Bill Davison

From: Davison, William C [william.c.davison@hp.com]

Sent: Wednesday, June 13, 2007 9:39 AM
To: wdavison@nedernet.net
Subject: bernstein gold

Getting Going
Buying Protection: How to Use Hard Assets to Hedge Your Bets
By Jonathan Clements
666 words
13 June 2007
The Wall Street Journal
D1
English
(Copyright (c) 2007, Dow Jones & Company, Inc.)

The world's natural resources are limited -- but apparently there's no limit to investor enthusiasm.

Commodity, precious-metals and natural-resources funds now boast $112 billion in assets, up from $8 billion at
year-end 2001, according to Morningstar Inc. No doubt many buyers are simply chasing the funds' mostly
dazzling performance of the past eight years.

Yet that isn't the reason to buy them. Instead, as yesterday's market drop reminds us, it's good to own something
that goes up when stocks and bonds get battered. But which hard-asset funds offer the best bear-market
protection?

-- Natural resources. In the past, investors have often turned to natural-resources stocks.

For instance, the late Thomas Rowe Price Jr., founder of the fund company that bears his name, launched T.
Rowe Price New Era in 1969. Mr. Price reckoned rapid inflation lay ahead, and he figured natural-resources
companies would be a good hedge. Sure enough, the fund gained a cumulative 142% during the high-inflation
1970s, versus 77% for the Standard & Poor's 500-stock index and inflation's 104%.

Sound appealing? Natural-resources funds ought to generate long-term returns similar to the broad market, and
they should fare well when oil prices climb, because many of the funds focus largely or entirely on energy
companies. But if we get rough markets that aren't driven by escalating oil prices, the funds may not offer much
portfolio protection.

"You basically get stock-market risk when you invest in natural-resources stocks," argues Mark Willoughby, a
financial planner in Old Tappan, N.J. "If you want the diversification benefits, you've got to own the
commodities."

-- Commodities. Indeed, much of today's buzz is about funds that own commodity futures or other derivatives,
plus bonds or Treasury bills.

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Historically, that mix has generated a pattern of returns totally unlike stocks and bonds, while delivering long-
term results that rival those of the S&P 500, according to a study by academics Gary Gorton and K. Geert
Rouwenhorst in the Financial Analysts Journal.

What's driven that impressive performance? Futures buyers allow producers to hedge their commodity exposure
-- for which they have been handsomely rewarded. "The question is, with all the money flowing into
commodity futures over the past five years, will that historical premium disappear?" Mr. Willoughby wonders.

Commodity funds can be tax-inefficient, and some involve tax-reporting hassles. Barclays Global Investors
believes its three commodity iPath Exchange Traded Notes, which trade on the New York Stock Exchange,
solve this problem, with investors getting tax-deferred growth. But the Internal Revenue Service may not accept
Barclays' tax interpretation.

"Put your commodity fund in a retirement account," Mr. Willoughby advises. "That's the safest route to go." He
recommends Pimco CommodityRealReturn and Oppenheimer Commodity.

-- Precious metals. Not comfortable with these newfangled funds? William Bernstein, author of "The Four
Pillars of Investing," contends the best bet is an old-fashioned gold-stock fund, such as American Century
Global Gold.

He figures a gold fund might, over the long run, clock one or two percentage points a year above inflation. But
there's an additional gain to be had: Because gold-stock funds perform so differently from other investments,
you can earn a rebalancing bonus by earmarking maybe 3% of your portfolio for gold and then occasionally
buying and selling shares to get back to this 3% target.

Instead of a precious-metals stock fund, you could invest in the actual metal through exchange-traded funds like
iShares Silver and streetTracks Gold.

Mr. Bernstein isn't impressed. "The metal itself has a zero real expected return," he notes. "It's a weak
diversifier. You would need to commit far more to get the same diversification benefit you can get with a small
position in a gold-stock fund."