Thursday, December 29, 2011

Gold and Investment

Most thoughtful observers realize that the US and the major Western economies are going to have significant inflation at some point. It is unlikely that politicians will ever deal forthrightly with the entitlement issues and the only thing left is to monetize the debt -- print money -- and hope that rampant inflation will destroy the value of the outstanding sovereign debt. An interesting future.

The conclusion that some draw is that gold (and perhaps other precious metals) should thrive in a world of out-of-control inflation and the absence of a safe haven asset. It is an appealing idea and gold has done well in recent years, until recent months.

But, how do you value gold? or silver? Normally things have some alternative use. But the prices of gold and silver are way beyond any alternative use value. Gold could trade anywhere -- up or down. There is no way of establishing a value for gold.

Should gold be a part of a diversified portfolio? No. But gold mining companies should.

Which brings us to the Hedge Fund industry in 2011. The hedge fund industry has stubbed it's toe big time by holding outsize positions in gold and in gold stocks. Why? What "expertise" that is worth paying money for leads a hedge fund to take a huge long position in gold? What are the analytics? Is it simply that Europe is imploding and the US is next? Is that it?

Is their some serious analytics behind the huge gold positions taken by hedge funds in 2011 or is this simply the herd instinct speculating in something with a bubble-like recent history?