Securing a place for gold

(June 25, 2004) With no end in sight to tensions in the Middle East and the U.S. balance sheet virtually in tatters, the price of gold seems to have found a permanent home around the $400 mark. Since 2001, gold has rallied by 60% and investment funds with a stake in the precious metal have been among the top performers.

But many investors do not understand the different roles gold can play in their portfolio, focusing on the short term gains that can be made flipping a mining stock, for example.

Nick Barisheff is the president of Bullion Management Services Inc. which manages the Millennium BullionFund. This fund holds platinum, silver and gold bullion — no mining stocks, not options — just bullion.

“Often investors and advisors will think of gold as part of the speculative component of the portfolio,” he says. “That’s true if you’re using commodities futures contracts as the investment vehicle.”

He points out that actual bullion was once considered a staple of a balanced portfolio, while today, investors treat gold as a commodity to be traded, but Barisheff considers it as part of the cash component, because of its liquidity.

“Our position is that you should hold 5% at all times regardless of demand,” Barisheff says. “You don’t cancel your house insurance because you think this year you’re not going to have a fire. You don’t trade your house insurance either.”

He points to Argentina — the name even implying that people might have known better — as an example of how precious metals can protect the investor. When that country’s economy imploded, an investor would have seen the value of their equities, bonds and even cash evaporate, while their bullion component would have appreciated.

“It needs to be allocated as bullion,” he says. “It’s not shares of mining stocks or futures contracts, they all would melt down. But actual physical bullion, that’s a totally separate asset class.”

Gold has a negative co-relation to other investments, such as equities and bonds. When interest rates rise, both stocks and bonds tend to decline, whereas gold tends to gain in value.

Barisheff probably could not be any more bullish on precious metals, pointing to the staggering debt carried by the U.S., topping $40 trillion in total at all levels. On top of that there are contingent liabilities such as unfunded social security, making up another $44 trillion. He says investors can expect gold to remain strong for the next 10 to 20 years.

“Today I think a strong argument can be made that we’re going through a cyclical trend change, where you’re going to have continuing U.S. dollar weakness and from that will come a rise in precious metal prices,” he says. “The reason to have gold these days is to avoid some potential vulnerabilities that will flow across the world as this debt bubble in the U.S. bursts.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com