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Wall Street Journal joins brokers in trying to talk investors out of gold

Section: Daily Dispatches

Advisers Try to Tame Investors' Appetite for Gold

By Ian Salisbury
The Wall Street Journal
Monday, October 25, 2010

As individual investors hop on the gold bandwagon, financial advisers are finding themselves in an all-too-familiar role: that of mom and dad slapping hands away from the cookie jar.

The precious metal has enjoyed a long run-up, gaining about 25% in the past year and consistently making headlines with records pushing ever higher. Also fueling the buying binge is a number of big-name investors like Paulson & Co.'s John Paulson. Gold prices stood at $1,324.40 a troy ounce Friday.

Such price spikes and high-profile bullishness often create a ticklish situation for advisers: They think about selling just as clients want to buy.

"I am not a gold bug, but I have a couple of clients that have just insisted," said Jim Heitman, a financial planner in Alta Loma, Calif. "Even as they objectively recognize the threat of a bubble, they just don't seem to care."

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Mr. Heitman says he sometimes uses commodity-sensitive stock funds such as PowerShares Dynamic Basic Materials Sector ETF but doesn't like making direct bets on a single commodity like gold.

To clients who walk in the door craving gold, he makes two arguments. For one, long-term gold prices merely keep pace with inflation, and investors should concentrate instead on their broader goals like what kind of income they would like to generate. For those that won't be swayed, he points toward SPDR Gold Trust, but he keeps the exchange-traded fund at no more than 5% of their overall portfolios.

Trying to talk clients out of hot investments is nothing new for financial advisers. In some ways, advisers say, the gold boom is easier to deal with than past spikes like the Internet-stock bubble in the late 1990s.

The Internet bubble proved to be the cap on a 20-year bull market that had many investors feeling invincible. After the dot-com blowup and the market crash that rocked Wall Street in 2008, few are feeling that way.

George Middleton, a financial adviser in Vancouver, Wash., says the current fascination with gold began in 2009, spurred in part by desire for a safe harbor.

As the price of gold has climbed steadily, investors have remained interested, if not always for the same reasons. While many of his clients own iShares Gold Trust, he has been selling small lots to keep the metal from becoming too big a part of their portfolios.

Clients "check to make sure they own it; then they ask should I buy more?" Mr. Middleton said. "The answer is usually 'No.'"

Financial adviser Bob Kargenian, in Orange, Calif., has gone a step further and begun to sell. For instance, for his moderately aggressive clients, he has cut exposure to Van Eck International Investors Gold Fund, a mutual fund that focuses on gold miners, to about 1.8% of investment portfolios from about 3.5% at the end of September.

Investors have hired him to protect them from their own worst instincts, he explains, particularly in situations like this.

"If clients start calling us up and saying, 'We want to see gold,' that is like the kiss of death," he joked, noting the general public's tendency to arrive at good investment ideas too late. "It's like seeing it on the cover of Time magazine."

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