American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Nov. 2009 – Gold and Risk

From time to time it falls upon us to pull away the punch bowl just when the party is in full swing. To that end we remind our readers that gold, now at an all time high, is by far the most volatile of our recommended asset classes. Our target allocations exist to ensure discipline, and wise investors will maintain steady exposure to gold and avoid the current enthusiasm for piling in as the price rises.

Gold has been in the news. Among the more telling indications that gold is “hot” are the seemingly inescapable advertisements for redeeming gold jewelry for cash. Most recently, hedge funds, notorious for making massive moves in and out of asset classes, have taken large positions in gold. Our approach is intended to help you avoid this exuberance; it is likely that many of our readers are reducing their exposure to gold as they restore their portfolios to their target allocations.

Our approach to holding gold runs contrary not only to Wall Street, but academia as well. Although our model portfolio recommendations are based largely on published academic research centered upon Modern Portfolio Theory (MPT), most researchers have concluded gold is of no use in a portfolio construction. They point out that unlike equities, which are a claim on future earnings, gold has no expected return, and that the gold price is extremely volatile. MPT is concerned with the theoretical “mean-variance investor”, who is concerned with maximizing his “return per unit of risk assumed.” But as practitioners we are acutely aware that a portfolio’s volatility is only one dimension of risk, and that human beings are far more complicated.

As investment advisors we would be irresponsible if we were to simply implement robotic portfolios based on quantitative models. Our obligation is not only to help investors to meet their future financial goals, but also to help them sleep at night. Data suggest that gold can provide portfolio insurance during periods of extreme financial distress, and our clients and readers have demonstrated a strong willingness to endure extreme volatility in the gold price in order to gain that protection. Over the past 40 years MPT has been an extraordinary boon to investors, but it is incomplete. Many investors have little faith in a global economy that relies upon fiat currencies, and take great comfort in the knowledge that gold is among their holdings.

Also In This Issue

Giving That Keeps On Giving
Before You Pop The Bubbly…
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles