It wasn't that long ago that a basic asset allocation model consisted of a pie cut into 3 pieces: Stocks, bonds, and cash. But little by little over the past decade, that pie has become more diversified, to the point where many models now reserve a slice for Gold (which is often referred to as Other).
The most most popular venue for purchasing gold is the SPDR Gold Trust ETF (GLD). The GLD gained much attention last month when it briefly became the largest etf by assets held, topping the SPDR S&P 500 (SPY). Whether the massive expansion into gold is the result of more investing vehicles like the GLD, better financial planning and sophistication, or both, it coincides with a gold rally that began in 2001 at $265 an ounce and has been fueled over $1,900 an ounce thanks to a steady growth in demand.
Demand growth is the cornerstone of a 4-pronged case for owning gold according to Rob Lutts, president of Cabot Money Management. Lutts not only points to the increasing appetite of individuals who view gold as an alternative to paper currency, but to the still budding appetite of institutions, who are just now dipping their toe into the proverbial pot 'o gold.
"I know of a $5 billion fund that just made its first position in to gold with a $200-300 million investment," Lutts says, adding that he expects mega funds like Calpers, Harvard, and Yale Endowments to follow suit.
Other reasons why Lutts is unwavering in his bullishness on gold center around China's growing wealth and influence. There's a well-known cultural affinity for investing in the metal in what seems to be unwavering demand. Combine that with the simple dynamics of limited supply, and China alone fuels the bullish case for gold.
Bottom line, Lutts sees gold rising to new highs. He says he could make a case for $6000 an ounce gold, but is targeting a more modest move to $2000 - $3000.
To get there, he applies a 3-stage process of investor sentiment that goes from denial, acceptance, and finally a "love affair" stage. How will we know we're in that final stage? "When you go to Thanksgiving dinner and your grandmother wants to buy gold," Lutts says.
While we're not there yet, Lutts believes the rebuild for the beaten down precious metal is already underway, whether it's being sought as a safe haven, a hedge, or purely for speculation.
As a matter of policy, Lutts says Cabot puts 10% 0f client assets in gold and/or gold mining companies, explaining that a stake in Barrick Gold (ABX) - a stock he likes- is "like owning the largest pile of gold in the world" given their unmatched reserves of the precious metal.
- SPDR Gold Trust ETF