Clients Push For Gold And Silver Exposure, Advisors Push Back

Wednesday, December 07, 2011 08:20
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Clients Push For Gold And Silver Exposure, Advisors Push Back

Tags: gold

Many retail investors are enthralled by the idea of holding precious metals in their portfolios. Many advisors hate the idea.

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Unfortunately, the recent gold rally means arguments about whether past results are any indication of future results. 

 

Investors are sophisticated enough to look at the gold chart and compare it to the sorry performance of the equity market over the last decade. So they want gold.

 

That urge to chase returns is motivated by greed, pure and simple.

 

However, the entire investment proposition around gold is built around fear, not greed. Gold is the hedge against inflation and other threats to currency. In the long term, its value should remain constant -- it does not "appreciate" like a normal security.

 

If you have a client who's demanding precious metals allocations, get him or her to separate the fear from the greed. 

 

Global risk appetites are changing, which is one reason gold has had such a great run lately. Your clients' risk appetites have undoubtedly changed, too.

 

But the relationship between risk and return should remain the same as always. You can't indulge greed without putting fear aside -- that is, without taking on risk. And you can't soothe fear without accepting lower overall returns.

 

Finding out what really motivates your gold bugs will help you address their demands better than any boilerplate discussion of whether gold is "overbought" or "oversold" right now or whether exchange-traded vehicles or physical bullion makes more sense.

 

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