By Ryan McGuire for Gold Avalanche
This Market Watch report concludes that gold does not need to be a part of your portfolio, although if it helps you sleep better, then go ahead.
We disagree - though not entirely.
The author writes,"Some investors say gold is a hedge against inflation. That is true of any good or service that consumers can be counted on to want in coming years, such as oil or poultry farms. Gold’s wild swings have made it a poor proxy for the consumer-price index, a key inflation measure ... Still others view gold as “real money” - the one thing that will hold its value if governments create so much new currency that those currencies lose their value. Taken to its logical conclusion, this means governments would eventually agree to once again use gold as the basis for their currencies, says James Swanson, chief investment strategist at MFS, a mutual-fund company.That is a fantasy, he argues, because some powerful nations have relatively little gold and some gold-rich nations have little power"
This Market Watch report concludes that gold does not need to be a part of your portfolio, although if it helps you sleep better, then go ahead.
We disagree - though not entirely.
The author writes,"Some investors say gold is a hedge against inflation. That is true of any good or service that consumers can be counted on to want in coming years, such as oil or poultry farms. Gold’s wild swings have made it a poor proxy for the consumer-price index, a key inflation measure ... Still others view gold as “real money” - the one thing that will hold its value if governments create so much new currency that those currencies lose their value. Taken to its logical conclusion, this means governments would eventually agree to once again use gold as the basis for their currencies, says James Swanson, chief investment strategist at MFS, a mutual-fund company.That is a fantasy, he argues, because some powerful nations have relatively little gold and some gold-rich nations have little power"
Continue Reading at: http://www.marketwatch.com/story/why-your-portfolio-doesnt-need-gold-2012-06-04
There are several problems with this article, though only from a long-term persepctive. From a trading perspective, the article has some points that traders should consider. Some of the more important problems are as follows: First, the author only works with hazy assumptions, and not with the reasons behind the assumptions people are making about gold as money. For example, the premise that gold won't be used as money because powerful nations have little gold while gold-rich nations have little power" creates a false dilemma. The reality is that powerful nations have abused their power status, and are creating digital currency units with such velocity that the foundation of western economies are danger of having the bottoms broken out of them. Poor nations are poor, on one hand, because they don't know how to manipulate the current world monetary system in a way that benefits their entire country - nor do they have much opportunity to do so.
Holding gold in today's monetary system, if this system were to be sure to continue status-quot for the next 100 years, would be futile - but the monetary system as we know it is under extreme stress, (it began with the tech bubble, followed by the housing bubble, and now the debt bubble). Ironically, the only way out for central banks is to continue to find ways to create money out of thin air -- thus perpetuating the debt bubble. The result of the debt bubble bursting is going to be a massive commodities bubble, characterized by manic buying, followed by manic selling. If this thesis is correct, then now is the time to start accumulating precious metals, energy and other commodities.
At present, a bubble may in fact be forming in bio tech stocks and hi-tech stocks due to the cheap lending environment, so there's another investment opportunity for you to consider. A bubble has almost certainly formed in bonds and treasuries over the past 10 years due to increasingly low rates, which are being perpetuated by a combination of government deficit spending and various treasury purchasing initiatives.
Thus, at Gold Avalanche, we maintain (for the sake of prudence, until at least until we strike a ratio of 1:1 on the Dow:Gold Relationship), that it would be highly near-sighted, and eventually painful to not have at least some gold and high quality gold miners in your portfolio. This is more than a hedge - we want to be on the right side of a major developing trend in commodities.
To counter the Market Watch article above, which seems to be a prevailing sentiment as of today (June, 2012), one must work within the framework of the article itself, which is a trading framework. The framework under which we recommend holding gold is a long-term investing framework. It is true that Gold was in a 20-year bear market before it began its spectacular run from 2001-2011. The real issue though, is that the factors which helped Gold get from it's 2000 lows to its 2011 highs have not changed! This is the point that needs to be hammered into our heads if we are to understand how Gold works in the broadest sense. Also, we must understand that central banks have become net buyers of gold since 2001, as opposed to net sellers of gold prior to 2000.
So as long as governments are willing to create currency units that were not produced by the economy, precious metals and commodities will generally do well, with some spectacular spikes along the way like gold's spike to 1,900 in 2011 along with silver's spike to $45, oil's Spike to $150 in 2007, and Rhodium's spike to TEN THOUSAND DOLLARS per ounce in 2008. Until country deficits are managed and maintained, commodities will be the safest of the safe long-term bets, but they are not without their risk - short and intermediate trend shifts are not only possible, but likely to be sharp and frightening. However, in the shorter term, it is likely that interest rates will continue to get pushed lower due to this same central bank money printing.
Likewise, real interest rates are poised to remain negative for the foreseeable future, thus we recommend (at the very least) using gold as a hedge against your bond holdings (5-10% of your total bond portfolio). In the interest of full disclosure, your contributing writer today has 10% of his total portfolio held in gold and silver related products and securities.
To reiterate, here's the context - the article above (as with most articles from major news sources) is written from the perspective of a trader, and in that context the author has a point. Trading gold is a bad idea unless you know exactly what you are doing - but the same can be said for day-trading anything. However, for anyone with a bent for trading, we highly recommend Scott Pluschau's analysis on gold, silver, the dollar, the bond market, and other broad indexes. And if trading is your game, and you are looking for some consultation, perhaps Scott's methods would be a good suit for you. The only way to find out is to give him a shout and see if his style is a fit. http://www.scottpluschau.blogspot.com
Until Next Time,
Peace
R
