why gold? why gold? why an allocation to gold may benefit investment portfolios june 2005
TRANSCRIPT
Why Gold?Why Gold?Why an allocation to gold may benefit investment
portfolios
June 2005
Arguments for an allocation to gold in a diversified portfolio include:
1.Gold can find favor as a “safe haven” against inflation or financial crisis.
2.Gold often trades inversely to the U.S. dollar, making it a useful hedge in times of dollar depreciation.
3.Gold can viewed as an alternative asset class.
4.Gold, and even gold stocks, typically are not closely correlated to either the stock or bond market.
All the gold ever mined would fit into a storage room about 55 feet long, 55 feet tall and 55 feet wide.
1. The Gold Supply is limited
2. Gold can serve as a “Safe Haven” in times of crisis
Gold experienced a fierce bull market in the ’70s as inflation accelerated Gold vs. CPI
$0
$100
$200
$300
$400
$500
$600
Jan-70 Mar-71 May-72 Jul-73 Sep-74 Nov-75 Jan-77 Mar-78 May-79
30
40
50
60
70
80
90
100
Gold (left scale)CPI
Inflation appears to be picking up again according to official government figures and anecdotal evidence.
Source: John Williams’ Shadow Government Statistics
Gold in Mexican Pesos
500
1000
1500
2000
2500
3000
3500
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Gold can provide “insurance” against unforeseen events or financial catastrophe. Gold's value as a safe haven can be illustrated by its behavior during periods of financial turmoil.
Mexico Crisis
Gold in Thai Baht
6500
8500
10500
12500
14500
16500
18500
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Asian Crisis (represented by Thai experience)
Crisis
Gold in Russian Rubles
100
1100
2100
3100
4100
5100
6100
7100
8100
9100
Jul-9
3
Nov
-93
Mar
-94
Jul-9
4
Nov
-94
Mar
-95
Jul-9
5
Nov
-95
Mar
-96
Jul-9
6
Nov
-96
Mar
-97
Jul-9
7
Nov
-97
Mar
-98
Jul-9
8
Nov
-98
Mar
-99
Jul-9
9
Nov
-99
Russian Crisis
Crisis
3. Trading inversely to the dollar, gold can hedge dollar depreciation
Gold vs. Dollar Index (12/90 - 5/05)
$250
$300
$350
$400
$450
$500
Dec-90 Sep-92 Jun-94 Mar-96 Dec-97 Sep-99 Jun-01 Mar-03 Dec-04
70
80
90
100
110
120
130
GoldDollar Index
In our view, there are a number of threats to dollar stability. These include:
Record trade deficits - which typically weaken currencies…
U.S. Current Account Deficit Q3 '90 - Q1 '05
-170
-150
-130
-110
-90
-70
-50
-30
-10
10
Sep-90
Aug-91
Jul-92
Jun-93
May-94
Apr-95
Mar-96
Feb-97
Jan-98
Dec-98
Nov-99
Oct-00
Sep-01
Aug-02
Jul-03
Jun-04
$Bill
ion
s
Source: Bureau of Economic Analysis
Foreign Holdings ofLong-Term U.S. Securities
$0
$500
$1,000
$1,500
$2,000
85 87 89 91 93 95 97 99 01 03 Q105
Source: Federal Reserve Z-1
Treasuries
Stocks
Corp. Bonds
Agencies
$Billions
And the risk that foreigners choose to hold fewer dollars (i.e. sell dollar denominated investments, putting pressure on the U.S. currency).
Foreign investors, including central banks, have been heavy buyers of U.S. Treasuries.
Foreigners are big holders of U.S. debt. Is this enthusiasm sustainable?
Foreign Holdings of U.S. Treasuries1985 - Q1 '05 (as % of total)
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Q105
Source: Federal Reserve Z-1
Have some of the biggest buyers of U.S. Treasuries had enough? Will hedge funds (Caribbean Banking Centers) continue to be reliable buyers?
Holdings of US Treasuries by Selected Countries ($ bill)
0
100
200
300
400
500
600
700
800
2001 2002 2003 2004 Q1 2005
Source: U.S. Treasury
Japan
China
UK
Caribbean Banking Centers
4. Gold can serve as an alternative to overvalued assets
Dow to GoldDow Jones Industrials divided by Gold Price
1920 - 2004
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000
Stock mania
Stock mania
Gold mania
But is the gold bull market already over?
After peaking near $455 in December 2004, the spot gold price fell to $417 in May 2005. Did the December peak mark the end of the bull market in gold?Gold Price (1/00 - 5/05)
$250
$300
$350
$400
$450
$500
Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05
Or is gold’s recent performance a minor setback in what will ultimately be viewed as a long bull market?
Gold Price (1/80-5/05)
$200
$300
$400
$500
$600
$700
$800
$900
Jan-80 May-82 Sep-84 Jan-87 May-89 Sep-91 Jan-94 May-96 Sep-98 Jan-01 May-03
After all, gold’s recent decline was coincident with the sharp rise in the dollar…
Yet the long-term threats that drove the dollar lower from 2002-2004 are still in place.
Gold vs. Dollar Index
$410
$415
$420
$425
$430
$435
$440
$445
$450
Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05
80
81
82
83
84
85
86
87
88
89
90
Gold
Dollar Index
Some bullish trends for gold
While financial assets flourished, gold was in a 20-year bear market. These trends seem to have reversed
Maturity of gold mines coupled with lack of exploration has constrained supply.
Asia, a traditional buyer of gold, is becoming more economically powerful
Gold accounts for an historically small amount of central bank reserves. There are signs this relationship may change. (Japanese Finance Minister Sadakazu suggested in Jan. 2004 that official reserves should include more gold. Japan’s Prime Minister in March 2005 suggested that reserves should be diversified).
Bonds offer less competition to gold with real U.S. interest rates negative
5. What about gold stocks?
While gold stocks are not perfectly correlated with gold, the correlation is closer than the relationship between gold stocks and the general stock market.
50
75
100
125
150
175
200
Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05
XAU Gold Stock IndexGoldS&P 500
All series indexed to 100 as of Jan. 31, 2000
While gold bulls and bears will argue about the nature of gold, certainly gold is not just another commodity:
“Gold will remain an important element of global monetary reserves.”Wim Duisenberg, speaking for the 15 European central banks, Sept. 25, 1999
“Gold still represents the ultimate form of payment in the world… Fiat money in extremes is accepted by nobody. Gold is always accepted.”Alan Greenspan, speaking to the House Banking Committee, May 20, 1999