The pros are leaving gold -- but what's next?
As prices fall, many advisers are shifting to less-popular investments to protect their clients' portfolios. But finding returns elsewhere is tough.
As gold prices began to plunge late last year, adviser Ethan Anderson began cutting his clients' gold exposure -- in half. But like so many investors, the Grand Rapids, Mich.-based pro is now faced with a new dilemma: Where to put the proceeds?
The shiny metal's recent fall -- it settled last Friday at $1,616 per troy ounce, down 7% from Dec. 1 -- along with its increasing correlation with stocks, has converted many gold bulls into bears. In December, investors yanked $2.2 billion out of the $65 billion SPDR Gold Shares ETF (GLD), the largest exchange-traded fund that invests in physical gold.
That compares to an inflow of $3 billion in November, according to fund research firm Morningstar. "Gold had a lot of momentum but then it seemed to lose it," says Jeff Tjornehoj, an analyst at fund tracker Lipper.
Many of these investors have simply turned to other traditional safe havens like short-term bonds and Treasurys, or are simply holding the cash. But some financial advisers who claim those options have become too crowded and expensive are trying to build a defensive hedge for clients by shifting to less-popular investments, including emerging-market debt, international currencies and even mutual funds that bet on the mergers and acquisitions market. "It's time to start looking to be more aggressive," says Brian Kazanchy, a wealth manager at RegentAtlantic Capital in Morristown, N.J.
Of course, many investing pros say they are sticking with gold as way to protect their clients' portfolios from inflation and stock market volatility. Chris Kichurchak, vice president of Strategic Wealth Partners, a financial planning firm in Seven Hills, Ohio, says gold prices should rise again, given the continued debt worries in Europe. And if the European Central Bank buys more government bonds, in what's known as quantitative easing, he predicts investors will once again pile into gold.
Where some are going instead
Still, many experts say the gold bubble is finally popping and that it's time to seek shelter elsewhere. One strategy, says Adrian Cronje, chief investment officer of Balentine, an investment advisory firm in Atlanta, is to buy emerging-market bonds, which provide some diversification against the dollar. Because the bonds are denominated in local currency, if that currency gets stronger against the dollar, the bond is worth more, in dollar terms. Adviser Anderson, who halved his clients' gold holdings last month to 1.5%, says he's considering buying emerging-markets bonds because they're issued by countries that don't carry as much debt as developed regions like the U.S. and Europe.
Instead of relying on gold as a hedge against inflation, other pros are piling into currencies that can gain against floundering currencies. Jeff Sica, president and chief investment officer at Sica Wealth Management in Morristown, N.J., pulled money out of gold and other precious metals to invest in ETFs such as the $784 million CurrencyShares Australian Dollar Trust (FXA) and the $574 million CurrencyShares Canadian Dollar Trust (FXC), to get exposure to Australian and Canadian dollars. Those currencies, along with the greenback, are among those that should benefit if the euro plunges, he says.
In Atlanta, Paul Jacobs, a financial planner at Palisades Hudson Financial Group, says he's finding stable returns in perhaps an unlikely place: mutual funds that try to profit from mergers and acquisitions. Along with avoiding gold, Jacobs is replacing about 10% of his clients' bond portfolios with the $5 billion Merger Fund (MERFX), which invests in shares of companies that are set to be acquired with the hope that the share prices of those firms increase after the deal. While the strategy could be risky, the fund, which has returned an average 4% a year for the past three years, is less volatile than gold, says Jacobs.
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