GMAT Essays (AWA)

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.

MY RESPONSE:

The argument, through a series of causal relationships, suggests that future investments in precious metals will be good for investors because past investments have been good and demand for precious metals is likely to increase in the future. Although this argument is not without merit, two main flaws exist in the assumptions that are made by the author. First, demand may indeed not go up. And second, other factors, such as overvaluation by the market, may cause investment in precious metals not to be profitable even if demand for such metals does indeed go up.

The argument first suggests that demand for metals by large countries, such as China, India, and Russia, is expected to be strong in the coming years. Although such demand could indeed exist in the future, it may not. The author does not present any evidence of the likely demand from these countries. The argument would be significantly strengthened by data from companies or government entities showing their plans to buy certain precious metals in the future. However, if such research instead showed a likely decline in demand for precious metals in the future, the main argument would be significantly weakened.

Second, the author adds another assumption that depends on the first assumption as well as additional information that is not provided. The author suggests that if demand for precious metals continues or increases, then investment in precious metals will result in a "unique profit-making opportunity." If indeed demand occurs as predicted, this does not necessarily mean that investment in metals will result in a positive return on investment. Assuming that demand is strong, other investors are likely to notice as well, resulting in a market price for metals that takes into account anticipated high demand in the future. As a result, metals may actually be over valued by the market, and investments made therein could be unwise. The assumption that projected high demand for metals in the future implies that investments should be made, could be strengthened if the author has unique information on the likely future demand for metals that others are not likely to have. In this case, investment may indeed be a wise decision.

Although the argument follows a logical path, two main assumptions are made without sufficient supporting evidence. First, the author projects high demand for precious metals in the future, but does not provide any research or other evidence to support his claim. Further, the argument states that because demand is expected to be high, investments in metals should be made. However, if other investors project high future demand for metals, then overvaluation of metals could result in metals being a bad investment. If the argument had more supporting evidence, it could indeed be made much stronger.