If you invest, you know that most stocks, bonds and alternatives are expensive once you perform even surface-level analysis — in contrast, gold and certain gold-related assets seem “cheap.”
Should you follow anti-gold advice from the famed “Oracle of Omaha,” or should you think outside neat boxes and open your eyes beyond America’s borders.
In February 2012, when gold traded around $1,700 per ounce, Warren Buffett published a crisp set of arguments against gold in Fortune magazine. With gold now trading around $1,200 an ounce, Mr. Buffett seems prescient at first blush.
One seductive portion of Mr. Buffett’s anti-gold argument is that physical gold never increases in quantity as you hold it, whereas companies can increase their customer bases, revenues, free cash flows and your dividends.
Leaving the quantity argument alone (using his logic, we should shun artistic masterpieces too), comparisons must consider entry prices, holding costs, custody risks, reinvestment and, above all, challenges to the global system that seem elevated and rising approaching October 2014.
Gold counters systemic risk
When investors earn “real” annual returns on their holdings — dividends, interest or other regular distributions whose value exceeds the loss caused by inflation — gold and other collectible assets certainly lose great portions of their luster.
The period from 2009 to present has not offered investors this opportunity — the Federal Reserve System and other central banks have suppressed key interest rates well below estimates for inflation.
As a result, the global financial system has essentially operated in purgatory. Led by the Federal Reserve System, central banks have collectively bent rules that stave off the inevitable “creative destruction” for securities looming on the horizon.
As Saxo Bank warns, the system faces a reckoning called a “Minsky moment” described in a paper, published in 1992, that deserves close focus now:
Gold bets on rising nations
Instead of evaluating opaque and impenetrable financial reports published by most Chinese, Indian and Indonesian companies, you might want to consider that these populations have a higher propensity to save and higher interest in owning physical gold and jewelry than we do.
Growing prosperity in China, India and Indonesia may provide enhanced support for the more constrained stock of physical gold and for certain publicly traded companies in the gold industry.
To see for yourself how different gold-buying habits are outside America, travel to India during the now-concluding Diwali holiday celebrations. If you subscribe to the view that China, India and Indonesia will enjoy faster economic growth than America, then you may already be a closet gold bug.
How to invest in gold
In 2014, accessible North American gold claims are picked over, so opportunities for personal prospecting are limited. Rather than assuming risks digging for it, Americans can find physical gold over the Internet or at local coin and ingot dealers with certainty.
If you want to invest in a portfolio of midsize gold miners, take a close look at Tocqueville Gold Fund — their investment team is careful, thorough and highly experienced.
There are many other options, including exchange traded funds and even individual companies — remember, you must always do your own homework and make sure you get any questions fully answered before you choose a specific investment.
Writing 112 years’ ago, Russian Leo Tolstoy offered words of wisdom relevant now: “The truth is obtained like gold, not by letting it grow bigger, but by washing off from it everything that isn’t gold”.
If you believe the Obama administration will emulate other progressive Democrats and seize private gold holdings, as Roosevelt did in 1934, then, by all means, follow the herd that follows Mr. Buffett.
On the other hand, if you are fearful about valuation levels of debt and equity securities, and the soundness of our interconnected financial system, travel the “yellow-brick” road. Examine carefully ways to allocate a portion of your capital to investments whose value will increase as the gold price does.
• Charles Ortel serves as managing director of Newport Value Partners (NewportValue.com), which provides economic research to executives and to investment firms.
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