A Gold-Laden Portfolio: Financial Advisors' Daily Digest
Kevin Wilson offers ideas to prevent the next crisis, and solutions to the crisis after ignoring reforms that might stave it off.
Roger Nusbaum offers an autopsy of the sophisticated strategies that just blew up.
Axel Merk evaluates U.S. equity market charts.
The abject failure of authorities to correct the problems that caused the previous financial crisis are among the reasons many commentators expect there will be another one. To me, the matter is akin to World War II, whose primary cause is understood to be the failure to address the problems leading to World War I. Germany's rise destabilized Europe. It took American power to correct that imbalance. Retreating back to Fortress America after the war merely returned Europe to its previous unbalanced state.
On today's Seeking Alpha, Kevin Wilson concludes his three-part series on the failure of mainstream economics, and in this third piece, he graciously offers not just ideas that might prevent the next crisis, but solutions to the next crisis after policymakers ignore reforms that might stave it off! Each of his ideas in its own right merits much discussion, and I recommend you read the article, and the whole series. For my part here, I thought I would treat perhaps the smallest detail found therein - namely his recommendation that investors consider holding gold as a response:
Given the current sell-off and the state of certain economies, it makes sense to invest some money in a gold fund like iShares Gold Trust (IAU)."
Readers of Wilson's articles are familiar with this recommendation and his endorsement of long/short strategies and long bonds, which regularly appear at the end of his articles. I've written previously about gold, and thought that the return of volatility would be a good time to revisit the topic.
Basically, I'm for it - but in a way that fits quite precisely in my own standard call for dividing assets among stocks, real estate and cash. To me, gold is a prettier form of cash. The aesthetic aspect of this is not entirely insignificant - at least in terms of the impression gold has made on my imagination. My first actual gold investment, in IAU, only occurred one year ago. But I can't forget a brief but memorable visit I once made to the New York offices of a French investment bank some 15 years ago. Someone had recommended me as a speaker. I had of course been to Manhattan many previous times, but I was struck by the ornate gold trimmings and tapestry on the door and wood paneling inside. I felt like I was in Versailles. Never before nor since have I seen a nicer office.
Fast forward to today (or any day, really). There are some folks for whom gold is a sort of Garden of Eden, a form of monetary purity that evil central banks destroyed with their fiat currencies. For them, the ultimate ascent of gold is a truth not to be denied, the comeuppance that financial sin cannot suppress forever. Such beliefs come with ready-made explanations for gold's performance at any one juncture, and help its adherents wait out the long down periods.
I am not of this camp. I just see gold as one of many types of financial assets from which one can make some money, but one that has a nice fit in my equity-property-liquidity tripod schema. As a risk investment, it ultimately disappoints. As a form of cash, it has the potential to outperform. I've explained numerous times (most recently here) the value of holding a large cash position. If your currency is the greenback, and all of your expenses are purchased in the greenback, then maybe you're not too bothered by the steep decline of the dollar over the past few years - it's lost over 10% of its value against the euro, to cite one example, in just the past eight months.
But if only for the sake of diversification - the only free lunch in investing, as the saying goes - it helps to have another currency that might zig while your mainstay is zagging. I see no particular reason to place my faith in the euro, Swiss franc, Japanese yen or Chinese yuan. Financial chicanery like competitive devaluation is not unknown to any of them. Gold isn't immune from manipulation either, but if it has one fairly known characteristic, it is as a safe harbor during financial crises. So it seems like a good way to diversify that liquidity part of my portfolio by holding something that may appreciate substantially when the rest of my portfolio is giving me grief.
And that brings me back to that ornate gilt outpost of a French bank I once visited. As glittery as its gold was, when you really think about it, it was but an elaborate overlay. Not even King Louis XIV had walls made of gold. The shiny metal was but a rim. Gold represents stability and strength. It is not a source of wealth, but rather a symbol of it. You make money from commercial activities, which is the reason to own stocks. But since cash-flow-bearing stocks can rapidly lose value when future cash flows are projected to be weakening, non-cash-flow-bearing gold can, like cash, provide a barrier of protection. A small allocation can enhance the performance of your liquidity reserves, and seems worthwhile to contemplate now of all times, since investors are again focused on stabilizing their portfolios.
Please share your thoughts on this issue in our comments section. Meanwhile, below please find links to other advisor-related content on today's Seeking Alpha.
Roger Nusbaum offers an autopsy of the sophisticated strategies that just blew up. Martin Lowy does not foresee a financial crisis in the near-term. Axel Merk evaluates U.S. equity market charts. Jack Waymire offers ideas on how smaller RIAs can bring in new clients. AllianceBernstein enters the debate on housing finance reform.For more content geared to FAs, visit the Financial Advisor Center.
