Tuesday, April 24, 2007

Gold: The $1,000 Investment

Just over two years ago (March 4, 2005), I authored and published a report titled “Gold Outlook: Buy”. The thrust of the report centered on the view that Gold was an attractive investment as it provided a necessary hedge against global uncertainty and US dollar weakness and that it had a zero correlation with equities and bonds. Since that report, little has changed to alter the view that Gold is a secular buy and the rationale for owning a position remains intact.

Gold is a special type of investment vehicle. Precious little of its value resides in its industrial use. And while most of what is produced ends up in non productive assets such as jewelry, the primary value in Gold is its standing as an alternative reserve currency to the US dollar. Given the sustained and projected US dollar weakness (not to mention an unforeseen exogenous event), Gold role as an attractive investment seems assured.

An investment in Gold is, of course, not without risk. However, the primary risk with Gold is not the production supply/demand equation but the official reserves. As noted in the report, “Perhaps the single biggest risk to Gold is the potential of an added supply hitting the market – particularly from the central banks of the world. As the aforementioned data from the February 28, 2005 Economist Intelligence Unit report on Gold show, the supply available from central banks dwarfs the supply/demand equation. At ten times the supply or demand levels, government and government organizational sales of Gold could have a serious negative effect its price.” The charts and tables in the report illustrate this and other points.

Investment Strategy Implications

Gold represents a 5% position in my Model Growth Portfolio (MGP) and has been a consistent provider of positive returns for the MGP. As a hedge against uncertainty and instability (and the weak US dollar), it is, in my opinion, an investment for the times. Moreover, as a zero correlated asset to equities and bonds, Gold is an excellent complement to anyone’s portfolio.

The only investment decision-making issue I see with Gold is when to increase or decrease the position. The recent increase in the MGP (from 3 to 5%) was made on March 26, 2007 when it was trading at just under $66. At 5%, it is currently at the maximum level allowed in the MGP.

In the coming weeks, I will update the report incorporating new data. Until then, you are welcome to consider viewing the 2005 report.

Note: Access to the report is available only to subscribers. To learn more about our subscription service, please click on the title of this posting or the services link to the left.

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