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By Paul Justice, CFA | 03-24-2011 12:16 PM

Gold and Silver as an Asset Class

Morningstar's Abraham Bailin and State Street's Anthony Rochte discuss shifts in thinking on gold, silver, and their application in a portfolio.

Paul Justice: Hi, I'm Paul Justice, director of North American ETF research at Morningstar. We're here today to talk about some precious metals, potential hedges for inflation or currency devaluations, and I'm joined by Tony Rochte, the head of the intermediary distribution business over at State Street, and Abraham Bailin, our commodities ETF Analyst.

Gentlemen, thank you for joining me.

Anthony Rochte: Thank you.

Abraham Bailin: Sure. Thanks for having us.

Justice: Tony, you run the second largest ETF on the market today, and the first largest, but the second largest is by far the largest precious metals fund on the planet, the SPDR Gold Fund--GLD is the ticker.

Could you talk about some of the benefits for owning GLD in a portfolio as a potential hedge against inflation, currency devaluation, or just the general attributes of having that in your portfolio?

Rochte: We launched GLD, the SPDR Gold Trust, in late 2004. We knew it would be a successful product. We certainly had no idea it would grow to $53 billion over the course of the past six years, but what's interesting about GLD, it really provides unique exposure for all different types of environments, whether it's an inflationary environment, what I call the fear trade in obviously 2008 into 2009, and what we've seen a lot more of is gold as an asset class.

So when we talk to institutional investors, when we talk to foundations and endowments, they really think differently about gold today than they did 10 or 15 years ago. 10 or 15 years ago, gold might have been a trade. Today, they really view it as a portion or a sleeve in any well-diversified asset class.

Now, the portion depends on the risk profile. It's not uncommon to see a weighting of anywhere between 3% to 5% in a well diversified portfolio. But again, what GLD did for the industry, it helped create a rethink on gold as an asset class, and that's why regardless of the environment, whether it's a bullish environment, whether it's a bear market, we continue to see demand for this asset class.

Justice: Now, I've always loved the simplicity of the fund, just holding the bullion directly and giving people that choice if they want to access gold. And by no means is gold the right investment for everyone. There is a use in asset allocation; I think it's extremely difficult to speculate on prices. You could use GLD for that function, and I think we've actually seen some people doing that in other precious metals funds, and namely, we've seen it in a silver product.

Abe, if you could, talk about some of the asset flows we've seen actually into silver, which is a good competing asset for gold, but not a direct substitute.

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