Montreal, Canada
Earlier this year I reduced my gold exchange-traded-fund holdings by 50% around $950 an ounce as I anticipated another deep correction for risky assets. Though a decline followed, gold prices recovered quickly and I admitted to making a mistake. I regret not keeping that position.
However, I did buy gold stocks last summer – a Canadian dollar denominated ETF – and I'm quite pleased with its performance over the last few months. But owning gold stocks is not the same thing as owning gold. Often, investors confuse these assets forgetting that historically deviations have occurred when gold prices have rallied while gold stocks have simultaneously declined and vice versa; I believe investors should overweight bullion and underweight the mining stocks.
My take on a correction back in May was that stocks were in the midst of another bear market rally and would succumb to profit-taking once more; a stock market sell-off would take commodities, including gold, sharply lower and the dollar higher. That never happened.
I plan on doubling my gold holdings today for managed accounts and funds in Europe and the United States. I don't think we'll see $1,000 or triple-digit gold prices for the next several years – if ever again. Even if we do, prices won't stay at those levels for long. Any correction in gold prices should be viewed as an opportunity to buy more of the metal – something I failed to do last spring. I won't make the same mistake twice.
As an investor or money-manager you must be prepared to accept risk. Otherwise, there's no reward and in the absence of some volatility your returns over time will be dull and uninspiring financially.
If you assume risk, then you'll make mistakes. No investor in the history of the world has ever called every trade – we all make mistakes. The way to succeed is to limit your losses (stop-losses) and keep the biggest speculations small as a percentage of your total portfolio.
Gold, however, which is inherently volatile, is now the only real money in the world capable of protecting our purchasing power. It deserves a core allocation in your portfolio.
The Federal Reserve as bastion of the world's reserve currency is on a course to print money like never before following its "quantitative easing" program last year – basically a fancy term that means "print or die." The Fed is out of control and really has no exit strategy to reign in all this massive credit creation; interest rates will stay low for a long time or until employment accelerates again.
The odds highly favour a major spike in inflation over the next few years – probably the worst inflation since the 1970s. Governments need inflation, a monetary phenomenon that remains in short supply since mid-2008 as real estate, bank lending, credit growth, wages, financial assets and oil all remain well off their highs.
The dollar and other currencies for that matter will continue to decline vis-à-vis gold for the foreseeable future because nobody wants a strong currency. Almost every central bank is printing money and since all markets are highly correlated in the age of violent capital markets, there's isn't a single currency that stands to protect your wealth – not the dollar, not the EUR, not the CAD or the yen. Not one. They're all no good.
So here I go again. I'm buying more gold today. I just can't see a better alternative as paper money continues to purchase less and less against gold since 2005.
Don't you think that sell off might come around late Q4 and thus you'd be buying near the top? I mean from a contrarian perspective, it seems that everyone is short the dollar and long a precious metal. After the correction though, I completely agree with you.
Posted by: Rodrigo Serrano | October 15, 2009 at 10:35 PM