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Voice of Moneta, April, 2013

Some Thoughts on Gold

On the off chance you haven’t noticed, the price of gold has been falling.  Gold reached its peak in September 2011, topping out at just over $1,900/oz.  On April 15, 2013, gold was trading at around $1,366/oz, and was down on that date alone about 8 percent.  There are many theories about why the selloff has occurred, including hedge funds exiting positions and the Yen weakening versus the dollar. But in reality it doesn’t matter why gold is down: it is down. 

Since its peak 19 months ago, we have seen inflation, political uncertainty here and abroad,  fiscal uncertainty here and abroad and a 30-year old in North Korea trying to show the world how much power and influence he has. And with all of these things happening—and often the assumption that this kind of unrest will cause the price of gold to rise—gold is still down 28 percent during the past 19 months.  These facts reinforce the reasons we did not recommend a static allocation to the metal. 

Gold is simply a piece of metal that produces no revenue, has no cash flow, has no earnings and pays no dividends.  An ounce of gold today will still be an ounce of gold 10 years from now.  Long-only gold buying is just hoping that someone else will pay a higher price in the future.  That assumption is pure speculation.   We do not mean to suggest that speculation does not have a part in a portfolio, but is better achieved in a risk-managed strategy that can be both long and short.  With these facts at hand, the wisdom of having 5 or 10 percent of a portfolio speculating that gold will always go up does not seem to be a wise strategy.