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GOLD
THOUGHTS
by
Ned W. Schmidt, CFA, CEBS
Schmidt
Management Company
THE VALUE VIEW GOLD REPORT
Disciplined Analysis of Gold
April 18, 2007
GOLD
THOUGHTS:
Much
talk about this index or that index making a new high, or near a new high.
The level for an index is interesting, but the return being earned is more
important. A stock market index could conceivably make a new high each and
every day without providing a desirable return. Today's graph compares the
return over the past five years of an investment in $Gold and U.S. stocks,
as measured by the total return on the S&P 500. As is readily apparent
from that graph, $Gold has substantially outperformed an investment in
U.S. equities. Why these results? Gold's price is a mirror reflection of
the global purchasing power of the U.S. dollar. As the Federal Reserve has
grossly mismanaged U.S. monetary policy over the years, the global forex
market has pushed down the value of the dollar. That depreciation of the
dollar's value is not reflected in the equity market.
Is this
situation like to change? The unwinding of U.S. monetary mismanagement
will take some time. The housing & mortgage bubble implosion has much
further to go. That bubble represented a massive misallocation of funds,
not reversed in just a few months. Additionally, the U.S. economy is
slowly moving into the recession necessary to purge the housing &
mortgage excesses. The risks for U.S. financial markets are not limited to
the aftershocks of the mortgage earthquake. The massive foreign currency
mismatch evident in the carry trade loans remains an overhanging danger to
financial markets. Borrowing in one currency to invest in risky assets
denominated in another currency is a sure way to ultimately destroy
wealth. Gold is perhaps the only insurance against the financial agony to
come from unwinding of the carry trade loans, and two decades of monetary
mismanagement.
© 2007 Ned W. Schmidt
Editorial
Archives
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive a trial subscription send a note to
Ned.
Please
remember that no method is perfect nor is the one running the model.
All estimated returns are for the model portfolio and do not reflect those
earned on actual portfolios.
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