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The Rationale for Holding Gold in Your Investment Portfolio
Part One
From:
Geofrey J. Greenleaf
To:
Greenleaf investment staff
Date:
November 2006
Re:
The Rationale for Holding Gold in Investment Portfolios
Greenleaf Investment Management and Counsel has held
gold shares in certain client portfolios for thirty years. More
recently, we have held gold and silver bullion through exchange traded
funds (ETFs).
The reasons are numerous. The most important is that
gold is a hedge against losses in paper currencies. Gold has a
5,000-year record of being a medium of exchange and a store of value.
Paper currencies fall short
No paper or “fiat” currencies have lasted during this
time—many last less than 100 or perhaps 200 years. Others have been
around more than two or three centuries. They include the British pound
sterling and the U.S. dollar, which have now plummeted to a fraction of
their original purchasing power.
There is no assurance, nor even likelihood, that
central banks will discontinue their policy of increasing the supply of
money at a rate faster than growth in goods and services in their
country. This is what is known as “inflation”, or purchasing media
growth so fast that the currency depreciates in value.
Today, nations are generally following a “beggar thy
neighbor” policy. They attempt to keep their currency stable versus
other currencies, and even to decline in actual and relative value, in
an attempt to increase their exports and reduce their imports. The United States, which has a trade
deficit of over $700 billion per year, is one, despite periodic
protestations to the contrary by the Federal Reserve Bank or the
Department of the Treasury.
The dollar loses currency
Further, the dollar may decline because of slippage in
its role as a worldwide reserve currency. Other nations are increasing
their use of Euros or Yen as a trading currency for major transactions
such as oil. Until recently, oil had been traded chiefly in dollars,
which created a growing demand for the greenback.
Also, we expect that the Fed has stopped raising
short-term interest rates and eventually will bring rates down to spur
the economy. Thus, the dollar will not have the yield support it
currently has and could weaken versus other currencies and gold.
Finally, the dollar’s strength has been supported by a
strong military. The recently discovered difficulty in fighting
terrorists has weakened the advantage of the U.S. Nuclear and Air Force
superiority.
Accordingly, we believe the price of gold will
continue its advance that began seven years ago from a 20-plus year low
of $253 per ounce. In November 2006, it was trading a little over $600
an ounce, well below the $850-plus price-per-ounce peak gold temporarily
hit in 1980. Silver, in the $13 range, is even further below its bubble
price of $50 an ounce, also from 1980.
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