Jeff Saut: The Intrigue of Permanent Investments

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

In Bernard Baruch, Park Bench Statesman (1944), Carter Field write:
 

Baruch liked gold mines. There is always a market, he pointed out, for their product, and at a satisfactory price. Gold, he insisted, is one of the very few things in the world that approaches the status of a permanent investment. Baruch told the story of a Rothschild who set up a "permanent trust" consisting of five different currencies. By the time Baruch heard about the trust, it had shrunk to one-fifth its original value. "But gold doesn’t yield any interest," a friend protested after listening to the story. "True," replied Baruch, "but consider the fabulous wealth of some of the Indian princes and rajahs. I had dinner with the Maharajah of Kapurthala on one occasion in Vittel, France. Several of us talked afterward about his wealth, and someone said that among the treasures of these Indian moguls were gold coins brought to the East by Alexander the Great, hundreds of years before Christ.”

Their gold and jewels had earned no interest during these more than 2,000 years, but they still had their capital. Suppose they had attempted to provide income from it. They might have been no more far-seeing than the Rothschild I mentioned. If they had tried speculation there have been many times in each century that they might have gone broke. No, save for gold, jewels, works of art, perhaps good agricultural land, and a very few other things, there ain’t no such animal as a permanent investment. Even in agricultural land, Baruch pointed out, there is some risk. Lands that made men rich in rice cultivation years ago in Baruch’s own state of South Carolina, are not nearly so valuable now that rice is produced more economically in other sections. City real estate is subject to all sorts of hazards, as he learned when he no longer needed his big Fifth Avenue mansion.

A “permanent investment” -- what an intriguing concept! When I first entered this business, one of my mentors, namely Lucien Hooper (securities analyst extraordinary), often spoke of permanent investments. In fact he once stated, “You should put one quarter of your investment portfolio in stocks, one quarter in bonds, one quarter in precious metals, and one quarter in farmland." His reasoning was that such a non-correlated asset allocation would grow and preserve capital through any multi-generational economic cycle. This morning, we focus on precious metals and farmland.

Last week a “tree fell in the forest and nobody heard it.” The headline read, “CME To Allow Gold As Collateral For All Exchange Products.” The lead paragraph was:
 

US-based clearing house CME Group Inc. (CME) will allow physical gold to be used as collateral for margin requirements on all exchange products, a spokesman said Monday. The new global policy is effective Oct. 19 in accordance with a member's notice issued late Friday, said spokesman Jeremy Hughes in London. Clearing member firms will be allowed to post up to a maximum of $200 million worth of gold as collateral to cover performance bond, or margin, requirements, Hughes said.

Then on Friday there was this gold quip on the Broad Tape:
 

If you’ve invested in gold, you’re about to gain a powerful ally: pension funds. "I think the largest institutions like our own are realizing that we barely own any [gold]," Shayne McGuire, Director of Global Research of the Teacher Retirement System of Texas said in an interview in Hong Kong very early this morning. "The same thing applies to most of the pension funds which manage trillions of dollars in world wealth." TRS oversees $95 billion, and just opened an internally managed gold fund for the 1.3 million public education employees, and suggests other pension funds follow suit. Owning gold is "financial insurance," he said, sounding a lot like David Einhorn at the Value Investing Congress earlier this week. "Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing . . . I don’t think the question really is what is gold worth but what are currencies not worth."