The guys over at Trustable Gold have put together an interesting infographic about the Oracle/Sage of Omaha, Warren Buffett. His investment strategies have been well documented but he’s no fan of gold…
Here’s a famous photograph from a 1949 issue of Life Magazine, of Chinese citizens rushing to exchange currency for gold. In an effort to promote confidence in their currency, the government offered citizens the chance to exchange currency for gold at a rate better than could be found on the black market, but had to quit the offer after just 21 hours because of the hysteria that ensued.
Now compared to the modern day Year 2012 “Chinese Gold Rush”.
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Stocks are rising. U.S. home sales are recovering. The economy is rebounding. Maybe it’s time to hunker down and buy some gold.
Generally, I am not a big fan of the precious metal. A subconscious reaction against my 22-karat Indian roots? Maybe. But, being a rational CFA, I like to think it’s because gold is an inferior investment: no revenue, no growth, no dividends and no sensible way to value it.
But gold does have its moments. Last June, with gold around US$1,500, I argued in its favor, expecting trouble in Europe. It was the right call then and it could be the right call soon again.
Since breaching US$1,900 last September, gold has drifted lower and is now below US$1,650. Gold has fallen for the same reason it rose: Europe. As the continent lurched from one default crisis to another over the past nine months, gold followed suit. The latest lurch came as Greece negotiated to extend and soften the terms of its bonds. On February 29, when it was clear that Greece would not default for now, gold fell 5.3%.
But there are growing concerns about the economy looking ahead to mid-summer and beyond, and a little gold in your portfolio is the best insurance policy because it tends to be relatively uncorrelated to stock returns.
The biggest concern is inflation. Central banks in Europe, the United States and Japan have kept interest rates low and increased money supply. These so-called evil policies were necessary for Europe to avoid defaults and for the U.S. and Japan to re-start economic growth.
It is too soon to reverse these policies. Growth is still weak and vulnerable to shocks. Indeed, the U.S. Federal Reserve has said more quantitative easing is possible if the economy starts to wilt in the summer heat. Europe, with its economy is on the verge of falling into recession, has no choice but to maintain easy money and its own version of quantitative easing.
Even emerging markets are relaxing money supply in response to slowing growth. China, suffering a manufacturing slowdown, has allowed banks to increase lending. India and Brazil have done the same and also recently cut interest rates.
Since there is so much fresh money sloshing about the global economy, inflation could quickly push higher. That’s good news for gold. Unlike those useful bits of paper we use as a medium of exchange, the precious metal’s limited supply makes it a decent hedge against inflation.
But there’s still the problem of sensibly valuing gold. The “back-to-the-gold-standard” fringe equates the global economy to gold supply and pegs the price at US$14,000 an ounce. How about that as a way to handcuff monetary policy and drive us headfirst into the next depression?
Based on some reliable indicators we monitor, gold is nearing buy levels. A dip to the US$1,600 level would be a buying opportunity. As for potential growth, US$1,900 is a good year-end target, though it will likely drift until inflation begins to rise or some other trouble develops.