Gold-up-date February 07, 2010
Why it is important to have gold in your investment portfolio
As we live in very uncertain times at the moment it is prudent to adjust to the prevailing circumstances in order to make the appropriate investment choices. And, as an investor, it is important to make the correct choices in order to maximize returns. The traditional investment instruments have always been equities, bonds and properties. And, since these are the investments most commonly touted and discussed by the main stream media, alternative investment classes are often overlooked.
While I most certainly do not have anything against equities, I do believe that commodities, currencies and precious metals should all constitute a part of any investment portfolio. I also believe that property and bonds do not offer any value at this stage. And, when it comes to precious metals, I think most precious metals such as gold, platinum, palladium and particularly silver are going to out-perform most other asset classes during the next five to ten years. But, no matter your personal investment choice and no matter what your stock broker tells you, every single investment portfolio should hold a percent of gold and silver. And, when it comes to gold, it is important to understand the dynamics of this precious metal.
For centuries gold has been a monetary metal and although bankers have tried continually to abolish the metal from being part of the monetary system, they have always failed. And, instead, each time it has been their fiat currency that has failed, and gold has always re-emerged as an important component of the monetary system.
During the last three years we have witnessed the largest financial crisis on record which in turn led to one of the worst global recessions. Yet, as the values of equities and property plummeted, and as currencies fluctuated widely the price of gold soared to new all-time highs. The combination of economic gloom and currency devaluation led investors to seek a safe haven for their hard earned money. Gold has once again performed its traditional role as a hedge against the declining values of currencies as well as being a way to protect ones wealth. Historically, gold has been a very effective way to preserve wealth. So, it is not surprising that the price of the yellow metal increased by more five-fold in the last ten years. Gold has out-performed most equities, corporate as well as government bonds, property and most currencies over the last ten years. Yet despite its incredible performance most analysts denigrate it as an investment. And, now that there are signs of a recovery, these same analysts are touting their favourite investment… equities. As I have mentioned, while I think carefully selected shares can offer good returns, gold should not be overlooked. And, it is not because I am judging its past performance and suggesting that it will continue at this unrelenting pace. No, it has nothing to do with that. It has everything to do with evaluating current economic and geopolitical trends as these are two main issues that will likely impact on the gold price in the next few years.
If we already know that the main driving forces behind the higher gold prices include massive government debt issues, currency devaluation combined with general global economic problems plus geo-political tensions, then it is logical to assume that as long as these issues are not resolved, the price of gold is unlikely to fall. However, this is merely a rather simplified view. When we look deeper and see that governments, especially the USA, have been debasing their currencies by their expansionary monetary policies we should understand the ramifications of this. What this has done and will continue to do is to make the US dollar weaken which will cause the value of any holdings of US dollars become worth, less. In the last ten years the US dollar has already lost more than 30% of its value when compared with other currencies. But, ultimately, since the US dollar is the reserve currency of the world this devaluation will drive the prices of commodities higher. Now, not only do governments have to find a way to stimulate their economies, they also have to find a way to deal with the burgeoning debt as well as high unemployment. But, in addition, as commodities become more expensive, the rate of inflation is going to increase. And, when these higher prices effect the price of staple foods of many poorer nations, we can expect to see unrest amoungst the population. So, now in addition, to huge national debt, currency wars, slow GDP growth, high levels of unemployment, increasing inflation we are also going to see more geopolitical turmoil. Unless you believe that this scenario is not nearly as bad as it seems and a remedy can be found overnight, then I strongly suggest that you add gold to your investment portfolios.
Peter Munk, chairman of the world’s largest gold producer Barrick Gold, couldn’t have said any better when he spoke in an interview at Davos recently. He said, “If you are a utopian, if you believe the problems of currency, the problems of terrorism, the problems of unrest around the world will all be resolved by the end of the year, then gold would have a difficult path. If you believe like I do that we bought ourselves a temporary peace from the panic of last year and the year before, [and] that the fundamentality of the problems are long term still issues, then your attitude will be a bit more positive toward gold.”
Even though gold maintains a special reputation as a safe haven in uncertain times, there are many other reasons why investors should keep a portion of their funds invested in the precious metal. And, when I mention gold , I mean gold bullion…physical gold in the form of gold bars and gold coins; not limited edition medallions, so called “ rare” coins which are really medallions. As far as I am concerned these have no investor value whatsoever, and should be left for the collectors.
Gold prices found good support above $1325 last week. While prices remain neutral for the time being, a decisive break above $1350 is needed to push prices higher.
About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.