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Bucks Blog: The Risk of Gold and Treasury Bills Right Now

August 19, 2011 by Leave a Comment

Chris Ratcliffe/Bloomberg News

This weekend’s Wealth Matters column opens with a bold statement about people who have sold stocks and are buying gold or United States Treasury bonds.

“They fled the perceived risk of falling stock prices right into the assured risk of overvalued assets,” said G. Scott Clemons, chief investment strategist for the wealth management division at Brown Brothers Harriman.

No one knows for sure if these assets are truly overvalued. But investors in T-bills did get hurt rather quickly in late 2010 and early 2011. And gold prices are based largely on sentiment, which can change in an instant.

So have you ditched stocks for Treasuries or gold of late? If so, how will you know when it’s time to reallocate again?

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Across Globe, Traders Brace for a Downturn

August 8, 2011 by Leave a Comment

Traders and bankers are braced for another volatile week in global markets — and the wildest ride is likely to be in stocks, not the Treasury bonds that were downgraded by Standard Poor’s on Friday.

The initial shock waves from the downgrade of the government’s credit rating were felt in stock markets over the weekend. Shares plunged in the Middle East on Sunday and were expected to open sharply lower in Asia.

On Wall Street, traders and strategists trekked to their offices on Sunday in scenes reminiscent of the fateful weekend before Lehman Brothers collapsed in 2008. Bank of America Merrill Lynch, Barclays, Credit Suisse and Morgan Stanley all hosted conference calls for anxious investors, and traders plotted strategy for what they expected to be a tumultuous day on Monday.

In Israel, shares fell 7 percent on Sunday, the worst drop since 2000. Investors placed so many sell orders that the Tel Aviv Stock Exchange delayed the opening of trading.

In early trading on Monday, Japanese and Australian stocks fell more than 1 percent. Gold prices were soaring, with spot prices approaching $1,700 an ounce, and the dollar weakened in early trading. In futures trading on Sunday night, major United States stock indexes were down more than 2 percent, although futures are not always reliable indicators of how stocks will open the next day in New York.

One factor that might bolster stocks is the announcement by European leaders on Sunday that they were planning huge purchases of Italian and Spanish bonds in an attempt to reassure nervous investors.

S. P. — the rating agency that issued a historic downgrade of United States Treasury securities to AA+ from AAA on Friday night — is expected this week to downgrade a host of other securities linked to Treasuries. Those include bonds from insurers as well as debt from Fannie Mae and Freddie Mac, the government-controlled mortgage giants.

Like Treasuries, notes issued by Fannie and Freddie are considered to be among the safest investments, so even a modest downgrade could rattle investors.

“What they did on Friday is a big deal,” said Peter Fisher, the head of fixed-income portfolio management at BlackRock, the giant asset manager. “We’re all waiting to see how they follow through in terms of the knock-on effect.”

At the Newport Beach, Calif., headquarters of Pimco, the world’s largest bond fund manager, the co-chief investment officer, William H. Gross, met with senior money managers and traders as Asian markets prepared to open, and also gathered a skeleton crew of employees to staff the trading desks.

It was the first Sunday that he had gathered his team at the office since Lehman’s collapse in September 2008, Mr. Gross said, adding that he was planning to be back at work at 3:30 Pacific time on Monday morning to gauge the market action in Europe.

“It’s a series of events that comes close to Lehman in terms of the anticipation, and the sleeplessness is similar,” Mr. Gross said. While he said he did not expect stocks or bonds to necessarily plunge this time, volatility reminiscent of the days of the financial crisis might be in store.

Mr. Gross said he expected that investors in only about 1 percent of his firm’s accounts would sell Treasury securities.

At the Manhattan offices of BlackRock, which has $3.6 trillion under management, Mr. Fisher was also at his desk Sunday. He said he did not expect that investors would automatically sell Treasury bonds as a result of the downgrade, but that they might unload riskier assets like stocks and lower-rated bonds.

“If you think the world is a risky place, you start at the outer edges, not what’s least risky,” Mr. Fisher said.

On both sides of the Atlantic, the twin worries of staggering amounts of government debt and slowing economic growth dominated the broader discussion, prompting European leaders to announce the purchases of Italian and Spanish bonds.

For American investors, the downgrade by S. P. comes at an especially jittery moment.

By the time the rating agency acted late Friday, Wall Street had suffered its worst week since the financial crisis, with the Dow Jones industrial average falling 5.75 percent, a slide punctuated by a 512-point drop on Thursday.

Even more than the standoff over raising the federal debt ceiling, the stock market’s plunge was caused by increasing fears that the economy has lost its momentum and could even be on the verge of another recession.

Those worries, compounded by the downgrade, could add up to a one-two punch for stocks.

“Investors who are still on the fence may begin to think a recession is more likely,” said Sam Stovall, chief investment strategist at S. P. Equity Research, which operates independently of S. P.’s ratings division. “There are a lot of things investors now have to contend with. They have to decide whether the global economy has stepped on a soft patch or on quicksand.”

To be sure, not everyone on Wall Street was calling for doom and gloom. In a note on Sunday, Barry Knapp, a strategist at Barclays Capital, said his firm remained bullish. Stock valuations, he insisted, remain appealing.

Still, in a sign of the anxiety coursing through Wall Street all weekend, nearly 4,000 investors dialed into a conference call organized by Morgan Stanley’s research team. “That’s the most I’ve ever heard of for a Sunday in August,” said Adam Parker, the firm’s chief United States equity strategist.

Echoing Mr. Fisher’s statements, Mr. Parker said that the Morgan Stanley team did not expect Treasuries to take a hit as a result of the downgrade.

But, as fear rises, riskier assets like stocks are likely to suffer, he said. He is recommending that investors avoid the consumer discretionary sector, which means companies like restaurants, retailers and apparel sellers, as well as industrial companies. A safer harbor might be health care companies and utilities.

“With the market having come down this fast, that in and of itself could increase the probability of a recession,” Mr. Parker said.

Bettina Wassener contributed reporting.

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With Silver Soaring, Attics Give Up Small Fortunes

May 2, 2011 by Leave a Comment

As investors send prices soaring for not only gold, but now also silver, consumers have been unearthing ancient stashes of silverware, teapots and jewelry from long-discarded beaus, and trading them in at pawn shops or selling them on eBay for cash. More and more cash, in fact, as weeks go by.

“We’re seeing an increase of people coming in from all walks of life because they hear the news — gold prices are at record highs, silver prices are at record highs, so they’re basically grabbing what they have in their home and coming in to pawn, or sell, the items,” said Yigal Adato, an owner of CashCo Pawn in San Diego.

The sharp increase in prices — on Friday, gold hit a new high, not adjusted for inflation, while silver in April had the largest monthly jump in 28 years — has had an effect across the spectrum of retailers dealing with precious metals. Plain old silver enjoys new cachet among jewelers moving away from gold. And jewelry designers are opting for cheaper alternatives than metals — like emeralds, in one case.

Even the business of marriage enters in. Bands of gold are getting closer in price to the diamonds that sit on them. And Indian weddings, with traditional displays of celebratory gold, may be less gilded this summer.

Gold has been surging for years, and on Friday, it almost hit $1,570 for a troy ounce (a nominal high, not adjusted for inflation). Silver, measured by futures for July delivery, is almost as high as it has been since 1980, at more than $48 an ounce, though that comparison, too, is not adjusted for inflation. So far this year, the price of silver has risen more than 50 percent.

Gold has been slower to increase, with contracts for future delivery rising about 9 percent this year. When gold started its most recent run after the banking crisis in fall 2008, it posted a 25 percent gain for all of 2009.

Pawn shops are benefiting. Three publicly traded pawn shop companies, Cash America, EZCorp and FirstCash Financial, recently reported sharp increases in net income compared with a year earlier. For Cash America, the rise was 14 percent; with 34 percent for EZCorp; and 87 percent for FirstCash. Armloads of metal merchandise brought in by customers helped to drive those results: at FirstCash, domestic revenue from wholesale scrap jewelry rose 45 percent.

Worried about inflation, and wanting the stability of precious metals, investors are buying them in coins, and via vehicles like the iShares Silver Trust, an exchange-traded fund backed by silver.

“Investors who feel they may have missed the boat with gold have jumped into silver because it has a better price point,” said Suki Cooper, a precious-metals analyst for Barclays Capital.

Yet even if investors think $48 an ounce is reasonable, jewelers say the price has turned once-plebian silver into something extravagant.

“I felt you’d never see the day when silver would start to jack up like this,” said Alexis Bittar, who designs jewelry sold at stores like Saks Fifth Avenue and Nordstrom. “It’s always been considered not like a base metal, but fairly close to it.”

He added, “But next to gold, it’s the next precious metal in line, and it makes sterling seem more luxurious.”

Mr. Bittar, whose jewelry typically sells for a few hundred dollars, said he was making shifts to keep prices flat. Brass, for instance, substitutes as a base for silver on items that will be coated with gold, and he is reducing the amount of metal used in some designs.

J. C. Penney, which is also trying to keep prices flat on most items, began using alternative metals when gold prices started rising, and now sells items made with sterling silver, cobalt and Platinaire, a mix of silver and platinum, said Rebecca Winter, a Penney spokeswoman.

Also, she said, the retailer realized that customers did not mind paying higher prices for trendy pieces. In February, Penney introduced Alexandra Gemstones, a line meant to capitalize on the popularity of colorful accessories while avoiding silver and gold.

Michael Bisceglia, the president of the jewelry company Stauer, is also emphasizing gemstones — even rubies, he said, can be had at low prices.

“Emeralds, rubies, sapphires, tanzanite, pearls — those prices haven’t gone up that much, so I’m adding more gemstones to jewelry now, and less silver,” he said.

As for the Indian weddings, some changes are under consideration. Indian weddings typically involve a lot of gold jewelry, said Anu Duggal, a founder and the executive vice president for new business development for Exclusively.In, a site that sells Indian fashion and jewelry and just introduced a weddings section.

“It is very common for not only the bride and groom, but also the family members to purchase new outfits and jewelry for these events,” Ms. Duggal said in an e-mail. She added, “Gold itself is the most common gift given during weddings, and it is customary for the bride to wear pure gold as part of the formal wedding ceremony.”

But as the cost of gold has shot up, brides are altering the tradition, shifting to semi-precious and gold-plated jewelry, Ms. Duggal said. “This is becoming more and more acceptable,” she said.

At CashCo Pawn, the metals rush has brought in lots of silver inventory, like coins, teapots and flatware. “People receive Tiffany silver items,” Mr. Adato said, “and the girlfriend brings it in to sell — they say: ‘You know what? I broke up with this guy. I don’t want to see this anymore.’ ”

In addition, people are still bringing in scrap gold, he added: “gold teeth, a lot of dental work. We get grills once in a while, gold grills.”

Joe Ellis, the owner of Cherokee Coins in Alpharetta, Ga., said he had never seen higher demand for gold and silver bars. Customers want coins like the United States silver eagle, generic silver bars, circulated silver dollars, and dimes and quarters from before 1965, when they were made with 90 percent silver.

Cherokee accepts pawned items, but, Mr. Ellis said, that business had slowed. During the recession, he accepted a steady stream of items like broken bracelet chains and silverware, but now, he said, his customers seemed to have little left in their attics and basements.

“Quite frankly, I think people just have so much they can sell,” he said.

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