Aiming for gold

While asset managers and advisors are loathe to diminish the tremendous fortitude, skill and determination required of a podium finish at the Olympics, a few precious metal advocates believe that the strong Olympic finishes are one way to alert the keen eye of a savvy investor to an investment opportunity.

Even as Canadian athletes continue to push for bronze, silver and gold medals, it is estimated that American swimmer Michael Phelps has accumulated $1,360 US with his eight Olympic gold medals — that is if you only take into consideration the value of the gold contained in each medal.

“It’s interesting how, when we celebrate achievements like the Olympics, the award is always bronze, silver, gold or platinum,” notes Nick Barisheff, president and founder of Bullion Management Group, which offers investors an open-end mutual fund that invests exclusively in precious metals. “Yet, when it comes to investing, people declare that they wouldn’t touch gold [or other precious metals] with a ten-foot pole. If gold was so worthless, why don’t we give Olympic paper certificates to the winners?”

Barisheff believes that, given the current state of the economy, now is an excellent time to diversify using precious metals.

“Stocks and bonds are correlated. People believe that they are non-correlated, but studies since 1969 show that they are correlated — stocks and bonds have a tendency to go in the same direction,” explains Barisheff. “That means an investor needs a product that goes in the opposite direction — something on the opposite side of the coin, so to speak.”

That something is precious metals

“The issue is that investors often look at gold as short-term speculation,” says Barisheff. “We recommend that precious metals should be a part of every portfolio, as they are the most negatively correlated asset class to stocks and bonds. This means precious metals give an investor a truly balanced, diversified portfolio.”

Barisheff references a study by Ibbotson Associates, released three years ago, that suggested that each portfolio should include 7% to 16% precious metals, depending on the mix of bonds and equities.

“Right now, though, most investors have 0% precious metals in their portfolio.”

Andrew Beer, manager of strategic investment planning at Investor’s Group, says that any precious metal holding should be considered a “long-term investment.”

“When you track the [historical] long-term returns of gold, we can see that an investor that bought precious metals in 1980, during the peak of the inflationary period, would not have made money until early 2000,” explains Beer. “That’s because precious metals can be subjected to long periods of stagnation.”

Still, Beer points to the fact that the trend for gold, since the 1960s, has been consistently upward.

“Gold needs to be considered a long-term investment first. Then it needs to be viewed as an insurance policy,” said Beer. “It’s a commodity, so it’s something stable. It will hold its intrinsic value while providing downside protection.”

Barisheff also believes that investors not currently holding precious metals should re-examine and readjust their portfolio.

“The value of precious metals and other commodities is inversely related to the production of paper money,” explained Barisheff. “Canada is projected to produce 11% more paper money over the next year. The U.S. will create 16% and China will create 18%. While the price of the commodity is not necessarily going up, the increased production of currency devalues its price. As a result, the price of all commodities will rise, relative to paper money.”

As such, Barisheff believes that gold (and other precious metals) in all forms will be a good investment to hold in the near future.

“Phelps would be wise to hold onto his medals, for gold value alone,” says Barisheff.

Beer also believes that anyone currently holding gold or other precious metals — including Phelps and the other Olympic medal winners — would be wise to hold on to the investment. “There are still opportunities in precious metals, and sound opportunities in gold or precious metal funds as long as they are holding for the right reasons — safety and peace of mind.”

He adds, however, that Phelps (and all the Olympic medal winners) should probably hold onto their medals, “just for the memory.”

Originally published on Advisor.ca on August 20, 2008