Dollars & Sen$e: Summer Hedging Strategies from the Pro’s

BY CHRIS HANLY

Investment Consultant, Gary Goldberg Financial Services

As markets and investors are roiled by the ongoing troubles in Greece and growing worries over Spanish banks, it may now be time to look at gold as an investment again. With the S&P down about 6 percent in May, and no sign of the European debt saga abating, investors are rushing into bonds and cash, which pay nearly nothing. There is a better way, at least if you are willing to take some risk and be patient. As a hedge to the world’s troubles, Gold and Silver may prove appropriate.

Here’s how I get there. When the Greeks exit the EU, there will be a global flight to safety. I suspect that investors will grow less and less enamored with the very low yields US Treasuries and money markets offer. With no conviction or stomach for equities, investors are likely to buy gold and silver. There are many ways to own precious metals. I believe the best way to own gold and silver are through the SPDR Gold Shares (GLD) and iShares (SLV) Silver Trust, both of which we own. Once you are properly hedged, here are some larger, related items to keep in mind.

1. Equity markets will remain volatile until the European sovereign debt crisis is resolved. This may take several years.

2. Despite added volatility and investment risks, there will be periods when the broader markets will rally on optimism. This will provide astute investment managers ample entry points into the market that could translate into significant investment gains over time. For a precedent, think back to February and March 2009 – few were comfortable with the market volatility, but those that invested have benefited from a 120 percent run-up in the S&P 500 index.

3. Assuming that Greece and the rest of Europe cannot come to a mutual agreement and Greece begins talks about an exit, it will take time. Accordingly, we do not believe that there is a significant risk of a disorderly default or exit. Rather, we believe all parties will work together to orchestrate a slow, mechanical, orderly exit because while any exit out of the Euro zone will be costly for all, a disorderly exit could be disastrous.

4. If and when the exit occurs, the world will be awash in liquidity. That’s because finance ministers from around the world, including here in the U.S., will engage in massive quantitative easing, to try to stimulate economic activity in their region.

In short, if you are willing to be patient, and find yields below 2 percent less than enticing, Gold and Silver may well prove to be a suitable investment for a portion of your portfolio. Just remember, diversification matters.

Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern can be reached at (845) 368-2900 ext. 247 or chris.hanly@garygoldberg.com.