During the past two years, precious metals have been an increasingly popular choice among all investors. One area that has been in particular demand is gold.

At the end of 2008, practically every investment sector had taken a beating. No matter whether investors’ holdings were in technology, health care, financial services, or some other sector chances are their portfolios lost money. However, gold was one of the few sectors to generate positive returns in 2008. Although the price of gold has been fluctuating lately, many small and large institutional investors still have an interest in gold.

In 2009, investors began to focus intently on gold as it continued to rally. Many investors wanted an inflation hedge and gold proved to be a smart choice. A recent article stated, “Gold has gained some new status in 2009 with more and more investors putting their money on gold. In 2009, gold price surged 24.6% to close at $1,096 per ounce after breaking through the $1,000 psychological resistance level.”1

BHA has been asking investors for their opinions on gold-related funds for the past year. Many believe that the sector will continue to see strong returns despite recent price drops. A private bank in Portugal recently expressed that it will continue to keep an eye on the gold sector. It believes that markets will remain unstable and that there will be a second round of “turbulence” similar to what we witnessed in 2008. Therefore, it expects gold-focused funds to be attractive since they did so well when markets crashed in 2008.

Gold has always been considered a stable investment in all types of markets—a view its performance in 2008 and 2009 confirmed. Because of this, BHA believes investors will continue to seek out gold-focused funds.

1. CommodityOnline, “For 9 years, no stopping gold,” January 25, 2010, http://www.commodityonline.com [...] 25081-3-1.html.

This week, Senior Research Manager Michael Marolda interviewed Saul Rubin, an auto industry specialist, who shared his observations and timely comments on some important topics. The interview follows:

MM: What changes will we see in the automotive industry in the months and years to come?

SR: There will be major changes. The governments around the world seem intent on doing everything they can to delay those changes, but I don’t believe their efforts will prevail. I think that market dynamics will ultimately prevail. The pressure has been building up for years and years. They are going to spill over and create major problems at some point in the next couple of years.

The root of the problem is typical: there are too many companies making cars. That’s a very simple issue and I think it’s been known for many years. But through rosy economic times, the problem wasn’t obvious to all. It took a recession for this problem to become clear. But there are too many car companies and this is an industry begging for consolidation. It’s going to have to occur at some point.

In the short term, governments are very intent on trying to prop up these companies. In the U.S., the problems are worse than anywhere else. GM has been running an unsustainable business model for years. There’s probably no alternative at this point other than bankruptcy. I think the government has recognized that. Hopefully, this will mark the beginning of a process that will occur not only in the U.S. but also in Europe and in Asia. This is not just a U.S. problem. It is a global problem of over capacity, and, yes, companies will fail not only in the U.S., but also in Europe and Asia. It will start with a vengeance in the supplier space. You’re going to see many failures among car suppliers. But it will ultimately fall upon the manufacturers as well. Hopefully, by the end of it, you’ll have a better industry.

MM: Do you think a restructuring effort for General Motors will ultimately be successful?

SR: If GM finds itself in a Chapter 11 bankruptcy proceeding, it will likely be fairly rapid. It will be a process whereby the good parts of GM-and there are good parts-will be spun out of bankruptcy into a viable company. The rest of the assets and liabilities will be left to wither away. If it is to be a viable company, it will have to be a much smaller GM, and that’s the key. It could be a GM that is rapidly snapped up by a competitor and that would aid in the overall consolidation of the industry.

MM: Do you see any opportunities in the auto-supplier industry?

SR: Yes, there are loads of opportunities in the auto-supplier industry. In many ways, the supplier space is more interesting than the manufacturer space. Car manufacturers like to make themselves out as high-tech companies, but largely [manufacturing] is a consumer and assembly business. A lot of the real technology lies in the supplier space, and therefore a lot more of the value lies in the supplier space.

If you look at the supplier space, there are some positive and negative aspects. The positive aspect is the technology, and the negative aspect is that your customers are these big lumbering giants that all have massive problems. If you get tied to one of them, you may go down with the ship. Within the supplier base, there are a number of companies that will just disappear because they will not be able to cope with the pressures. They don’t get the government support that the manufacturers do, so I think you’ll see on the one hand a large number of bankruptcies, but on the other hand, those that survive and have real valuable technology could actually come out of this extremely well-positioned and better off.

MM: When you go through a time such as this, there’s always opportunity, right?

SR: Well, there is. Suppliers that go through it and come out alive will see their competition left behind.

Saul Rubin is an investment manager at Silverstone Capital Ltd. (“Silverstone”).

Michael Marolda is a special features contributor to Brighton House Associates Investor Monitor.

Industry Insight is a bi-weekly special feature of the Brighton House Investor Monitor. The feature is designed to take advantage of Brighton House Associate’s unique position between investors and fund management companies. It provides readers insights from leaders in the field.