Given this economic context, we think the odds favor continued abuse of the paper currencies; so, our portfolios are tilted in favor of a future characterized by rising interest rates, rising inflation, and domestic economic growth that is labored at best. Our bond portfolios are dominated by high credit quality issues (mainly corporate obligations) and short maturities to limit our interest rate risk. Our fixedincome positions are supplemented with meaningful investments in gold to protect their buying power.
In our CORE Profile, gold is a 7% position, which equals about 1/5 of our bond exposure. Our more risk-averse IN COME Profile has a larger bond portfolio, so a greater gold allocation seems appropriate.
Gold As An Investment
With respect to the price prospects for gold itself, it needs to be said up front that nobody knows where it will sell next month, next year or ever. Gold is a commodity; a very special one, but a commodity nonetheless. As such, its price tends to be volatile. If stocks and bonds generally were trading at more attractive prices relative to estimated future cash flows, we might have little or no interest in owning gold as an investment. But those two traditional asset classes are, in our opinion, somewhere between expensive and very expensive. We invest in stocks very selectively when we find well-run businesses at attractive valuations.
Our core belief as capitalists is that the two most effective ways for citizens of free countries to cope with the risks of currency
manipulation by the monetary establishment are:
To support the election of candidates most likely to pursue sober and transparent fiscal and monetary policies.
To invest their savings in global, prudently managed, legal businesses. Business, we think, is in the best position to contend with
weak currencies and other threats to prosperity.
We have a saying: "Businesses can adapt, bonds cannot". So, our philosophical bias is toward equities. We regard gold
as a defensive holding that is sometimes necessary... now is one of those times.
As to the specific challenge of valuing gold bullion, James Grant, one of the truly elite money mavens, (www.grantspub.com)
puts it well, we think: "You can't value a non-earning asset, even though you can pretend to. Gold's valuation takes the form
of a fraction: 1/n, where 'n' is the world's confidence in paper currencies and the mandarins who manipulate them." He goes on to say that, "Regrettably, 'n' is not quantifiable."
In a way, that is the essential mystery of gold, isn't it. There is no dependable metric for gold's valuation comparable to a P/E
ratio for a company's stock or the "real" yield on a sovereign bond. The total value of investment gold is, as we have seen above, tiny compared with traditional asset classes, and gold's physical supply tends not to respond very much to price changes the way other commodities do. So, what we have is an asset whose price can change rather dramatically in response to shifts in "currency confidence" which is impossible to quantify.
Inflationary monetary policy is the current fashion in areas accounting for about 2/3 of global GDP. If that remains the state of
affairs, I think the price risk in gold is less than the risk in stocks as an asset class. If however, a convincing attitudinal conversion should take place among the central bank Pooh-Bahs, confidence in the major currencies could conceivably be resuscitated. I think we ought to assume that such a development would shake out the momentum traders and knock gold's price back to the pre-credit crisis era... a potential setback of about -40% to the $900 oz. area.