Call me a crank. Call me a little paranoid.
But right now, with the overriding uncertainty in the markets, putting hard assets like gold and silver into your portfolio is looking like the smart bet.
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Today, gold traded on the Comex in New York hit $1,006 per ounce, about $30 shy of its high late in the first quarter of 2008. Although silver only is trading near $14.60 an ounce, the skittish markets combined with the perceived banking sector instability, has given it an upside potential that could push it above $22 an ounce.
During times of economic unrest, investors frequently beat a path to safety. Hard assets like gold and silver have always been part of that mix.
The Prudent Option
I would never advocate that any investor convert all his or her assets to gold or silver. Given the current economic conditions, however, including these hard assets as part of your portfolio may simply be prudent.
The actions taken by the federal government to shore up the economy should slow the continued erosion of equity, and avert a total implosion of the banking system. Even with the flood of data being analyzed at all levels of government and the private sector, the bottom of the market is still hard to predict.
Between the 1929 crash and 1933, the U.S. economy shed approximately 300,000 jobs per month. Since October, the monthly U.S. job loss figure has climbed to 600,000. With the U.S. population being twice the size, this makes the Depression Era job losses roughly proportionate to those currently being experienced.
Most analysts agree that it is likely that stock market values will recover before the employment lines begin to shorten. This means that overall tax revenues will continue to fall, and be unable to keep pace with debt growth, especially in light of this latest injection of taxpayer monies into the economy.
Upside, Downside of U.S. Dollar
U.S. debt is primarily financed by sovereign governments from Asia to Middle East, with China being our single biggest creditor. As this debt grows, and the payments come due, the U.S. Treasury will be under increasing pressure to print more dollars to service its obligations. This action will undermine the global valuation of the U.S. dollar.
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On the positive side of the equation, a cheaper dollar generally boosts the U.S. export market. But as the global recession deepens, the pool of consumers for our exports will likewise shrink, offsetting the constructive effect of a weaker dollar.
Historically, the dollar and precious metals such as gold and silver have always had an inverse relationship. As one rises, the other falls, and vise-versa.
Presently, we are seeing not only a weakening of U.S. currency, but a significant softening of other major world denominations, including the Euro, Yen, Chinese Yuan and even the vaunted Swiss Franc. This confluence is driving precious metal prices back to their previous highs, and may continue to do so for the next several months.
Generally, I am not an advocate of any long-term holdings, particularly under the current market conditions. But unless and until the markets regain some semblance of stability, I have reconsidered my position on the acquisition of hard assets such as gold and silver, and recommend you do the same.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
