How a Gold Exit Might Impact Your Commodities Portfolio

My favourite story from economics class is the Wizard of Oz. Believe it or not, this book was actually a story about the great depression. Go ahead, Google it and come back here when you’re done. Rather than bore you with the details, I’d like to quickly draw your attention to the prevalence to characters that embody the impacts of the commodity market on everyday life. The scarecrow who was constantly trying to keep all of his straw-stuffing represented a farmer hoarding his crop in storage until he got a better price, even though it was rotting away.

The Tin-Man represented industry, which would get up and going again if only it had a ready access to oil. The cowardly lion was a scared investor that wasn’t going to help support any of the other characters, and I’m pretty sure Toto was supposed to represent Japan or something. Most important of the metaphors was the yellow brick road, which represented the author’s disillusionment with the gold standard.

From there, we need to understand that Dorothy’s Ruby-Red-Slippers were originally meant to be Silver, but were changed to a brilliant red to accommodate the invention of color television. At the end of the story, when Dorothy solves all the world’s problems by clicking her silver slippers together on the golden pavement of Oz, we see everything resolve through a fairly blatant plea for bi-metalism to balance out the gold standard. Fascinating right? It becomes even more so when you think about this story in the contexts of the modern gold boom, and realize that the Wizard of Oz might very well capable of telling you how to make some decent returns in 2012.

Story time aside, it is important for us to remember that gold is not the only precious metal that acts as a store of value. Silver and platinum have demonstrated similar intangible value as gold, which is then further supported by actual industrial demand. These two metals tend to be used by investors that are looking to diversify out of gold, because of the stability that they provide. As was mentioned in the Wizard of Oz allegory, even so much as diversifying the Federal Reserve currency backing into two metals, we could greatly improve the resilience of a portfolio.

Alternatively to precious metals, we might think of a gold liquidation as an opportunity to begin investing back into those commodities that actually support economic growth. Copper, for instance, has been well known as an early-indicator of economic growth due to its presence in so many products. Oil prices are also a strong indicator of economic progress, in that it is used to literally fuel the growth of industry back into a boom.

Without Oil or Copper, we cannot move out of a recession. Without diversified precious metals, we cannot diversify out of the risk that such volatility in the gold market presents. As such, the possibility of a flight from gold presents a serious opportunity and risk to a personal portfolio.