Osisko Gold (OR) is the newest and smallest of the “big four” gold and silver royalty co...
Gold Shines in Storm of Paper Money
07/04/2012 11:00 am EST
The precious metal benefits from aggressive printing by central banks, and bullion is safer than an ETF, says Michael J. Cuggino, president of Permanent Portfolio Family of Funds.
Well, gold is in the news a lot, and it can be very volatile. So why have a portion of your portfolio in gold even if you are a conservative investor? My guest today is Michael Cugguno to talk about the reasons behind that. So Michael, in a conservative fund, why have a portion in gold?
We use it as one asset class of many in a diversified strategy. So from our perspective, gold is a hedge against inflation, it is a hedge against the devaluation of paper currencies in this negative real short-term interest rate environment. It acts as an alternative currency, an alternative to sort of paper assets and assets more bent on growth than capital preservation or wealth preservation.
All right, do you make predictions about levels in gold? Is it important to you to say that gold is headed to $2,000 or gold is headed to $1,200? Do you make those kind of calculations?
Completely irrelevant, except for psychologically, maybe. I mean, the reality is that it is more an indicator of the current state of the health of monetary currency and paper currency around the world. So it’s not necessarily even a dollar issue per se.
But everybody else as well as the dollar—and in this environment we have had declining unit values of currency, we have had the world central banks flooding our various countries with money to guard against the deflationary issues of several years ago. And as a result, the unit value of that currency continues to decline. Gold acts as a counterweight or an indicator of measure of the devaluation of those paper currencies.
Finally, in an asset allocation environment, is it enough to own the Gold ETF (GLD) or do I need some physical gold? Do I need some of the miners? What do you recommend there?
Well, we own gold physically, so we don’t own it in GLD or any other ETF. There are several out there; you mentioned one, GLD.
I think investors can own in a lot of ways, and it depends on what their objective is. In ours, we are seeking that alternative currency move of the metal itself. So for us, the physical ownership is best, and we take title and ownership—unlike an ETF, where we are just a shareholder, you have a third party owner kind of situation, and the risk that are intendant to that.
Other people that are looking for equity performance might invest in the miners as an asset class. That has issues too, in that stocks behave like stocks first, and you are not getting the exact move of the metal. Businesses hedge their production and so you can have returns that lag or change from the actual move of the metal.
Then you get into derivatives in futures and those sorts of ways to hold it, which are highly leveraged and you have counterparty risk. But again, for a certain investor that makes sense. Then you have the tax treatment that needs to be dealt with in the various forms of ownership. So we have looked at all that, and we believe the best way for us to hold it is physically at this point.
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