by Jaime E. Carrasco CFP
Investment Advisor, Blackmont Capital
February 11, 2009
There is a high level of financial noise. And, with so many diverging opinions, it is hard for investors to decide what to do. No wonder that there is so much nervousness about what lies ahead. But I assure you that this mess has a solution and that it is no different this time; therefore, certain asset classes will greatly benefit from this financial crisis.
Historically, gold has done well through all financial crises. Why? Because it offers a financial constant to gauge the value of currencies. Financial crises are always about the re-evaluation of the purchasing power of the value of money. This crisis is no different except that it involves the US$ and other global currencies. As they revalue, gold will appreciate to reflect their true purchasing power. As always, government action to mitigate the pain leads to lowering currency purchasing power. It starts by presenting itself as deflation followed by inflation, both being gold-bullish.
Note that hyperinflation always results from too much political involvement during financial crises, and the rational investor should be wary of current government actions.
Precious metals are just beginning their ascent because we have only started currency re-evaluation. I have never been a ‘gold bug’ and I do not fully subscribe to the theory that the world will return to a gold standard. Is it possible? Yes, but unlikely given the financial evolution that has taken place during the last 40 years. However, I understand the benefits of owning gold and precious metals through this coming economic period.
Canadian markets offer a great advantage for the rational investor seeking exposure in this sector as they are home to many of the world’s leading and up-and-coming precious metal companies. The level of participation should be appropriate to each individual investor’s risk tolerance and time limits. Consideration should be given to the commodity itself as well as exploration and production companies. Ownership of physical gold, silver and other precious metals can be achieved through physical purchase of the commodities or through ownership ETFs or mutual funds that specialize in owning the physical.
Canadian investors must understand that the value will be handicapped by the conversion back to $C as the currency is usually negatively correlated to the $US thus lowering the full upside. For foreigners that are worried about the expropriation of their physical gold or silver, Canada offers a safe storage haven.
As for production and exploration companies, Canada is the home-base for many companies involved in the worldwide production and exploration of precious metals. I like looking at mid-tier companies on their way to rival the seniors. They tend to have lower production costs and will be acquired or are acquiring. When weighing possible considerations, I recommend reviewing:
- Level of reserves on the ground
- Ability to grow those reserves
- Cost of production
- Political risk of location
- Managements’ experience
- Who are the financial backers
- Current valuation of the stock in relation to the commodity’s price
- The company’s ability to raise capital
Use those parameters and the rational investor will find many companies that merit investment consideration.
The current financial reality is that ownership of precious metals is essential to hedging one’s net worth from the continued loss of currency purchasing power. It is advisable that investors discuss the level of suitability of that participation with an advisor as it depends on each individual’s risk tolerance and time horizon. It is now obvious that the rise in the price of gold signals a clear picture of things to come. Get ready for the ride!
© 2009 Jaime E. Carrasco CFP