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The case for precious metals may 2012

Multi-asset investment manager and our discussion on the pros and cons of investing in precious metals, specifically Gold and Silver.

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The case for precious metals may 2012

  1. 1. 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 of freedomand benefit." Emersons keen observation that since ancient times people have bought gold not simplyto own gold, but for what gold represents, certainly rings true for todays investment managers.Historically, gold has served both as a safe harbor during economic downturns and as a valuablehedge against inflation. Therefore, over the long-term, gold can be an effective tool for wealthpreservation.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 todays low interest rateenvironment. As Warren Buffett, one of the great investors of our time and a famous critic of gold,once quipped, "[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, diganother hole, bury it again and pay people to stand around guarding it. It has no utility. Anyonewatching 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 its still possible to make money in gold. With respect to goldpositions, our robust technical analysis generally leads us to subscribe to the 13 ½ month cycles thattechnician Tom McClellan espouses. This cycle suggested as of the end of May 2012 that gold wasforming a bottoming pattern in the mid $1530 to $1570 range. Complementing technical timingconsiderations, factors like currency stability, geostrategic/political context, and demand for preciousmetals drive our investment decisions.Of course, gold is a complicated measure of value because gold also reflects the currency that it is
  2. 2. measured in. As such, gold weakened in the last month or so because the U. S. Dollar strengthenedprecipitously against the Euro. As a result, the weakness in gold prices does not just reflect aweakening in demand for gold instruments, but also serves as a proxy for a strengthening dollar. Theconsensus view seems to be that the dollar will strengthen against the Euro because of fallout from theEuropean debt crisis that has rocked global markets for more than two years.Yet, while market volatility persists in Europe due to Spains banking system teetering on the brinkand Greeces political future hinging on results from next months elections, its important toremember that, with mounting debt and lingering unemployment, the United States has a significant"fiscal cliff" of its own. Whats more, last summers fractious debate over raising the debt ceilingcertainly taught us that getting our nations fiscal house in order is no small task.Todays physical demand for gold continues to outstrip the production capability of the mines. Whilethis does not necessarily suggest that the price of gold must rise, it is a contributing factor that couldgenerate structural changes that shift supply and demand and increase the price of gold at each level.Governments of the world also remain net buyers of gold and this is a positive contributor to increasesin price.Although gold and silver appear fairly correlated from a price perspective, the case for silversunderlying physical demand is a compelling one for the next five to ten years. In addition to silversuse in coinage, silverware, jewelry and photography (although the latter is diminishing because ofdigitization) industrial use is growing in such areas as cellular phones, photovoltaic cells in solarpanels, automotive electronics and medical applications. Notably, although it has sold off even moreaggressively than gold, silver tends to trade in sympathy to gold. Additionally, silver tends to be morevolatile than gold, bringing potential for additional opportunities as well as risk.McClellans 13 ½ month cycles, currency instability, underlying potential physical demand, geo-strategic/political uncertainty, and future potential inflation continue to inform our dynamicinvestment approach to gold and precious metals. Our consideration of these factors led us to take asignificant position in gold and silver throughout the month of May, 2012. We will continue toexamine precious metals in the coming quarter as part of our multi-asset wealth management strategy.© Major League Investments, Inc., 530 Loring Avenue, Suite 302, Salem, MA 01970 Telephone: 978-740-1011 ? Please visit our website at www.majorleagueinvest.comDisclosureThis article should not be regarded as a complete analysis of the subjects discussed. All expressions of
  3. 3. opinion reflect the judgment of the authors as of the date of publication and are subject to change.Information presented does not involve the rendering of personalized investment advice and shouldnot be viewed as an offer to buy or sell, or a solicitation of any offer to buy or sell the investmentsmentioned herein. Different types of investments involve varying degrees of risk, and there can be noassurance that any specific investment or strategy will be suitable or profitable for a clients portfolio.All investment strategies have the potential for profit or loss. Major League Investments, Inc. isregistered as an investment advisor and only transacts business in states where it is properlyregistered, or is excluded or exempted from registration requirements. Registration as an investmentadvisor does not constitute an endorsement of the firm by securities regulators nor does it indicate thatthe advisor has attained a particular level of skill or ability. Major League Investments, Inc. 530 Loring Ave Suite 302, Salem, MA 01970 Phone: 978-740-1011 michael.finer@majorleagueinvest.comIRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in thiscommunication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for thepurpose of avoiding tax penalties that may be imposed non the recipient or any other taxpayer, or (ii) in promoting,marketing, or recommending to another party a partnership or other entity, investment, arrangement or other transactionaddressed herein.