Gold. Dead… or alive?

With the yellow metal seemingly knee deep in a bear market and generating negative headlines everywhere, many are beginning to wonder if precious metals like Gold still have a place in their portfolios. In short, our answer is yes, but allow us to explain.

First, lets state the obvious: Gold has had a difficult year so far in 2013. There are many factors, but primarily Gold has suffered due to two seep sell-offs; the first in April, and the second in June.

Next, those who believe gold is unnecessary in their portfolios are expressing their confidence in state of the current global banking system. They are expressing their belief that central bankers can create money and manage debt in order to stimulate economies without any harmful consequences to either lenders or borrowers. They believe that central bank policies, rather than free markets will determine market outcomes.

That said, we firmly believe the fundamental case for owing gold as a hedge against financial chaos is still intact, and is in fact stronger now than it was back in September of 2011 when this current gold correction began. Not sure? Let’s review some fundamentals to support our view:

• Europe is no better off now than it was 2 years ago

• The US continues to run $1T annual budget deficits with no end in sight

• The US national debt remains un-addressed and continues to grow rapidly

• The Federal Reserve continues to increase their balance sheet through QE (In fact – the Fed’s balance sheet has quadrupled since the financial crisis of 2008!).

• The banks that were rescued with taxpayer money in ’08 because they were “too big too fail” are even bigger now.

And that’s just here in the USA. Globally, the stimulus of the Chinese, Japanese, British, and Eurozone economies (by their central banks) has no collective precedent. Certainly individual  country episodes of stimulus have happened,  but there has never been the degree of global monetary easing to major economies like we are experiencing simultaneously around the globe.

But despite all those fundamentals, gold is still in a current correction. For context, prior to this year gold values had gone up for 12 consecutive years which is very unusual for any asset class.  In fact, this correction could be just what gold needed to shake out the short term speculators and allow the metal to build a strong base for the next leg up.

To help us put the performance of gold over the last decade in perspective, let’s compare it to whom many consider to be the most gifted investor in the world: Warren Buffett.  As the graph below shows, since the year 2000, the price of gold is up over 400%, while shares of Buffett’s Berkshire Hathaway are up roughly 120%:

The historical truth is, every asset that has been through a great long term bull market has undergone corrections.  Take the great bull run of Apple as an example:  It’s easy to look back now and say “I should have bought apple at $7… and sold it today $441.”  Sounds easy right? Just by Apple stock, do nothing for 14 years, and then wake up and smile about the fact that your stock is up more than 60 fold (6,000%).

But look closer at the history of Apple during its run up and you will find some painful corrections… in fact, investors faced 4 stomach-churning corrections of greater than 40% in the last decade (the largest one being 82%!). Let’s take a deep breath here and admit that even the firmest believer in Apple would have had his courage tested… but those who ignored these corrections rode their stock to unmeasured heights.

Our point of view is that regardless of the current correction of gold values, the financial risk factors that drive gold continue. Gold has been a hedge against the debasement of paper currencies and insurance for an over-leveraged system.  We continue to believe in the long term case for gold.

Categorized in: Blog

This post was written by Conscient Capital