By Daniel A. Barnes

I don’t watch TV much. I don’t keep up with what’s going on in the media or commercials. My favorite shows of the last five decades were: “The Bionic Woman,” “Eight is Enough,” “Hill Street Blues,” “The Paper Chase” and “The West Wing.” (“Mad Men” might make my elite list if it gets through more seasons.) I like the tried-and-true, both in television and investments.
Because of this, I have not even taken much notice of media fervor on Gold fever. However, recently, several people–knowing I’ve advocated Gold for investment portfolios for a long time (since 2002) – asked me whether I still like Gold?

The answer is simple: Yes–because Gold is a classic long-term instrument for capital preservation. Let me pose a rhetorical question: “What backs the dollar?” Answer: faith in the political stability of the nation and the work ethic of the American people. In the 1930s the dollar was known “as good as gold” Is it still? Well if it were, then $35 would still buy an ounce of Gold. But $35 dollars doesn’t even by a gram of Gold anymore. Why not? It’s not because the dollar isn’t as good as gold, government policies of overspending have led to a 95 percent decline in the value of the dollar since World War II.

Given the errant pirates in charge of the printing press and the underinvestment in Gold reserves by China and Russia, at Barnes Capital we believe that demand for the pretty metal will continue to increase for years to come. Jefferson understood the danger of banks 210 years ago when he said “If the American people ever allow private banks to control the issue of their money, first by inflation then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”

His point is well taken: Banks manipulate money issues for their own benefit, not the benefit of the rest of us. We’ve clearly seen that with how they’ve handled the bailout money and $700 billion in TARP funds. Looking ahead, I believe that we haven’t even begun to see the great unraveling of some of the inequities that currently persist. And it’s unclear how much reform is really going to take place in under the “Obama revolution.”

But it’s clear to me that more rocky shoals lay ahead. How are things going to end? Probably with a swerving U.S. supertanker caroming off fiscal shoals. ($7,000 Gold anyone?) But betting on a crash is imprudent. It’s far more likely that radical changes will be thrust upon us, like a supertanker doing a 90-degree turn. These changes will happen so fast that they will avert the calamity, but because of the velocity and magnitude of the change, no one will be able to reposition their assets fast enough to respond to the unfolding of events.

This scenario could play itself out any time in the next twenty years. The bottom line is that we may have to swerve the U.S. supertanker, in order to avoid economic calamity. On the way to that seminal event, Gold might just keep climbing longer and higher than most anyone imagines. Will it? I don’t know, but I still know very few people outside of my clients and a few friends who are actually are invested in Gold. Do a survey yourself; just ask ten friends whether “more than two percent of their money is in Gold or Gold stocks?” I bet you the answer is still “No.”

Our firm shares offices with Creekside Partners, an excellent investment firm. Creekside recently made a compelling case for holding natural resource and commodity stocks rather than Gold. We agree, and we use similar assets in our client portfolios. But we also view Gold as an asset class for capital preservation. If we are wrong about Gold moving steadily higher in its powerful bull market, then our client portfolios will prosper via their diversification in other assets, particularly stocks and bonds.

In Conclusion

We don’t know what Gold or stocks will do in the near or intermediate term. That’s why we focus on making sure a client portfolio is intelligently diversified. The genius of diversification is that we don’t have to know exactly what will happen in the future, we just have to get the mix of assets right for each and every unique client family.

If you are unsure whether your portfolio is sufficiently diversified, give us a call and ask about our “Second-Look Service.”

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Tuesday, December 1st, 2009 at 8:47 pm and is filed under Monthly Column. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.