A Portent: Value Investor Goes For Gold

As reported by Forbes magazine, noted value investor Jean-Marie Eveillard has gone for gold in a big way. What makes this portentous is the fact that gold is not exactly a value investment. As gold skeptics never tire of pointing out, gold does not generate a return. There's no cash flow, no dividends, no earnings from a hunk of gold. Moreover, gold underperforms stocks in the very long term. Forbes columnist William Baldwin makes both these points. Gold mining stocks do generate returns, but only when the companies' proceeds are sufficiently above all their costs to do so. Even if gold goes up, a cost squeeze can make for losses. Suffice it to say that gold miners are cyclicals, and their earnings are volatile.

Eveillard is frank about his reasons. The funds he's a senior advisor to, except for one that's a pure gold fund, have "insurance" levels of gold in their portfolio. They're using gold for hedging purposes, not because of any bullish call. He himself recommends that investors only put 5-10% of their holdings into gold, and pegs 10% as a good maximal insurance level for a fund. Beyond that 10%, a manager begins to speculate on gold's rise.


One of the abiding characteristics of value investors is that they're in it for the duration. They buy on the assumption that an investment they hold will be held for years, as it will take that long for the market to revalue it properly. Every value investor knows that gold generates no return, and that every dollar spent on gold is a dollar that can't be put into a company that does generate returns. Deciding to hobble one's portfolio with a no-cash-flow investment for insurance purposes, means that one has decided that the insurance is worth paying for. In Eveillard's case, he's betting that the Fed has (yet again) erred on the side of too much easing.

That conclusion is one that gold bulls will nod at, and probably like. However, value investors have a track record of buying too soon relative to their calls. More than a few were buying stocks with both hands in October-November of 2008, because the valuations were compelling at that time. Many of them got temporarily blindsided in February and March of this year, when the valuations became even more compelling. As is often the case in the value-investing world, their judgement was vindicated in the end...but the ride was bumpy in the interim.

Given this habit, it's safe to say that what M. Eveillard expects re reflation will take a few (or several) years to come to fruition. It's also safe to say that he's early in expecting the effects of over-reflation to kick in. Gold enthusiasts, please take note: when value investors are on your side, it means that the long-term story comps out, but...

...they buy too soon.