Arden Partners – Equities to Win

We are indebted to Ewen Stewart of Arden Partners for permission to publish his report: A Game of Two Halves – Equities to Win. Please see that report for full detail.


2009 was a remarkable year for the global economy and a remarkable year for equities. In this note we try to explain why 2009 turned out as it did and examine the prospects for 2010 and beyond.

We have called this note ‘A Game of Two Halves – Equities to Win’ because we believe that although the short-term trends for the UK economy are improving the longer-term forecast looks troubled indeed. Despite this, we believe the outlook for UK equities remains positive.

The first few months of 2010 may well surprise on the upside in terms of employment, house prices, consumer-spend and even, ultimately, GDP. But this is no ‘V’ shaped recovery.

We argue that trend growth, longer term, is likely to significantly disappoint. We argue that the UK’s superior growth, relative to many other developed nations, in the noughties was largely an illusion and we struggle to find the dynamo for growth over the next few years. We believe that the unwinding of the extraordinary fiscal and monetary stimulus, is a necessity, but will also be very difficult to achieve painlessly.

We believe the markets are still underestimating the structural problems with the public sector deficit and that politicians of all colours will be forced to deal with it. The consequences of not doing so would result in rising interest rates and a collapse in international confidence. The deficit remains the key issue for the UK and it may well bring substantial political challenges in itself. Indeed perhaps we should not have called this ‘A Game of Two Halves’ but a ‘Back to the Future – Welcome Mr Heath and the 1970s’?

Despite this, we are not bears of equities. It is true that current valuations are not particularly cheap by historic standards but the UK stock market is fairly defensive and internationally diverse. We believe equities look attractive against cash, bonds and, ultimately, real estate. We are concerned about a potential rise in inflation and again equities are a good hedge.

We have set a year end target of 5750 for the FTSE 100. Sector valuations do not follow a clear pattern and we believe this offers a number of anomalies. We have outlined our suggested sector weights below. As a generalisation, we seek overseas earnings – especially the US$, moderate leverage and strong cash flow as the place to be in 2010 with a return to M&A being more pronounced than perhaps expected.

Policy reaction

The extreme cannot become the norm?

It may be a blessing that Ben Bernanke made the study of the 1930s great depression his speciality. We say may because, while the unprecedented global response undoubtedly has alleviated economic implosion, it does remain to be seen if the ‘nationalisation’ of deficits, the eclipse of moral hazard and the unique policy of both near-zero global interest rates and, in many parts of the globe, with quantitative easing (QE), has succeeded in sending growth back on an inflation-free growth projectory or whether the underlying malaise has been merely kicked into the medium grass. These issues are global, with substantial government deficits, trade and growth imbalances impacting upon different regions.

Source: Bank of England Stability Report, December 2009.

The economic policy reaction in the UK has been greater and more prolonged than any G20 nation, which is partially demonstrated by the chart above. The Bank of England cut interest rates to 0.5% (the lowest since the foundation of the Bank in 1694); 2009 saw a programme of QE to the tune of £200bn (equivalent to 25% of all outstanding gilt stock) and government spending was accelerated, despite plummeting tax receipts. The fiscal deficit is forecast by the Treasury to peak at 12.6% of GDP – a figure roughly twice as large as the UK’s 1975-1977 IMF crisis, and on a par with Greece.

Read on: A Game of Two Halves – Equities to Win


The Function of Money

This is the first in a series of articles taken from Mises, The Theory of Money and Credit (1934). Here, we introduce the function of money. Emphasis mine.

The Theory of Money and Credit is available from Amazon, as a PDF and online.

1 The General Economic Conditions for the Use of Money

Where the free exchange of goods and services is unknown, money is not wanted. In a state of society in which the division of labor was a purely domestic matter and production and consumption were consummated within the single household it would be just as useless as it would be for an isolated man. But even in an economic order based on division of labor, money would still be unnecessary if the means of production were socialized, the control of production and the distribution of the finished product were in the hands of a central body, and individuals were not allowed to exchange the consumption goods allotted to them for the consumption goods allotted to others.

The phenomenon of money presupposes an economic order in which production is based on division of labor and in which private property consists not only in goods of the first order (consumption goods), but also in goods of higher orders (production goods). In such a society, there is no systematic centralized control of production, for this is inconceivable without centralized disposal over the means of production. Production is “anarchistic.” What is to be produced, and how it is to be produced, is decided in the first place by the owners of the means of production, who produce, however, not only for their own needs, but also for the needs of others, and in their valuations take into account, not only the use-value that they themselves attach to their products, but also the use-value that these possess in the estimation of the other members of the community. The balancing of production and consumption takes place in the market, where the different producers meet to exchange goods and services by bargaining together. The function of money is to facilitate the business of the market by acting as a common medium of exchange.

2 The Origin of Money

Indirect exchange is distinguished from direct exchange according as a medium is involved or not.

Suppose that A and B exchange with each other a number of units of the commodities m and n. A acquires the commodity n because of the use-value that it has for him. He intends to consume it. The same is true of B, who acquires the commodity m for his immediate use. This is a case of direct exchange.

If there are more than two individuals and more than two kinds of commodity in the market, indirect exchange also is possible. A may then acquire a commodity p, not because he desires to consume it, but in order to exchange it for a second commodity q which he does desire to consume. Let us suppose that A brings to the market two units of the commodity m, B two units of the commodity n, and C two units of the commodity o, and that A wishes to acquire one unit of each of the commodities n and o, B one unit of each of the commodities o and m, and C one unit of each of the commodities m and n. Even in this case a direct exchange is possible if the subjective valuations of the three commodities permit the exchange of each unit of m, n, and o for a unit of one of the others. But if this or a similar hypothesis does not hold good, and in by far the greater number of all exchange transactions it does not hold good, then indirect exchange becomes necessary, and the demand for goods for immediate wants is supplemented by a demand for goods to be exchanged for others. [1]

Indirect exchange becomes more necessary as division of labor increases and wants become more refined. In the present stage of economic development, the occasions when direct exchange is both possible and actually effected have already become very exceptional. Nevertheless, even nowadays, they sometimes arise. Take, for instance, the payment of wages in kind, which is a case of direct exchange so long on the one hand as the employer uses the labor for the immediate satisfaction of his own needs and does not have to procure through exchange the goods in which the wages are paid, and so long on the other hand as the employee consumes the goods he receives and does not sell them. Such payment of wages in kind is still widely prevalent in agriculture, although even in this sphere its importance is being continually diminished by the extension of capitalistic methods of management and the development of division of labor. [2]

Thus along with the demand in a market for goods for direct consumption there is a demand for goods that the purchaser does not wish to consume but to dispose of by further exchange. It is clear that not all goods are subject to this sort of demand. An individual obviously has no motive for an indirect exchange if he does not expect that it will bring him nearer to his ultimate objective, the acquisition of goods for his own use. The mere fact that there would be no exchanging unless it was indirect could not induce individuals to engage in indirect exchange if they secured no immediate personal advantage from it. Direct exchange being impossible, and indirect exchange being purposeless from the individual point of view, no exchange would take place at all. Individuals have recourse to indirect exchange only when they profit by it; that is, only when the goods they acquire are more marketable than those which they surrender.

The theory of money must take into consideration all that is implied in the functioning of several kinds of money side by side. Only where its conclusions are unlikely to be affected one way or the other, may it proceed from the assumption that a single good is employed as common medium of exchange. Elsewhere, it must take account of the simultaneous use of several media of exchange. To neglect this would be to shirk one of its most difficult tasks.

3 The “Secondary” Functions of Money

The simple statement, that money is a commodity whose economic function is to facilitate the interchange of goods and services, does not satisfy those writers who are interested rather in the accumulation of material than in the increase of knowledge. Many investigators imagine that insufficient attention is devoted to the remarkable part played by money in economic life if it is merely credited with the function of being a medium of exchange; they do not think that due regard has been paid to the significance of money until they have enumerated half a dozen further “functions”—as if, in an economic order founded on the exchange of goods, there could be a more important function than that of the common medium of exchange.

This applies in the first place to the function fulfilled by money in facilitating credit transactions. It is simplest to regard this as part of its function as medium of exchange. Credit transactions are in fact nothing but the exchange of present goods against future goods. Frequent reference is made in English and American writings to a function of money as a standard of deferred payments. [5] But the original purpose of this expression was not to contrast a particular function of money with its ordinary economic function, but merely to simplify discussions about the influence of changes in the value of money upon the real amount of money debts. It serves this purpose admirably. But it should be pointed out that its use has led many writers to deal with the problems connected with the general economic consequences of changes in the value of money merely from the point of view of modifications in existing debt relations and to overlook their significance in all other connections.

The functions of money as a transmitter of value through time and space may also be directly traced back to its function as medium of exchange. Menger has pointed out that the special suitability of goods for hoarding, and their consequent widespread employment for this purpose, has been one of the most important causes of their increased marketability and therefore of their qualification as media of exchange. [6] As soon as the practice of employing a certain economic good as a medium of exchange becomes general, people begin to store up this good in preference to others. In fact, hoarding as a form of investment plays no great part in our present stage of economic development, its place having been taken by the purchase of interest-bearing property. [7] On the other hand, money still functions today as a means for transporting value through space. [8] This function again is nothing but a matter of facilitating the exchange of goods. The European farmer who emigrates to America and wishes to exchange his property in Europe for a property in America, sells the former, goes to America with the money (or a bill payable in money), and there purchases his new homestead. Here we have an absolute textbook example of an exchange facilitated by money.

Particular attention has been devoted, especially in recent times, to the function of money as a general medium of payment. Indirect exchange divides a single transaction into two separate parts which are connected merely by the ultimate intention of the exchangers to acquire consumption goods. Sale and purchase thus apparently become independent of each other Furthermore, if the two parties to a sale-and-purchase transaction perform their respective parts of the bargain at different times, that of the seller preceding that of the buyer (purchase on credit), then the settlement of the bargain, or the fulfillment of the seller’s part of it (which need not be the same thing), has no obvious connection with the fulfillment of the buyer’s part. The same is true of all other credit transactions, especially of the most important sort of credit transaction—lending. The apparent lack of a connection between the two parts of the single transaction has been taken as a reason for regarding them as independent proceedings, for speaking of the payment as an independent legal act, and consequently for attributing to money the function of being a common medium of payment. This is obviously incorrect. “If the function of money as an object which facilitates dealings in commodities and capital is kept in mind, a function that includes the payment of money prices and repayment of loans…there remains neither necessity nor justification for further discussion of a special employment, or even function of money, as a medium of payment.” [9]

The root of this error (as of many other errors in economics) must be sought in the uncritical acceptance of juristical conceptions and habits of thought. From the point of view of the law, outstanding debt is a subject which can and must be considered in isolation and entirely (or at least to some extent) without reference to the origin of the obligation to pay. Of course, in law as well as in economics, money is only the common medium of exchange. But the principal, although not exclusive, motive of the law for concerning itself with money is the problem of payment. When it seeks to answer the question, What is money? it is in order to determine how monetary liabilities can be discharged. For the jurist, money is a medium of payment. The economist, to whom the problem of money presents a different aspect, may not adopt this point of view if he does not wish at the very outset to prejudice his prospects of contributing to the advancement of economic theory.

Further Reading

Please see our literature for a range of further reading.


The market yawns

Where’s the market reaction? Yawns the prophet of Princeton, Paul Krugman in response to the passage of Obama’s health care bill.

In totally separate and completely unrelated news on the same day, the yield of the 10 Year US Government bond rose to 2.5 basis points above the 10 year interest rate swap rate (the rate at which banks can fix their lending rates to each other). (h/t zero hedge).

Allow me to explain how Obama’s passage of trillions of dollars of liabilities onto America’s children has no link at all to the fact that US government debt now requires a higher interest rate than the equivalent rate of interest charged between all of those bankrupt banks.

Er, hold on, something doesn’t quite compute here….

The serious point here, given that uncle Sam needs to pay roughly the same rate as its banks to attract finance, is that the next crisis is likely to be a governmental one (Sovereign risk in market parlance) rather than the banking system that created the risk in the first place.

The banking system is now a fully fledged arm of the state.


Some people doodle pictures

Some people doodle pictures, but I’m the type who mucks around random bits of historical price data just to see where it goes.  For example, I love charts of the Dow Jones Stock index in the 1920s – it me it tells a vivid story of hopes and dreams and pain mixed with desperation.  The wild fluctuations in the early 20’s, the solid gains of the mid 20’s then the euphoria and ensuing panic, well.. you know the rest.

A while a go, I came across a quote;

With an ounce of Gold, a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson…

What does a ‘fine suit’ cost today?  Well, an ounce of Gold is just short of £700.  If you went into Harrods, and asked for a fine suit, would that see you into an Armani or Zegna number?  I think so.

So, the maxim seems to ring as true today as it ever did.

So my mind got to thinking – if an ounce of gold seems to buy the same stuff over the centuries as it does today, then it would seem to be a great proxy for true purchasing power.

The problem with looking at historical charts of stock movements, especially if you are trying to learn the lessons of history, is that the picture is muddied by the fact that the unit of account – i.e. money, does not do a very good job.  It is rapidly decaying so when you compare over time, it just gives the wrong impression of what is going on.

For example, look at the stock market over the whole of the 70’s, and you think that equities didn’t do too badly.  But adjust for inflation, and you soon realize that stocks lost over three quarters of their value in the first half of the 70’s!

So, the idea dawned on me: the price of stocks and shares are only represented in terms of money.  What if you priced them in Gold instead of pounds and dollars?

Firstly: what data?  Well, I stuck to the UK, and I chose the FTSE all share index.  I took the index value for each day, going back a few decades.  I then converted them into ounces of gold.  The chart gave me a pretty shocking picture.

But then I realised I’d missed something pretty important.  Stocks pay dividends.  So, I added a 5% annual dividend return, and then reinvested it into my index.  Surely that’d make my chart look less ridiculous?  Erm, a bit… but not by very much.

What I was left with was a completely different view of history, and some pretty worrying revelations.

Firstly, my chart had nothing to say until the 70’s.  This is because until then, money was gold – therefore priced in money or gold – it didn’t make a difference.  In essence, the chart had no surprises.

But in the 1970’s, money was cut loose from gold, with some pretty shocking results.

FTSE All Share in terms of in oz of Gold (click to enlarge)

Some salient observations.

1. The mayhem of the early 70’s had some pretty catastrophic consequences for the world, and recovery only came in the 1980’s.  From over 12 ounces of gold, down to nearly 1 ounce of gold is a pretty insane move.

2. Real growth took off in the 80’s, but something happened in the mid 90’s – the internet.  This was a period of real economic growth, that morphed into a bubble, thanks to some pretty silly policy mistakes by Greenspan et al.

3. What happened in the 00’s?  Wasn’t that supposed to be the ‘NICE’ decade?  Wasn’t the stock market supposed to have risen back to its peaks?

My answer to this is that the noughties were a period of stagnation, economic misalignment, and we were all swamped by a money fraud.

The authorities were in such a blind funk in 2001, with the overriding perception that we were facing a 1929 style collapse, that they turned on the money gusher, and flooded the whole world with liquidity.  This found its way into the greatest worldwide property bubble the world has ever seen.

But… this was not true growth – at least for the Western economies.  Sure, great advances were made in some sectors of their economies, but huge misalignments of capital were occurring, and this decade of false signals  to producers, but especially to Western consumers, is why we had the economic crisis of 2008.

Look where we stand now.  In ruinous debt.  Shackled to low interest rates and nervously watching retail sales and property prices.  This is a direct consequence of our societies living the high life for ten years, without actually realising we were in decline.

We have been living like cannibals.  Hollowing out ourselves out, yet living the high life.  And this is all down to a pseudo neo-Keynesian/monetarist aggregate kabala fetish.

I feel a sense of panic looking at this chart, so what is the solution?

Free markets built on the bedrock of honest money.


The Luvvie Tax

I see the panel of economic experts that is the acting industry have latched onto the Tobin tax, now re-branded the ‘Robin Hood Tax’.  Never mind that Robin Hood fought against unjust taxes by tyrants: the modern day bogey man is the banker.

Now funny thing is, I do agree with a lot of the sentiment expressed by the morally indignant of Primrose Hill.

Yes, the financial world has grown out of all proportion to the real world

Yes, the rewards for participation in this job seem ludicrously high

Yes, bankers have been bailed out by tax payers and are now furiously spinning the wheels of casino capitalism faster than ever before.

Yes, we should do something about it.

But.  Not this.

Firstly, why financial markets are important.  The good that these things do is provide a price on the future.  They allow us all to insure ourselves against the unknown, whether that be a fixed rate mortgage to buy your house, or a bond issue that allows a company to grow.

Financial markets provide sellers for the shares you want to buy, insurers for risks you want to avoid and lenders when you need to borrow.

Attack the market, and you attack its ability to do this job efficiently.  The price will be paid by you.

It is said that the market will absorb the Tobin/Hood/Luvvie tax.  Anyone who says this clearly underestimates the ability of a bank to pass on its increased costs.  You will either pay directly by higher fees, or indirectly, as the cost of everyday things get more expensive.

And more expensive they will be as the Luvvie tax will infect its way through the whole system.  At every stage of production, financial markets are used to quantify and reduce costs.  Commodity futures allow manufacturers to fix input costs, freight derivatives allow shippers to control cash flow, forward foreign exchange allows import/export companies to insure against wild market swings, credit insurance allow insurance against default and so on and on.

But surely a tiny transactional tax would pass unnoticed?  Well, it may seem tiny, but to many market participants this Luvvie tax will be huge.  What people fail to understand is that a regular and competitive price in many instruments come from institutions that are prepared to turn over huge volumes in order to make a net margin often much smaller than the Luvvie tax.  In one fell swoop, you make a huge proportion of this trading unprofitable, therefore you take away the ability of the market to provide a price.  It’s always the way of ill thought out taxes: unintended consequences.  Some arbitrary decision is made, and a myriad of economic activity suddenly becomes futile.

So what?  Who needs them?  Well, you do.  Every time you want to invest in your pension, you will (indirectly) need to buy a bond or some shares.  Where do you think the seller comes from?  Charity?  No, it is the myriad of active traders that act as the buffer between ‘real’ buyers and sellers of these things.

In the end, you will pay by being poorer as a pensioner, by paying more interest on your mortgage and by generally being gouged more by the banks.

And so, we turn to the banks.  The true villain of the piece.

The problem with financial markets is that banks are allowed to actively participate in this trading game.  It would be less problematic if banks used the markets merely to reduce their risks, but this is not what they do.  They see markets as a lucrative opportunity to enhance their profits, and they seize it with both hands.

Why is this bad?  Because they punt their customer’s demand deposits.  They take the money set aside to pay your gas bill, multiply it up tenfold, then wade onto the casino floor.  What allows them to do this with some level of (misplaced) confidence is the myriad of legislative favours, monopoly rights,  tax payer protection and political pressure arrayed to support them.

Here at the Cobden Centre, we’ve bleated on time and time again about how fractional reserve banking conjures money out of thin air, but it is worth repeating.  You deposit £100 of notes and coin in your current account, and this becomes the property of the bank to do with as they wish.  You sign it over to the bank, who lend most of it out.  £100 of cash, becomes £197 of purchasing power.  Whomever gets £97 loan, deposits it at their bank, and the same happens again and again.

Are you happy that the £100 you think is being safely held aside for your weekly food shopping is being used to fund £1000 of credit default swaps?  I thought not.

At the end of the day, what consenting adults do in the privacy of their own bedrooms is of no concern to you.  What hedge funds do with their willing clients’ money does not concern anyone but the investor.  What pure trading companies do with their retained capital is of no worry to you.

The problem is the banks.  An the best way to put a stop to their nefarious influence is not by taxing them and innocent parties.  Not by robbing pension funds.  Not by forcing you to pay higher fees to manage your financial affairs (as you surely will).  No, they way to deal with the problem that banking has become is simple:

Free markets built on the bedrock of honest money.

Further Reading


Corrigan on inflation, unemployment and the stimulus

On inflation, unemployment, especially desperate youth unemployment, and the stimulus. Consider, in the lows of the first years of the century, there were 2.8 people seeking every job; the ratio is now 6.3.

Download the report here.

Economics – Traders make $8bn bet against euro

Euro coinsThe Financial Times has an item up about the weight of investor pressure to sell the euro, taking the view, no doubt, that the financial crisis affecting debt-laden Greece could raise the chances of a breakdown in the single currency bloc:

Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis.

What interests me about this saga are not the specifics of the Greek financial debacle – which is, in my view, a particularly egregious example of fiscal incontinence by that country’s government – but rather what the FT story tells us about the benefits of short-selling.

The practice of shorting, which describes the process of temporarily borrowing a financial instrument such as a currency, selling it and repurchasing it at a cheaper price to pocket a profit, has sometimes been politically attacked. About two years ago, the UK government decided that those wicked investors who had been shorting the securities of banks such as HBOS needed to be warned off. It was if the very idea of seeking to profit by taking a negative view of a stock or bond was “unpatriotic”. In their defence, policymakers might argue that they were trying to prevent frenzied attacks on a company or country, but all too often, attacks on shorting turn out to be a classic case of “kill the messenger”. I hold no great admiration for George Soros, given his political views, but he certainly did the UK a favour, in my view, in shorting the pound in 1992, a process that eventually helped drive the UK out of the European fixed exchange rate system at the time.

Likewise, in the latest example of foreign exchange drama, traders who are shorting the euro are sending out a powerful message: this currency has a great big flaw in it. Can, for example, the relatively big economies of Germany and France be expected to bail out Greece in the way that say, the Federal US government might have to bail out California, a state that has been teetering on the brink of collapse for months? Such a bailout would only raise the question of whether countries doing the bailing out were entitled to have a more direct say about the fiscal policies of a member state.

Healthy Shorting, in any event, is part of a healthy, liquid financial market. Without those who are willing to sell, buyers cannot operate (a point so obvious that I feel a bit embarrassed to have to even mention this on this site). If we want efficient price discovery to work in markets, then it should be possible for operators to profit not just from when a price rises, but when it falls. Shorting can enable financial players to hedge risks.

Of course, part of the issue for those monitoring the markets is that the routes by which an investor can short a stock have multiplied. You don’t have to be a big hedge fund with access to a powerful prime broker such as Morgan Stanley or Deutsche Bank. You can, for example, short a security through derivative-type products such as contracts for difference (CFDs) and spread-betting, both of which are instruments open to the retail investor, given certain constraints. These processes can be accessed online via firms such as IG Index, for example.

So armed with such instruments, traders can express a bearish, as well as bullish, opinion. And the FT story is striking about what the euro bears think. For example, the report says that traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, “amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis”.

Figures from the Chicago Mercantile Exchange, which are often used as a proxy of hedge fund activity, showed investors had increased their positions against the euro to record levels in the week to February 2.

It has been one of the ironies of the financial turmoil that when problems first arose, it was easy for the European nations such as Germany and France to hint that their systems were so much more robust than the approach taken by those cowboy Anglo Saxons. But in truth, EU countries, many of which now have levels of debt that are alarming investors, have big problems. Short-sellers are simply expressing the wider worries that investors have about the viability of the euro and the willingness of euro zone states to operate a sound currency.

Economics – Ofgem urges shake-up of energy market

Via, Ofgem urges a shake-up of the energy market,

Sweeping reforms of the UK’s energy market must be brought in urgently to protect energy supplies, reduce greenhouse gas emissions and deliver the £200bn investment needed in the power sector, the energy regulator said on Wednesday.

Ofgem said options for reform would include placing more stringent legal obligations on energy suppliers, and “improved market signals”, which could include a higher price on carbon dioxide emissions. More drastic options could include a centralised renewables market and a central buyer of energy for the whole of the UK.

Which all seems very well, until you realise that this is the fruit of an ideological aversion to the free mutual cooperation of individuals and corporations. Ofgem apparently tell us, “It would mean taking away the market’s role in delivering that investment.”

We need to make our minds up about whether planned or free economies can provide us with the means of our survival and prosperity. History’s answer is clear: planned economies cause misery and then collapse.

Further reading


Addressing Progressive Conservatives

I have just accepted an invitation from that great London free market networker, Shane Frith, to address an excellent group he is involved with called Progressive Conservatives.

Not being a Conservative myself (I consider their general disassociation from much that I regard to be progressive and liberal off-putting), the chance to speak to a group professing Progressive Conservatism in the liberal sense greatly excites me.

My talk is scheduled for 22 February 2010 and the current title is ‘Free Market Thoughts on the Political Atmospherics of Money, Banking and Finance’.


A Contrarian’s Dilemma

This article from Tocqueville Asset Management is a must to read for anyone interested in the role gold plays in the investment portfolio of the public and of the Contrarian. It is simply one of the best articles written on the matter:

Is gold a “bubble” because it has now become popular or is there still worthwhile upside? As a contrarian, it is more difficult to reconcile the metal’s recent popularity with the prospect of future rewards. Is the investment consensus always wrong, or can it be right for extended periods? Does the perceived flood of new investment mean the jig is up?

The effect of four digit gold has been magical on investment psychology. Day after day, the financial media publishes glowing reports on the metal’s prospects while never failing to trash the beleaguered U.S. greenback. Hardly a day passes when I do not receive another meticulously researched, solemn tome on the merits of gold written by a market strategist or hedge fund manager. My office has stacks of them, all basically saying the same thing: paper currencies are bad so buy gold. In the parlance of the contrarian, gold is no longer a “thin file” investment idea.

Read on by downloading the article from Tocqueville.