Bank of England
last week dumped a ton of the stuff -- or 25 tons, to be somewhat more precise -- but gold bugs continue to insist that the barbaric relic should be a cornerstone of virtually every portfolio. That sort of advice has always struck me as having been derived from nine parts emotion and one part analysis. The analytical element is that gold makes a great diversifier for a portfolio of financial assets -- but the same might be said of oil, say, or cinder blocks.
Estimates have it that about one-fifth of all the gold ever mined is held as monetary reserves by the world's central banks. But times have changed from the days when gold production meant digging it up in South Africa, only to bury it in lower Manhattan, in the vaults of the
Federal Reserve Bank of New York
. Now central banks are disgorging the stuff: The U.K. has announced plans to sell off 415 tons of its 715-ton reserve over the next three to five years. That works out to a 25-ton auction, such as last week's, roughly once per calendar quarter. Australia, Belgium, Canada and others have also announced intentions to diversify their monetary reserves into higher-yielding instruments, such as government bonds.
All of these superbanks vow to sell at a gradual pace in order to minimize disruption to the market and maximize the bids they will receive. But with this sort of massive overhead supply drip, drip, dripping into the market, it is difficult to see how gold can provide a store of value to anyone else.
As for the analytical case, the reason alternative assets are added to portfolios is to diversify risk, not to eradicate return. Gold hasn't been able to hold its value even against a loser such as oil has been during the 1990s. Oil -- now there's a commodity market worth monitoring closely right now for its investment implications: Crude is up 60% year to date.
On the subject of diversifying out of gold and into government bonds, it's not clear that there will be any around, at least not U.S. The current projections of the
Congressional Budget Office
, with all the usual tenuous assumptions about congressional behavior and economic performance, show that future budget surpluses will pay down the federal debt over the coming 10 years, from the $3.6 trillion now held by the public to a mere $865 billion.
As a proportion of GDP, federal indebtedness to the public at large will fall to roughly 6% from the current 40%. T-notes and bonds, in this scenario, will have such scarcity value that prestigious museums will probably matte, frame and hang them. Trade in your Rubens for a Rubin?
If this CBO projection indeed comes to pass -- i.e., in the unlikely event that both Congress and the economy behave -- then spreads against Treasuries or other fixed-income investments will gap out to levels that in the past have indicated panicky levels of anxiety about corporate solvency. But those spreads will have to be interpreted differently as Treasuries complete their transformation from the "certificates of confiscation" of the 1970s to the museum pieces of the coming decade.
Jim Griffin is the chief strategist at Aeltus Investment Management in Hartford, Conn. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. Aeltus manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at