Is Gold the Ticket to Your Successful Investments?

Gold has been the benchmark of wealth since the beginning of time.  Whether it be in the form of a crown, a ring, or a hidden treasure chest, gold has long been a symbol of power and prosperity.  Maybe that’s why people on TV are always yelling at us to sell them our scrap gold.  And maybe that’s why other people on that same TV are urging us to buy their gold.  So what do you do? Do you buy?  Do you sell?  Do you ignore them altogether?

Those questions can be hard to answer with the thoughts on gold investments differing with almost every new person you ask.  30% of investors believe that gold is the best long term investment for them, making it more popular than nearly every other investment venue offered, according to a recent Gallup poll.  With the popularity growing, it was time to get the facts on this precious and historically coveted metal.  A new study by Duke University professor Campbell Harvey and co-author Claude Erb did just that, looking into just what is behind the allure of gold.  The point of the study strayed away from giving a thumbs up or down assessment of gold, but rather looked at the true role that gold played in asset allocation.  Here are some of their major findings:

·         Long Term Inflation Hedge-  In the short and intermediate term, gold does little to protect against inflation.  Overall, it is hard to say whether gold could serve as an inflation hedge in the long run, but if an investor is patient enough to hold on to their gold for nearly a century to find out, only then would they find a definitive answer.  Until then, it’s hard to say.
·         Currency Hedge- The fluctuation of the real price of gold seems to stand almost entirely independent of the change in currency.  This means that the real price of gold moves in unison among different perspectives or currency indicating that gold doesn’t appear to serve as a currency hedge either.

·         Protection Against Poor Markets– Although gold seems to stand slightly apart from market movements, gold fell in minor correlation with market drops.  It isn’t as dependent as other investments find themselves, but gold cannot be considered a complete safety net against market movement.

·         Demand Based- The price of gold has little effect on the production and supply of gold.  The demand is based in majority on the impact of the momentum of investors.  The price of gold that is affected by this momentum is often short lived and returns to original value in a matter of time.

·         The Current Real Price- Right now, the current real price of gold is high, and could continue on the rise.  As more central banks, often found in developing countries, buy into gold, the price should continue to rise.  Since 2002, the real price of gold has increased over 500% to $1,600 an ounce.  That rise is certainly nothing to scoff at.

Outside of the economic and financial details of gold, many people waiver on the tangibility of the gold itself.  Some see it as an advantage while others a disadvantage, in terms of possessing the gold and keeping track of the physical bars.  The idea of being in physical possession of their investment causes a feeling of security for some who are reassured by the presence, while for others it’s a cause of concern as they fear theft or misplacement.

You might look at these findings and think, “So, what am I supposed to do?”  Well, part of having the right answer is the ability to ask the right questions.  These facts lay out the examinations of the many justifications of investing in gold.  At the end of the day, gold is an investment, and like any other investment, it must be considered from all angles on an individual basis.  Overall, if you find yourself with an ancient looking map upon which “x” marks the spot, it may be worth the trip, but in terms of investments, gold is still up in the air.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535

Photo Courtesy of: davidweinbergcollection-com1

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The Ricks Report – July 23, 2012

The Ricks Report

July 23, 2012

The Markets

The man with his finger on the pulse says the U.S. economy faces two main risks. We have no control over one of those risks and the other, well, we do have some control, but whether our politicians will appropriately exercise that control is a big question.

Federal Reserve Chairman Ben Bernanke faced Congress last week and he delivered a rather subdued outlook in his semi-annual monetary policy report. He said our economy faces two major headwinds:

1. The Euro-area fiscal and banking crisis and its potential spillover effects on our economy.
2. The unsustainable path of the U.S. fiscal situation (e.g., the “fiscal cliff”).

Source: Federal Reserve

The U.S. has little control over the euro-area situation so we’re at the mercy of European leaders to make bold and tough decisions to get their houses in order. The second item, though, is clearly within our control.

The so-called fiscal cliff, in which a series of tax hikes and spending cuts will take effect in 2013 if Congress takes no further action, could throw the economy back into a recession. The Congressional Budget Office estimates if no policy changes are made, then our 2013 federal budget deficit will decline by about $600 billion. On the surface, that sounds great. However, such a huge shock to our system in a short period of time could be problematic.

So, will Congress agree to adjust the legislation for the benefit of the economy? We’ll see.

For his part, Bernanke said the Federal Reserve “is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” It’s good to know that the Fed is ready to help if needed.

Data as of 7/20/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.4%	8.4%	2.8%	12.7%	-2.3%	5.2%
DJ Global ex US (Foreign Stocks)	0.6	0.5	-16.9	3.3	-7.8	5.6
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.6	5.0	4.6
Gold (per ounce)	-1.2	0.1	-0.6	18.3	18.3	17.2
DJ-UBS Commodity Index	4.2	3.9	-11.1	6.3	-3.4	3.8
DJ Equity All REIT TR Index	-1.1	16.0	9.5	31.4	2.7	12.1

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

IT’S BEEN ALMOST A YEAR since August 5, 2011, the day the U.S. lost its coveted AAA credit rating from Standard and Poor’s. So, how have the financial markets responded in the year since? Quite well, actually.

It may not feel like it, but the broad U.S. stock market, as measured by the S&P 500 index, rose 13.6 percent between August 5, 2011 and last Friday, according to data from Yahoo! Finance. Despite all the angst from the credit downgrade, the threat of a double-dip recession and the turmoil in Europe, the stock market has hung in there.

The returns in the bond market are perhaps even more startling. The 10-year Treasury yielded 2.56 percent on August 5, 2011 and by last Friday, the yield had dropped to 1.46 percent, according to Yahoo! Finance. Normally, you might expect interest rates to rise after a credit downgrade since the ratings agency is essentially saying your bonds are riskier than previously thought.

The U.S., though, is perhaps a “special” case. The day after the credit downgrade, none other than Warren Buffett went on Bloomberg television and said he thought the U.S. should be a “quadruple A” rating. And, to this day, the U.S. dollar remains the world’s leading reserve currency as more than 60 percent of the world’s foreign currency reserves are held in U.S. dollars, according to BusinessWeek.

We shouldn’t get overconfident, though. While the U.S. has tremendous assets, it might only take a few bad decisions from our leaders to undo what took decades to build.

Weekly Focus – Think About It…

“There is nothing wrong with America that the faith, love of freedom, intelligence, and energy of her citizens cannot cure.”

—Dwight D. Eisenhower, 34th president of the United States

Best regards,

Gregory Ricks

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