The case for precious metals article from major league investments june 7 2012Document Transcript
The Case for Precious Metals: What Role Should Gold and Silver Play in Your Portfolio? By Michael S. Finer and Gary M. Coon Major League Investments, Inc. June 7, 2012As Ralph Waldo Emerson wrote, “The desire of gold is not for gold. It is for the means offreedom and benefit.” Emerson’s keen observation that since ancient times people have boughtgold not simply to own gold, but for what gold represents, certainly rings true for today’sinvestment managers. Historically, gold has served both as a safe harbor during economicdownturns and as a valuable hedge against inflation. Therefore, over the long-term, gold can bean effective tool for wealth preservation.And yet, because gold has no earnings and does not pay dividends, an investment in gold is oftencategorized as “dead money.” This traditional knock has particular merit in today’s low interestrate environment. As Warren Buffett, one of the great investors of our time and a famous criticof gold, once quipped, “[Gold] gets dug out of the ground in Africa, or someplace. Then we meltit down, dig another hole, bury it again and pay people to stand around guarding it. It has noutility. Anyone watching from Mars would be scratching their head.”So, after a decade-long run-up in price, no actual earnings, no yield or other way to return cash toinvestors, you might wonder whether it’s still possible to make money in gold. With respect togold positions, our robust technical analysis generally leads us to subscribe to the 13 ½ monthcycles that technician Tom McClellan espouses. This cycle suggested as of the end of May 2012that gold was forming a bottoming pattern in the mid $1530 to $1570 range. Complementingtechnical timing considerations, factors like currency stability, geostrategic/political context, anddemand for precious metals drive our investment decisions.Of course, gold is a complicated measure of value because gold also reflects the currency that itis measured in. As such, gold weakened in the last month or so because the U. S. Dollarstrengthened precipitously against the Euro. As a result, the weakness in gold prices does notjust reflect a weakening in demand for gold instruments, but also serves as a proxy for astrengthening dollar. The consensus view seems to be that the dollar will strengthen against theEuro because of fallout from the European debt crisis that has rocked global markets for morethan two years.Yet, while market volatility persists in Europe due to Spain’s banking system teetering on thebrink and Greece’s political future hinging on results from next month’s elections, it’s importantto remember that, with mounting debt and lingering unemployment, the United States has asignificant “fiscal cliff” of its own. What’s more, last summer’s fractious debate over raising thedebt ceiling certainly taught us that getting our nations fiscal house in order is no small task.