of which is my wife’s from an insurance settlement she got before we got married seven years ago.

I run the account and she doesn’t know anything about the market.

I’ve recently been advised to put 10 percent of this account in gold. I’ve been reading your column for a long time and have never read where you have commented on or recommended gold.

But can you please tell me what you think of gold as an investment? I don’t want to discuss this with my wife until after I do it because she always gives me the third degree when I make a change in the account, and several times we lost an opportunity because she was too timid and we got into a bad argument. – T.T., Oklahoma City

Dear TT: You’re as right as a mountaintop.

I’ve never recommended gold in a column, nor have I ever recommended silver. And I’ve said “no” to most readers who asked about buying gold or silver as an investment.

I do not consider gold or silver to be investments. I don’t know how to analyze something that doesn’t have a cash flow, book value, operating margin, net profit margin, return-on-share equity, price-to-earnings ratio or a specific number of shares outstanding.

So my opinion of the lovely metal is only worth what I know, and that isn’t much.

But I do know that the supply/demand factor that gold enthusiasts use to support their views has been working overtime. And I do know that enormous demand from money managers buying gold as a currency hedge and the unprecedented demand from individual investors who are buying gold coins — at ridiculously exaggerated prices — from those numerous faux mints have overwhelmed the fundamental supply/demand paradigm.

And, certainly, these two factors have pushed gold to record highs. And I do know that the “professional traders,” the guys who live and breathe this metal, rely on their analysis of “fundamentals” to make their buy-and-sell decisions. However, it appears that these fundamentals are beginning to deteriorate.

For instance, some 75 percent of gold-mining companies have unwound their price hedges — via the purchase of gold — and are no longer big buyers in the market. And I do know that jewelry sales are sagging at the large retail stores due to extraordinarily high prices. And I do know that global supplies of gold are burgeoning as myriad miners are busier than one-armed paperhangers, ever digging up more gold to sell at these higher prices. And lots of folks are selling their gold watches, chains, rings and other olla podrida to cash in on the record high prices.

I do know that the 2010 gold supply will total 115.7 million ounces and that 39.8 million of those ounces will be purchased by money managers, hedge funds, etc., according to CPM Group, a commodities consultant. And I do know that these money managers, hedge funds, etc., will purchase less gold this year than last year and that imports by India, the world’s largest buyer of physical gold, have declined 9 percent this year, according to the Bombay Bullion Association.

Logically, this suggests that gold prices will either begin to decline or level off. However, logic may be a good discipline when measuring value but a worthless discipline when used to predict price. And even Goldman “Sucks” has continued to raise its price forecast for gold five times so far in the past 12 months and now expects gold to trade at $1,650 in the coming 12 months.

Some observers believe that gold will continue to rise, thinking it could reach $2,000 by next year. Others feel that today’s current gold prices, like stock prices, reflect the expectations six to a dozen months in the future and believe that gold prices have topped out.

And all of this is beyond my pay grade, as the future price of gold relies upon mass psychology rather than numbers and facts. So the only advice I can give you is: If you can afford the risks, go for it and put 10 percent of that $482,000 into gold.

But I will give you some advice you can take to the bank: Tell your wife what you’re going to do before you do it. If you don’t, you can bank on the possibility she may take you to divorce court.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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