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Focusing on Gold

Recent declines in gold prices caused many investors to raise eyebrows, particularly the single-day drop of more than 9% on April 15. Since the beginning of the year we have spent quite a bit of time analyzing how large clients’ exposure to gold should be. Because of the world turmoil starting in 2008, we had increased exposures. In March of this year we trimmed some larger client positions when we thought they had more than needed. Our views continue to evolve, but we want to share our current thoughts.

First, it is useful to review the role that gold plays in our portfolios. We have always viewed gold as a hedge that may help buffer portfolios against major financial events. Even in normal times, we expect gold to be among the most volatile assets in a portfolio. This is why we hold gold and other "riskier" assets in smaller amounts relative to other holdings which typically are less volatile. Over the long run, we actually don’t expect gold to make money. Rather, it has historically been a store of value. We would rather make money on the other assets in portfolios.

After a decade long run up, gold has been in a volatile trading range since 2011. Now, gold has moved below that range. Possible explanations range from Cyprus’s central bank selling gold (likely not a very significant factor due to limits imposed on global central banks), a rising dollar, and a rotation from gold into global stocks as fears subside. At the Raymond James National Conference for Professional Development that we recently attended, there was speculation that a major gold holder was forced to liquidate, which would explain the sudden drop.

As long term investors, it is our job to look forward rather than managing in the rearview mirror. Although our disciplined process avoids making short term predictions, our perspective is that the recent drop may have been too much, too fast, and that a bottoming and short term recovery is likely. As always, there are no guarantees.

Much more importantly, we continue to believe that gold plays a role in hedging against unexpected negative events. Policy makers and central banks around the world remain in uncharted waters, experimenting with the money supply and interest rates in ways that have never been tried. Given the potential for accidents, we continue to emphasize managing risks and structuring portfolios around our clients’ goals and objectives. Volatility has always been and will continue to be likely for gold related investments. We have lowered the upper bounds for gold positions we will hold in our portfolios, and we will continue to evaluate what exposure our different portfolios should have.

We continue to be positive on global markets and think the majority of investors are too pessimistic. US stock markets continue to enjoy a strong start to the year and the current pause is normal. Residential real estate data is improving. The economy is shrugging off potential challenges. Longer term, the themes of energy independence and "on-shoring" of jobs seem likely to provide a tailwind for U.S. growth and the markets. Washington even looks less combative. At the Raymond James meeting several "experts" suggested it is likely we are in a long term bull market. Bob Doll, who recently joined Nuveen from Blackrock, talked about the "Muddle Through Economy and Grind Higher Equity Markets". He argued one day it looks good and the next it looks bad, and that the slow recovery provides the foundation for a long term bull market. Let’s hope.

As always, we welcome your calls. We consider ourselves very fortunate as we have a wonderful group of clients and associates.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Robert and Charles Kreitler and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Please consult with a qualified professional regarding your particular situation before making any investment decision. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results.

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