The following appeared in a strategy memorandum of an investment company:
“Over the past several years, investment in precious metals, such as gold and silver, has proven to be one of the most profitable investment strategies for our firm. Over the next decade, the demand for these metals is expected to be strong, largely driven by the economic growth of large emerging markets--China, India, and Russia. Thus, our investors are best served by increasing their exposure to precious metals to take advantage of this unique profit-making opportunity.”
The argument appears to be well reasoned and logical on the surface. However, a careful scrutiny reveals several important flaws in the argument. It discusses the demand of the metals but does not talk about the supply. It recommends a long term investment strategy to all of its investors without cautioning them against the risks involved. Furthermore, the recommendation is blind to the investment horizon of its investors and does not discuss what kind of investors should follow this strategy: long term, short term or both. In the following paragraphs, i shall expand these issues and examine the quantum of their effect on the soundness of the argument.
The price of any commodity, including metals, is a function of both it's supply and demand. If there is high demand for a commodity, but limited supply, the price of the commodity would go up, thereby giving good returns for the investors. But if the demand is high, but supply is high as well, the price for a commodity may not go up. Finally, if the supply of a commodity is more than it's demand, the prices can be expected to fall, resulting in losses for an investor. This argument, does look into the demand for the metals, but never mentions if the supply would remain same, go down or increase. Hence, the conclusion that investors will make profit by investing in metals, is incomplete and might even be incorrect.
All investments have a risk associated with them. An investment strategy is incomplete if it does not identify the potential risks that can affect the profitability of the investment. This argument does not mention any potential risks involved in the investment. Without examining the risks, it is incorrect to say whether the investment is a good investment or not. Examining the risks associated with this investment strategy should make for a sound argument. And any conclusions, drawn thereafter, would be much more sound.
Finally, the investment strategy mentions that the demand for metals is expected to be strong for the next 10 years. On the basis of such information, investment is recommended to investors. However, the argument never mentions an investment time period. Without a clear investment horizon, several short term investors might be led to believe that the investment would be profitable even in the short term, which might not be true.
It is hence, apparent that the argument has overlooked several important pieces of information that are not only relevant, but also important. Without such information as the expected supply scenario, risks involved and investment time horizon, the argument is incomplete, incorrect and likely to mislead investors into investing their hard earned money into an investment strategy that might not be suitable for them. If the argument adds the information discussed above, it is much more likely to stand in the face of a logical scrutiny in addition to being complete and true in it's intentions.
1. Great profits in the past by investing in gold doesn't indicate that the same investment strategy will work in future.
2. Predictions are risky. Though emerging economies may have a great chance to perform well in years to come, their economies may also fail due to unpredictable factors, such as natural disasters, social unrests, etc.
3. It's hard to say Gold will be the BEST investment, because there are so many other good investments, such as stocks, foreign currencies, etc.
4. In fact, as investment history has suggested, investment in gold can be very risky, and the price flucturations could be big. A sensible strategy has always been to spead out the risk by building an investment portofolio.