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sofia123 Newbie | Next Rank: 10 Posts
18 Jul 2016
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Post Sun Sep 25, 2016 8:43 pm
Elapsed Time: 00:00
    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.

    The author states that since investment in precious metals has been profitable for the firm, the company should try to continue exposure in this area to generate future profits. The author bases the claim on expectation of strong demand from growing markets of China, India and Russia. The argument may seen reasonable at first but a deeper scrutiny reveals that not only is the assumption based on unsubstantiated claims but the line of reasoning is flawed and further information is needed to assess the validity of the claim.

    Firstly, the author expects the demand for these metals to be strong in the next decade without giving out reasons on which the expectation is based on. It is highly likely that the author has based this expectations on highly volatile variables or discounted the effects of certain changes over next decade which may seriously effect the demand for these metals. For instance, the author might have based the expectations on past trends while it is highly possible that the trends may not hold in future. A war, for example, in one of the major markets such as China or India may lead to a downward economic growth trend and thus may significantly impact the demand for precious metals. Similarly, it is highly possible that the demand for these metals may have increased over the previous decade or previous two decades because the countries were facing an increasing demand curve for this, but, the end of this year might mark their saturation point for the demand of these metals and thus the trend would not hold in future. Also, substitutes for precious metals and alternate options for their use may emerge which would halt the increasing trend of demand by these markets.

    Secondly, the author implies that currently the markets are profitable. There may be numerous reasons for current profitable outlook which may not be true in future. For instance, the metals due to their limited supply and high demand may be commanding profits currently. However, the supply may not remain limited in future due to discovery of new reserves of these metals, more players entering the market, etc. This would put a downward pressure on price, their by reducing the margins for sellers and thus certain suppliers, despite an increase in their sold quantities may witness declining profits.

    Also, the authors states that the increased exposure to such metals may lead to profits for the firm. This again is a vague claim. The author refuses to give an explanation of how it would hold true. Increased exposure to these metals would probably require investments in Research and Development and manufacturing capital. It is possible that while the firm was previously working on an increasing efficiency curve, an increase in output of metals after this level may lead to inefficiencies or the cost of investments may not be fully justified by subsequent increases in output. Hence, it would not be in interest of the firm to increase exposure and may not lead to profitable outcome.

    In conclusion, the expectation author relies on have little evidence to support them. More information in form of qualitative details, statistics, breakeven analysis etc is needed to understand and verify the claim. Also, the line of reasoning used in the article is dubious, if not fallacious. A lot of details are needed to verify the validity of assumptions and soundness of claim given by the author.

    Thanked by: marcinstopa
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