YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Gold - an investment or speculation?

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A good friend of mine sent me an email today about a very respectable hedge fund manager, David Einhorn of Greenlight Capital, and how he is making bets on gold. In a letter to his investors, Einhorn wrote, “The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed…Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.” He has a good point. If we have temporary deflation, the Fed will continue to use its remaining tool of flooding the economy with even more cash leading to the inevitable.

We have mentioned in prior letters and conference calls our concern about the dollar in the long-run. In the short-run, there’s always the possibility of deflation with credit constricting so much. Going back to Econ 101, what we’re seeing is despite the Fed flooding the economy with money, there is no multiplier effect because there is still no lending as banks are protecting their capital ratios. So, every $1 the Fed puts into the economy does not turn into $10-20. But how bad will inflation become when credit returns and the multiplier effect kicks back in?

Despite our concerns about the currency being debased, we still avoid making bets about price directions of currency and commodities. Besides, history has shown that businesses that have pricing power and don’t need frequent access to the capital markets will outperform commodities in high inflationary environments. We’d prefer to own a growing business that generates cash flow than to own a stagnant hard asset with volatile and unpredictable price fluctuations. Or, put another way, we are investors, not speculators.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | March 09, 2009 | Permalink

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