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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 strategy cited by the investment company is based on the analysis of previous few years. The memorandum states that valuable metals such as gold and silver have proven to be the most lucrative investment strategies for the company to book higher profits in coming years. The memorandum also predicts a future increase in demand for emerging markets such as India and China . Hence it concludes that to book higher profits the firm should invest more in precious metals. I personally feel that the argument rests on a lot of unstated assumptions to come to such a concrete conclusion and with reasoned arguments I shall prove that the strategy might not meet the needs of the firm.

First,the strategy has been based only on the results of previous several years and the author of the memorandum assumes that since past results were positive future results will also be positive. However, the strategy does not cite any evidence or data or statistics that can provide any correlation of the various factors which affect the price of precious metals. The memorandum assumes that the world markets will remain in favor of precious metals and that the previous key metrics which determine the price of valuable metals such as gold and silver will show a positive correlation or increase with time.

Secondly, the author assumes that because demand in emerging markets is high it will drive the price of precious metals to new high in the coming future. However the author forgets that the price of gold depends on the price of dollar and overall demand of the precious metals.

For example - If the currency of these emerging markets depreciates by a very big factor when compared to the dollar;perhaps due to oil prices . Its quite possible that demand for the precious metals will fall down as the price of the precious metals will go unreasonably high and purchasing power might go down.

In addition to above the author has also used the factor of demand in emerging markets as one of the key factors to certain that price of precious metals will increase manifold. Although the demand and supply rule does apply and could increase the price further we are not certain whether the demand will remain constant or increase in the coming years. If demand remains constant its quite possible that price remains constant.Also no evidence is given that can suggest that emerging markets will only invest in precious metals and not in stock markets or bonds which can yield a higher return.Thereby reducing the demand for precious metals.

Also the author assumes that investment in one instrument can help his firm achieve great profits. Greater exposure to only one instrument of investment ,such as precious metals, can increase risk for the firm .

The argument could have been strengthened had the author provided key factors that govern the price of precious metals . Also the author should have provided some more details on the demand and supply in emerging markets and some evidence to prove that future demand will persist in such markets. Apart from these a reasonable view of return on other instruments when compared to precious metals if provided could have helped make a sound judgement on the effectiveness of the strategy.

Thus I find the argument flawed and the argument rests on a lot of unstated assumptions .Hence the company's strategy of taking advantage of this opportunity might not be as lucrative as suggested by the memorandum.