ESSAY QUESTION: 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.”
Discuss how well reasoned you find this argument. Point out flaws in the argument’s logic and analyze the argument’s underlying assumptions. In addition, evaluate how supporting evidence is used and what evidence might counter the argument’s conclusion. You may also discuss what additional evidence could be used to strengthen the argument or what changes would make the argument more logically sound.
YOUR RESPONSE: The argument claims that the demand for precious metals such as gold and silver is expected to remain strong over the next decade. Thus the investors of the investment company would be served well by increasing their exposure to precious metals. Stated in this way the argument fails to mention several key factors, on the basis of which it could be evaluated.
First, the argument readily assumes that increase in prices of precious metals such as gold and silver is largely due to the demand generated by the economic growth of large emerging markets as China, India and Russia. This assumption fails to take into consideration the effects of other recent factors such as the economic recession, and the high industrial demand for silver on the prices of precious metals. For example the initial increase in the prices of gold was mainly due to investors hedging against the weakening US dollar following the slump in US economy. The argument would have been much more convincing if took other factors leading to increase in prices of precious metals into account.
Secondly, although argument claims that the demand for gold and silver is driven by the economic growth in emerging countries it fails to mention the future trends for economic growth in these countries. Each of these economies would face an acid test in the next phase of their expansion. While China and India have concerns over rising inflation, Russia has to overcome decades of stagnating industry. The next spurt of economic growth in these countries would be determined by their ability to overcome these roadblocks. If the argument had mentioned the future growth prospects of these economies it would have been much clearer.
Finally, is it advisable for an investment company to suggest to its customers to put all their eggs in one basket? The basic rule of investment is to diversify so that you are safe in case one of your investments goes bust. If the investors increase their exposure to precious metals and it proves to be a bubble like the recent US housing crisis, it would turn out to be a disaster. Clearly there is a need for the investment company to take into account each investor’s personal appetite for risk before suggesting such a broad based investment strategy. Without a serious effort in this regard, the argument seems more of a wishful thinking rather than substantive evidence.
In conclusion the argument is flawed due to the above mentioned reasons and it is therefore unconvincing. It could be considerably strengthened if the author clearly mentioned the other factors leading to increase in price of precious metals, the growth prospects of emerging economies over the next decade and the risk levels for the investors if they heed the investment company’s advice. Without this information, the argument seems unsubstantiated and open to debate.