April 2006

Gold - A Cornerstone for the Portfolio

Gold continues to trade steadily higher (see chart below) and is clearly illustrating what is thought of the irresponsible monetary policies in Washington and the “open-checkbook” administration. Gold is now trading well above the US$600 per ounce level; currently trading at $635 per ounce. We see no reason to believe that there will be any change in the secular upward trend currently underway. Some have observed that revenues from oil-exporting countries are reallocating central bank reserves partially into gold, i.e., Russia recently announced that it will be increasing its gold reserves by 5% to 10%. More recently, the Swedish National Bank reported that it had divested a sizable amount of its U.S. dollar holdings. We suspect that some of these funds found their way into gold.

Ever-increasing deficits (current account and trade) are eroding confidence that the U.S. is serious in protecting the exchange value of the dollar and, likewise, dollar-denominated debt. Bureaucrats are enjoying the benefits of deficit spending today by garnering votes through trading “pork” promises, leaving the arduous task of repaying the debt to future generations. Washington has become a farce where politicians typically promise to fix the social ills of society upon (re)election only to later blame “the other side of the aisle” for their lack of accomplishments while in office. With endless chatter in Washington about “tax reform” never seeming to yield any fruit, maybe our elected officials ought to first seriously talk about “spending reform.” And, until they do, gold and related assets should remain a cornerstone of investment portfolios.

On an aside, a decline in demand for U.S. debt from foreign central banks will necessitate higher domestic interest rates in the months ahead, regardless of economic conditions. One of the most important underpinnings of our financial system is for the U.S. dollar to remain "the world's reserve currency."