SUNDAY, DECEMBER 12, 2010 PERSONAL FINANCE


Gold: Long- term hedge, or bubble near burst?


BY ANDREW TANZER AND BOB FRICK


G old, often considered a


safe place to invest in a rocky economy, climbed


past its all-time high in recent weeks, fueling speculation that the price per ounce could hit $1,500. The rally was clipped last week by concerns that China could raise interest rates, which triggered a retreat. What’s an investor to do? Dig deeper into the glittery stuff, or sell and collect on the gains?Here are two views:


Andrew Tanzer: Love it The surge in gold prices to


about $1,400 an ounce makes perfect sense. Confidence is waning in paper money, such as the dollar, and for good reason. Our monetary and fiscal policies are remarkably lax, debasing our currency as a store of value and raising the specter of inflation down the road. The Federal Reserve Board continues to pump money into the economy, and we will run huge budget deficits as far as the eye can see, dramatically expanding our financial liabilities.Martin Murenbeeld, an economist at Canada’s DundeeWealth Economics, shows that over the past decade, gold prices have moved almost in lock step with the expansion of global liquidity (U.S. money supply plus overseas foreign reserves). Both have multiplied fivefold. Our government, like those in


Europe and Japan, has made entitlement-benefit promises to voters that it cannot possibly keep. Politicians will fall back on the quick fix of printing money —an easier solution than calling for steep spending cuts and tax


ILLUSTRATION BY TIM GRAJEK FOR THE WASHINGTON POST


increases. Failure to adopt tough, economically sound policies bodes well for gold prices. Let’s not forget the growing


demand for gold abroad. Citizens of China and India are using their rapidly growing incomes to buy gold jewelry and to invest in the metal. Central banks in many emerging nations have become big buyers of gold to diversify their foreign-exchange reserves. Gold provides a hedge against


inflation, currency weakness and financial turmoil. Gold doesn’t move in sync with stocks or bonds, so it’s a good diversifier. Everyone should consider owning some.


Bob Frick: Leave it You’d think that after


experiencing two investing manias in ten years, we’d recognize the symptoms. To recap: A mania begins when an asset runs up in price, attracting buyers. That begets more price


THE COLOR OF MONEY


Warren’s determination will give new consumer bureau real teeth


singletary from G1


advocate imposing regulations so tough that it wouldmake it more difficult for people to get credit. But right now,Warren says


her focus is on helping consum- ers understand howmuch they are paying for debt on every- thing fromcredit cards tomort- gages. At a recent conference held by the Consumer Federa- tion of America,Warren said the bureau’s initial goal isn’t to im- pose a series of “thou-shalt-not rules.” Instead, she said that first on the agenda is providing con- sumers with better and shorter credit disclosures. Although this goalmay sound so simple, it has the potential to greatly reduce the financial burden for people, because they don’t fully compre- hend howmuch their debt is re- ally going to cost them. “There are a lot of financial


institutions thatmake their money by keeping products con- fusing so the price isn’t clear un- til it’s way too late,”Warren told me. “Theymakemoney by con- cealing risk, whichmeans that people can’t compare the prod- ucts head to head.” Think about it this way,War-


ren says: Restaurants would lose customers if they weren’t clear about what ameal cost. “No restaurant survives by


saying, ‘You will find out how much the food costs on the back end after you’ve eaten, after it’s too late to do anything about it,’ ” she said. Yet that’s exactly what hap-


pens tomany people in their dealings with financial institu- tions. The true cost of credit is often hidden in lengthy, incom- prehensible legalese documents. “Making it clearmeans there


will be some families who will know the true cost of these prod- ucts and say, ‘I don’t want any part of this,’ ”Warren said. “If that had happened 10 years ago, there would be some families who wouldn’t have refinanced their homes straight into fore- closure. There would be some families who didn’t take on cred- it cards that pushed them straight into bankruptcy.We are not saying you have to put a cap on prices.What we are saying is


increases and attracts still more buyers. And on and on. After a point, none of the buying can be called rational. During the Internet mania of


the late 1990s, stocks surpassed what companies could possibly earn to support their share prices. With the recent real estate mania, home prices rose far beyond what the demand for housing and inflated credit markets could sustain. The latest mania is gold. Bulls


say gold will become the world’s de facto currency as the dollar disintegrates and theU.S. and other developed nations print money to pay off their massive debts. Such moves are bound to spur inflation, a great friend of gold. The reality: Gold isn’t suited to acting as the world’s currency because it’s not a great store of value and is tremendously volatile. Gold’s price can fall even in inflationary times—and, in any case, inflation isn’t even a speck on the


horizon.Unlike other assets, gold doesn’t pay dividends. And unlike other commodities, gold has fewindustrial uses. Some safe haven. But gold is a great hedge


against political and economic upheaval. Yes, there’s a lot to be fearful about in today’s crisis- prone world economy, but there are better assets to invest in than gold—especially when its price is in bubble territory. And when the developed economies get their acts together, that loud whooshing sound you’ll hear will be the fear being let out of gold prices.


—Kiplinger’s Personal Finance


Andrew Tanzer is a senior associate editor of the magazine. He has 5 percent of his investments in gold. Bob Frick is a senior editor of the magazine. He has a krugerrand in his sock drawer.


Investors take a shine to silver, but rally raises risk of pullback


BY ELIZABETH ODY G


old isn’t the only precious metal to have captured investors’ fancy lately. The


silver market is white hot. From late August through Dec. 2, the metal’s price surged 58 percent, to $28.50 per ounce, racing ahead of gold’s 13 percent gain. Consider silver a juiced-up


version of gold. Although they tend to move in sync, silver prices have been 60 percent more volatile than gold prices in recent years. That’s partly because demand


for silver is more closely tied to economic activity.Unlike gold, which is used mainly in jewelry, silver has many industrial applications. Silver is used in electrical switches and fuses, in batteries, and in the making of photovoltaic cells. Another reason for the greater


volatility is that the market for silver is much smaller than the market for the yellow metal. As a result, a small pickup in investor interest can make a bigger impact on silver’s price than on gold’s. One important influence on


the price of both metals is investor sentiment—gold and silver prices rise when investors become mistrustful of “paper assets” such as stocks, bonds and currencies. William Rhind, head ofU.S.


sales and marketing of ETF Securities, says investors are probably betting that the Federal Reserve Board’s loose-money policies will lead to a weaker dollar and higher inflation, both of which are bullish for precious metals. “By expanding the money supply, the Fed’s policy is inherently inflationary,” he says. “For investors, precious metals are the antidote to inflation.” But silver’s recent rally has a


distinctly speculative feel to it, says Chris Burba, a strategist for


6 NEW ISSUE—Book-Entry Only


Standard & Poor’s. “We’ve seen a frenzied sort of buying since August,” he says. Investors have been buying silver up in heavy volume, and the metal’s price has traced rapid, steep gains over the past fewmonths. “That is often reflective of a highly speculative market,” he says. Silver probably won’t keep up


the breakneck pace. “There’s a high risk of a pullback after a big rally like this,” Burba says. But he thinks the metal is still in the early stages of a multiyear bull market and that silver won’t finish its run until it revisits its record high of $49.45 an ounce, set in 1980. You can play the rally with


iShares Silver Trust, an exchange-traded fund that holds the actual metal. Silver is treated as a collectible for tax purposes, so gains inside of regular accounts are taxed at a maximum rate of 28 percent. Year-to-date through Dec. 2, iShares silver returned 69 percent, according to Morningstar. However, given its volatility,


silver should make up only a sliver of your portfolio. For more balanced exposure to precious metals, consider ETFS Physical PreciousMetals Basket Shares. The ETF, which launched in October, holds a basket of gold, silver, platinum and palladium. The fund is suitable “for investors who want access to precious metals, but who don’t want to have to decide which metals to buy or in what proportion,” Rhind says. The precise weightings among the different metals will fluctuate as their prices change. But on Dec. 3 the fund’s weightings were: 50 percent in gold, 37 percent in silver, 8 percent in platinum and 5 percent in palladium. Like the iShares Silver Trust, the fund is backed by holdings of the actual metals. — Kiplinger’s Personal Finance


More from Kiplinger Go to www.kiplinger.com for more analysis.


KLMNO


EZ EE


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Under no circumstances shall this announcement constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. The Bonds will be sold by means of an Official Statement.


EXPECTED RATINGS:* Fitch: AA– Moody’s: Aa2 S&P: A+


$172,455,000*


District of Columbia (Washington, D.C.)


General Obligation Bonds Series 2010A


(Federally Taxable—Build America Bonds—Direct Pay to Issuer)


Series 2010B (Tax-Exempt)


• Maturities 2012–2020, * and 2023*


• Expected Pricing: December 15, 2010* • Bonds will be available in $5,000 denominations


BRENDAN SMIALOWSKI/GETTY IMAGES Improving credit disclosures is one of ElizabethWarren’s goals.


that you have tomake your pric- es clear.” I askedWarren whether con-


sumers should be held account- able for their bad decisions in taking on riskymortgages or failing to understand the credit contracts they signed. Warrenmoved to the edge of


her chair. “The fact that we are fallible


human beings—that wemake mistakes, we sometimes get greedy or we sometimesmis- judge—is that an excuse for anybody to cheat us?” To furthermake her point,


Warren told the story of a 67- year-old widow who hadn’t un- derstood that themortgage she took out had a two-year teaser rate. The woman’s loan eventual- ly adjusted to amonthly pay- ment she couldn’t afford. She lost her home to foreclosure. The woman had trusted the bank representative who persuaded her to refinance,Warren said. Warren got choked up recall-


ing that. The new watchdog agency has


some broad policing powers over consumer financial prod- ucts and services. But it’sWarren’s history of


passionately advocating for con- sumers that I’d bank on. Under her direction, the bureau can be- come one of themost powerful agencies in the federal govern- ment, unapologetically and ag- gressively looking out for the welfare of consumers.


Readers can write toMichelle Singletary c/o TheWashington Post, 1150 15th St., N.W.,Washington, D.C. 20071. Her e-mail address is singletarym)at)washpost.com. Comments and questions are welcome, but due to the volume of mail, personal responsesmay not be possible. Please also note comments or questionsmay be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated.


In the opinion of Bond Counsel, under existing law, (a) the interest on the Series 2010A Bonds is not excludable from gross income for Federal income tax purposes, and (b) assuming continuous compliance by the District with certain covenants described more fully under “TAX MATTERS” in the Official Statement, (i) the interest on the Series 2010B Bonds is excludable from gross income for Federal income tax purposes, and (ii) the interest on the Series 2010B Bonds is not an item of tax preference for purposes of the Federal alternative minimum tax imposed on individuals and corporations and is not taken into account in determining adjusted current earnings for the purpose of computing the Federal alternative minimum tax imposed on certain corporations. As described in the Official Statement under “TAX MATTERS,” other Federal income tax consequences may arise from ownership of the Series 2010 Bonds. In the further opinion of Bond Counsel, under the existing law of the District, the Series 2010 Bonds and interest on the Series 2010 Bonds are exempt from District taxation, except for estate, inheritance and gift taxes.


Further information, including copies of the Preliminary Official Statement for these Bonds, may be obtained from the firms listed below:


(800) 522-3546 Citi


BofA Merrill Lynch (800) 825-1521


Loop Capital Markets (800) 894-0506


Rice Financial Products (888) 740-7423


Siebert Brandford Shank


& Co., L.L.C. (800) 334-6800


Fidelity Capital Markets (800) 544-5372


RBC Capital Markets (800) 368-3880


Wells Fargo Bank, N.A. (866) 287-3221


**Preliminary, subject to change. **Before purchasing any Bonds, contact your tax advisor to determine any applicable federal, state and local tax consequences.


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