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The Popular Press Discovers Gold: Time to Take Profit?


Strategists explain the media's effect on investments, and if it applies to the yellow metal.

Market pros remind us that, according to one old saying down in the canyons of lower Manhattan, we should think about selling an investment when it's discovered by the popular media.

If that's the case, then now would be the time, it would seem, to strip your portfolio of the yellow metal.

Our colleagues in the press have decided that the barbarous relic deserves a lot of attention: Notice the recent headlines splashed across your daily newspaper such as the Financial Time's twin pieces, Growing Demand for Bullion Hands Banks Golden Opportunity in Storage and Demand for Bullion Puts Strain on Vaults.

The New York Times has also pounced on the popularity of gold. Reporters at the Gray Lady in a big article on June 12 -- Uncertainty Restores Glitter to an Old Refuge, Gold -- outlined gold's increasing popularity as a mainstream investment.

The New York Times emphasized that gold bulls, often dismissed as end-of-time weirdos, are "finally having their day" as everyone from Fox News commentator Glenn Beck to financier George Soros have become gold enthusiasts.

They're joined by an array of top-notch professional money-makers, from David Einhorn to John Paulson, and the general investing public is following their lead. In fact, the United States Mint is now running short of gold coins.

The SPDR Gold Trust (GLD), an exchange-traded fund that tracks the price of bullion, is up 13% year-to-date. The Market Vectors Gold Miners ETF (GDX), which includes Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM), AngloGold Ashanti (AU), and Kinross Gold (KGC), is up 15%.

The S&P 500, in contrast, has gone nowhere with a lot of whiplash-inducing volatility in the process.

Investors use gold as a hedge against rounds of currency debasement, the near-term risk of deflation, the long-term risk of inflation, and fiscal irresponsibility inside the Beltway. But all this enthusiasm now has some market pundits like Gluskin Sheff's David Rosenberg urging caution at these levels. Although he remains very bullish on a long-term basis -- forecasting gold going to $3,000 -- Rosie recently wrote that what he sees as the "herd mentality" surrounding gold right now is a bit "disconcerting."

(For an alternative take on gold, also check out our recent article, Where Is Gold Headed?)

Frank Holmes, CEO and chief investment officer of US Global Investors, reminds us that we're often urged to consider selling our investments once they're "discovered" by journalists scribbling for popular rags like the New York Times, as that indicates, he says, group-think among investors that can lead to short-term corrections.

However, in a chat with Minyanville, Holmes says that might not be good advice for gold investors today. Yes, the mainstream press has caught on and front-page articles abound but, unlike the frenzy over Tech stocks in 1999, there isn't a mania about the metal and people haven't borrowed to buy gold.

"You don't have that mania and you don't have that leverage," he says.

Holmes reminds us that there's a slew of factors supportive of gold, including the renewed interest of central banks in adding to their gold holdings to diversify their foreign reserves; gold-mine output on track to decline this year and next even as investment demand remains solid; and his opinion that, as we approach the 2010 midterm elections, deficit spending could go even higher as politicians try and curry favor with the electorate. (For more on his views, check out his blog).

Holmes advises investors to consider a maximum 10% allocation to gold-related assets, half in bullion or bullion ETFs and the other half in a good gold fund or gold stocks.
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