The Price of Gold

Gold has dropped precipitously in the last two days.   Many individuals and institutions own gold as part of their portfolio.   Those who owned gold for speculative reasons may have been scared out of their positions or forced to sell because of margin calls.  There were rumors about hedge funds with gold exposure who might have to sell other assets to raise cash.  Markets reacted to this risk of contagion other than gold causing a broad stock sell-off.

If you own gold you should evaluate why you own it.  Here is one mutual fund’s rationale for owning it.

There is a key reason for this investment: Exposure to gold provides a hedge against what the portfolio managers believe are structurally weak developed market fiat currencies ‒ the yen, the U.S. dollar and the euro. These currencies appear even weaker now in the face of several years of aggressive central bank monetary policies.

What is their position in face of gold’s weakness?

Gold’s position in the Fund is used as a hedge against these inflationary policies, not simply as a means of obtaining additional portfolio alpha via price appreciation. As such, the portfolio managers plan to maintain the gold position because the aggressive monetary policies from global central bankers remain in place.

Is the rise of gold over or is this a temporary blip?  It depends on many factors and we’re not sure whether gold will prove to be a hedge against the creation of a massive amount of fiat currency by Central Bankers.  It’s not even certain that inflation rather than deflation is in our future.   In an uncertain world it’s usually wise to give yourself lots of alternatives and stay alert.

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