Thinking about buying GOLD? consider this.....

Gold has always been a safe haven in a bumpy stock market. People have several reasons for buying gold when the market gets rough, the most common reason is "you will actually own something real". Gold can be traded like a currency world wide and its value is undisputed. So when the equity markets turn south, there is usually a gold buying rush. When the equity markets recover, gold usually drops as people sell it to raise cash to invest in equities. While gold has many uses world wide, no demand seems strong enough to support a long term position in the metal. Yes METAL. When you really think about it, thats all that its is, a metal. The demands for other metals like steel are much greater, as steel is a utilized product used to develop our lifestyles.

Warren Buffett, the worlds most successful investor was quoted on GOLD:

"It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."


SHOULD YOU BE BUYING GOLD RIGHT NOW IN THIS BUMPY MARKET?

I believe the answer is no. The market has changed. Traditional moves wont work because the market is simply not there. Consider this... The #1 challenge for stock brokers right now is where to invest their clients money. As I type this information the TSX composite is down around 500 points on the day and gold has dropped significantly. The brokers are not selling equities and buying gold as they did in the past. In fact they are selling gold. So where is the money going?

There are 2 things apparent. First off investors are lining up to by T-Bills. This will give them short term comfort and no losses. Bonds have also been on the rise, but corporate debt is under severe scrutiny, so people are being extra careful when lending money to companies, as thats what happens when you buy a bond. Bond performance is also correlated with interest rates. Bonds do better when rates are dropping, but rates have been holding mainly due to the increased risk of inflation from high energy costs.

Secondly, we are in a world of NOW. People want things now, including investment gains. Short selling is racking up huge profits in this dropping market. The concept is simple. You have a credit arrangement with the broker where you borrow say 100,000 shares of GM at $10 for a total loan on $1 million. You immediately instruct the broker to sell the shares at $10 and he does. Now you have $1 million cash in your account. You are required to pay about 9% interest and within a short period of time pay off the loan by returning the 100,000 shares of GM to the broker. So you simply buy them back. Heres the deal - your betting that the share price will continue to drop, when you borrowed and sold the shares they were at $10, when you bought them and returned them lets say they were going for $5 per share. In this example you just made $500,000 because after the deal is complete you still have $500,000 cash in your account. ( less interest charges of course which are minimal in a short period). These kinds of transactions give people money NOW. While this type of investing is highly speculative and not recommended for most of us, individual investors are participating indirectly in short selling through hedge funds. These hedge funds have become market movers over the last few years as they control huge amounts of the money flowing through the system. I will be getting into more detail about hedge funds at a latter date, but most people need not worry about them. They are restricted to people who have a net worth of at least $1 million and an income of $250,000 annually.

So there you have it, the gold rush may finally end with this market. So what do you do?

follow the 2 rules of investing.

1. dont lose money

2. never forget rule #1

I know the picture is a bit like a dog chasing its tail, but a good investment advisor can guide you through this market without losing money. So thats what you really need.

Jeff McLellan, President MN Investments Private Client