More About Our Gold Position

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Last week’s blog post about Mission adding gold to client portfolios elicited a few questions and comments. Among others, there were questions about the relative attractiveness of bullion, exchange-traded funds or gold mining stocks.

For the purpose of our purchase, which is to hedge against the probability of money printing, bullion is the best pure play. Gold is heavy, however, and presents the problem of storage and possibly also of transport. For our purposes, investing in physical gold for large numbers of individual clients would be impractical.

While investing in the common stocks of mining companies would be an easy alternative, mining stocks do not always move in concert with the price of gold. Often, the direction of the overall stock market has a greater influence on gold stocks than does the direction of gold’s price. While mining stocks pay a dividend, unlike the metal itself, that dividend yield is typically below the already low average yield of most common stocks. Despite the fact that gold’s price has risen for a decade, the stocks have been far less consistent. Most major gold stocks are trading below their levels of four to six or more years ago. In fact, giant Newmont is trading barely above its price in early 1994. Periodically gold stocks do very well, but they are not as consistent a hedge against the perils of the printing press as is gold itself.

The exchange-traded fund GLD presents the best combination of direct correlation to the price of gold and ease of ongoing ownership for large numbers of investors. It’s not perfect. In an extreme market disruption, access to the value of the asset could be temporarily compromised, as would be the case with any tradable security. It does not, however, suffer the inconveniences of storage and transportability, which burden physical gold.

A separate question was why we bought now and not years ago. As longstanding readers of our commentaries and attendees at our seminars know, I have long been an advocate of individuals owning some gold. I have characterized such ownership in those communications as more an insurance policy than an investment. Its purpose has been to protect against unpredictable and dangerous economic, political or monetary events.

What has changed our thinking about adding gold positions to client portfolios is the growing belief that we are now faced with predictable and dangerous events. Over the past six months there has been clear evidence in this country and Europe that governmental and monetary authorities are unwilling to take meaningful actions to deal with our respective debt crises. Europe’s unwillingness has precipitated the dramatic rise in sovereign bond yields in recent months. While we still maintain that the timing of the ultimate resolution of these crises is highly uncertain, it looks increasingly likely that the resolution will have to involve large quantities of newly printed money. Because such heavy printing could be ramped up at any time, we decided that it would be worth initiating gold exposure now in case such printing should begin very soon. As indicated in last week’s post, we plan to build our position if gold prices correct further in the weeks, months or quarters ahead.

In the meantime, we wish our readers a merry Christmas and happy Hanukkah and a peaceful, relaxing holiday season.