By Gregory Dorsey

       Throughout the course of human civilization, gold has been a consistent choice for investors seeking a store of value through good times and bad. The defensive nature of gold during periods of high and rising inflation is well documented. In the 1970s, for instance, the yellow metal soared from a fixed price of $35 per ounce before topping out at $850 in January 1980.
        What's less well known is gold's propensity to do well during deflationary times too. Consider the early 1930s, the last time we experienced a prolonged period of deflation. Gold shares returned nearly 30 percent annually on an inflation adjusted basis, topping all other asset classes during the period. In short, no other investment offers the same level of protection against whatever perils investors may face.
        So it makes sense to jump in when a great buying opportunity occurs. From mid-July to mid-September, the price of gold fell by 25 percent, despite the fact that inflation is running at a 17-year high. Many gold shares, moreover, tumbled 40 percent or more.
        The reason for this stark decline, which has affected commodities, commodity stocks as well as other assets, has been the forced selling by ailing, highly leveraged financial institutions in order to raise cash. In our view, the shake-up in gold is likely nearing an end and will be followed by a resumption of the bull market that will carry this ultimate store of value toward $2,000 within the next several years.
        We currently hold one gold miner in our Growth & Income Portfolio, Goldcorp (GG). The company, which sports a market capitalization of approximately $21 billion, has mining operations in Canada, the U.S., Mexico, Argentina, Australia and elsewhere. Goldcorp is one of the world's largest gold mining concerns, boasting proven and probable reserves of 43.4 million ounces in gold along with 1.1 billion ounces of silver.
        But size isn't the only reason we like the company. Goldcorp has by far the best production profile of any major gold producer. Its collection of high-quality properties is poised to raise output by nearly 90 percent between the end of 2007 and 2012 to more than 4 million ounces of gold a year. And its cash cost of production of approximately $250 per oz. makes it one of the lower-cost producers. Plus, the company doesn't hedge or sell forward its gold production, so it benefits fully from rising prices.
        If gold resumes its bull run, as we expect, gold mining stocks will do even better, with Goldcorp leading the pack. Meanwhile, the stock pays a modest 0.6 percent dividend.
        Because of our strong belief that this is an excellent time to buy gold, we're adding a second gold position to our portfolio now to capitalize on the weakness caused by the irrationality in the market today.
        SPDR Gold Shares (GLD) is an exchange-traded fund (ETF) that holds physical gold. Each share of the ETF represents one ounce of gold (minus the fund's minimal expenses). In fact, this ETF is one of the major players in the gold market because it actually buys and sells the gold, and the number of shares outstanding has grown rapidly (the recent price correction aside).
        GLD is the easiest, most liquid, way to buy gold. It's also a pure play, without the costs, uncertainties and complications inherent in mining stocks. What's more, GLD is a more conservative vehicle because mining stocks tend to be more volatile than the metal itself.
        Gold and gold shares deserve a place in any diversified portfolio these days. The solution to the current financial crisis involves government throwing huge amounts of money at the problem. This excess liquidity eventually will translate into higher inflation and higher gold prices. And if we're faced with a deflationary accident before that occurs, gold likely will more than hold its own, even if other investments lose ground.

A Strong Defense For Your Portfolio

        Despite the recent respite because of falling commodity prices, more conflicts are a likely outcome of increasing global competition for scarce natural resources. Russia's recent invasion of Georgia, in defiance of world opinion, effectively brought under its control a vital oil pipeline that carries crude oil from central Asia to the west. China has shown no hesitation to deal with even the most despised regimes, such as the thugs running Sudan, to secure greater access to oil.
       Regardless of who is sitting in the Oval Office come January 20, the U.S. flag will continue to fly in the oil-rich Middle East to protect our interests there, just at it will in other parts of the globe. And the list of smaller countries boosting their defense outlays is on the upswing. The U.S. is playing a key role in all of this: "We've more than doubled our sales of armaments to foreign nations over the past three years.
        So you're likely to be well rewarded in the coming years for picking up shares of any of the handful of major U.S. defense companies at current prices. We're adding one for growth and income to our portfolio now.
        Lockheed Martin (LMT) is a premier defense contractor. It's best known for its fighter jets. For example, Lockheed is now developing the F-35, also known as the Joint Strike Fighter, the replacement for the current generation of front-line fighters. But the company is actually engaged in four broad business areas, each of which should enjoy strong growth for years to come.
        In addition to combat aircraft, its Aeronautics business includes air mobility, special mission and reconnaissance aircraft, and advanced development programs. Its Electronic Systems division includes missiles and sensors, platform integration, training simulators and energy programs. The company serves intelligence, defense and civil agencies via its Information Systems and Global Services business. Lockheed's Space Systems business offers launch services, satellites and strategic & defensive missile systems.
        Lockheed's order backlog approaches a stunning $75 billion across diversified operations.
        Lockheed has all the valuation characteristics we like to see in a stock. It's trading at a price/earnings multiple of just 13 based on year ahead earnings and it's expected to generate annual double-digit profit growth over the next several years.
        The company's operating margins are rising and it's generating tons of free cash flow. Lockheed is putting that cash to work in a number of ways, including paying down debt and buying back shares. And while the stock currently yields a modest 1.6 percent, its low 21 percent payout ratio means the company is likely to continue hiking its dividend, as it has in each of the last five years."
        Editor's Note: Gregory Dorsey is a regular contributor to Leeb's Income Performance Letter, P.O Box 97, Williamsport, PA 17703, 1 year, 12 issues, $72. www.leebincomeletter.com.