Greenville Business Magazine 2010 January issue : Page 12

››columns Is There Gold in Them There Hills? BY ALLEN GILLESPIE | PHOTOGRAPH BY ASHLEY RUFF - IMAGE TO IMPACT “ A s we come into the new year, many investors are asking “Is now the time for gold?” The precious metal has risen in price for 10 consecutive years and sits at an all time high after taking out its high from the early 1980s. Conversely, stocks have struggled. One of the primary points I try to illustrate in this column, however, is that invest- ing is about anticipating an uncertain future; not chasing a clear past. If that is the case, what is the outlook for gold? It depends on the great seesaw. Investing is thinking about future value, not past price movements. The past means nothing. I have seen investments go up 100 percent, which causes people to think the price is too high, only to see the price go up another 500 percent. We wait for a pullback that never comes. Think about stocks in the early 1980s, when the Dow Jones Industrial average went from 1,000 to 2,000 on its way to 10,000. Conversely, think about what happens when a company goes bankrupt – frequently the stock is down 70-90 percent from its all time high, but on that last day it goes down 100 percent as it loses its last remaining equity value. Like all investments, gold must compete with alternatives. Thus gold must be attractive relative to what you can earn on your cash, real estate and stocks. If you could make 6 percent on a CD, then gold would have to go up at least that much to be an 12 GREENVILLEBUSINESSMAG.COM | JANUARY 2010 Like all investments, gold must compete with alternatives. ” attractive alternative. Now that hurdle rate is close to 0 percent, a rate so small that even a small child could jump over it. Think of a seesaw with interest rates on one side and gold on the other. As interest rates have come down, gold has gone up. I think the question now is, how long can interest rates stay down here? Historically, there are some long periods of low rates. For example, when the Fed got down to 1 percent inter- est rates in 1937 they stayed there until after the Korean War in the 1950s. Thus, while the gold market has lost the benefit of the drop in interest rates, it may still be able to move higher because there is truly no competition from interest rates. Simi- larly, if the Federal Reserve and government change policies, gold could sink very quickly as the great seesaw swings down. Given that, rates at this point really can only go one direction, I think it makes for a difficult game. I can see a case for gold continuing to be an attractive investment, but I also know it has lost its seesaw leverage.In my mind, I think there is a better alternative than gold: lithium. Lithium is that little metal that now goes into everything – including your laptop computer’s battery. It is anticipated the electric cars of the future will also run on lithium batteries, an application that would cause a large increase in demand. Lithium is also used in medical applications. I think lithium benefits as an alternative to low yielding cash like gold does, but in the future I see it has a far more practical utility than gold. The modern world cannot work without lithium because it cannot work without computers. A cleaner future also depends on lithium. I believe lithium could turn out to be 21st century gold. I understand that the London Metals Exchange is plan- ning to add a lithium contract in 2010 and there are a couple of mining companies that have lithium exposure. Riding a seesaw can be fun, but I think there are clearer alternatives to gold for long term investors. ■ Allen R. Gillespie is a principal of GNI Capital, responsible for portfolio management and investment research for all of the company’s managed assets. The information contained herein should not be considered investment advice. Please consult with your investment professional before making any investment decision.

>>columns - Is There Gold in Them There Hills?

Allen Gillespie

As we come into the new year, many investors are asking “Is now the time for gold?” The precious metal has risen in price for 10 consecutive years and sits at an all time high after taking out its high from the early 1980s. Conversely, stocks have struggled. One of the primary points I try to illustrate in this column, however, is that investing is about anticipating an uncertain future; not chasing a clear past. If that is the case, what is the outlook for gold? It depends on the great seesaw.

Investing is thinking about future value, not past price movements. The past means nothing. I have seen investments go up 100 percent, which causes people to think the price is too high, only to see the price go up another 500 percent. We wait for a pullback that never comes. Think about stocks in the early 1980s, when the Dow Jones Industrial average went from 1,000 to 2,000 on its way to 10,000. Conversely, think about what happens when a company goes bankrupt – frequently the stock is down 70-90 percent from its all time high, but on that last day it goes down 100 percent as it loses its last remaining equity value.

Like all investments, gold must compete with alternatives. Thus gold must be attractive relative to what you can earn on your cash, real estate and stocks. If you could make 6 percent on a CD, then gold would have to go up at least that much to be an attractive alternative. Now that hurdle rate is close to 0 percent, a rate so small that even a small child could jump over it. Think of a seesaw with interest rates on one side and gold on the other. As interest rates have come down, gold has gone up.

I think the question now is, how long can interest rates stay down here? Historically, there are some long periods of low rates. For example, when the Fed got down to 1 percent interest rates in 1937 they stayed there until after the Korean War in the 1950s. Thus, while the gold market has lost the benefit of the drop in interest rates, it may still be able to move higher because there is truly no competition from interest rates. Similarly, if the Federal Reserve and government change policies, gold could sink very quickly as the great seesaw swings down. Given that, rates at this point really can only go one direction, I think it makes for a difficult game. I can see a case for gold continuing to be an attractive investment, but I also know it has lost its seesaw leverage. In my mind, I think there is a better alternative than gold: lithium.

Lithium is that little metal that now goes into everything – including your laptop computer’s battery. It is anticipated the electric cars of the future will also run on lithium batteries, an application that would cause a large increase in demand. Lithium is also used in medical applications. I think lithium benefits as an alternative to low yielding cash like gold does, but in the future I see it has a far more practical utility than gold.

The modern world cannot work without lithium because it cannot work without computers. A cleaner future also depends on lithium. I believe lithium could turn out to be 21st century gold. I understand that the London Metals Exchange is planning to add a lithium contract in 2010 and there are a couple of mining companies that have lithium exposure. Riding a seesaw can be fun, but I think there are clearer alternatives to gold for long term investors.

Allen R. Gillespie is a principal of GNI Capital, responsible for portfolio management and investment research for all of the company’s managed assets.

The information contained herein should not be considered investment advice. Please consult with your investment professional before making any investment decision.

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