Tuesday, July 13, 2010

Is Gold The Worst Investment?

Despite the bearish stance by the mainstream media on gold like a Wall Street Journal article titled 'Why Gold Is the Worst Investment Right Now', history shows that gold has consistently outperformed stocks since the US went off the gold standard in 1971. A fair analysis of gold’s performance should take into account both its historical low and high prices. See the following post from Expected Returns.

Inquiring minds will ask how gold can be peaking while the mainstream media is eternally bearish on the yellow metal. The WSJ follows up its article relegating gold to Ponzi scheme status with another article that does little more than illuminate the ignorance of mainstream reporters. The lack of understanding is truly eye-opening, but I suppose it is this misunderstanding that has allowed me to vastly outperform by being invested in the gold space. In that sense, I welcome ignorance, zombie-like consensus opinion, and the blind worship of mystical Wall Street analysis- which, in fact, any investor/trader worth their salt fades at every opportunity.
Gold reached its peak in 1980 when it reached $800 an ounce, which is $2,000 in today’s dollars. So in real terms, gold has lost about 40% of its value since 1980. In the meantime, the stock market has gone up about 500% in real terms.

Some other time frames for comparison: From 1975 (post the U.S. getting off the gold standard) to now, gold is up 500%. The Dow is up 900%. Gold was worth about $20 an ounce in 1800. Since then it’s averaged a 2% gross return. Subtract out the costs of mining and storing gold, and what you have is basically a worthless rock that has a net negative return as an investment.
First of all, gold peaked at $850 dollars, not $800 dollars. It's hard to take an article seriously when the basic facts are so blatantly wrong. But anyway, this is an argument I've heard time and time again. Gold bears pick the absolute top in gold (as if the smart money actually buys the absolute top in any asset) as the starting point of their analysis, and then lecture about the subsequent lousy returns. They conveniently ignore the returns of gold in the past decade.

Fine. But Altucher feigns objectivity by selecting 1975 as another starting point to compare the relative performance of stocks vs gold. This is pretty arbitrary, especially since Nixon allowed gold to float in 1971. But it appears Altucher realizes this, since he implies that 1975 was the year we came off the gold standard.

I wonder what compelled Altucher to choose 1975 as a basis of comparison as opposed to the far more logical year of 1971. Could it possibly be because gold had already risen over 400% by 1975 while stocks traded flat in the same time frame? Nahhhh. Why would anyone selectively handpick data to support an argument?

Using 1971 as a starting point, gold has actually outperformed stocks. But you will never hear this from permabears who have their set way of thinking. I suppose calling gold a bubble gives people who missed an obvious bull market some level of comfort. In my experience, people who missed the boat on gold do one of two things: 1) They call gold a bubble and describe gold bulls who have made outsized profits as morons; or 2) They say that they are "neutral" on the metal. Then they argue incessantly about why gold is a bubble.

Anyway, who is this Altucher guy and where is he getting his data from? Why does he choose the all-time high in gold as one basis of comparison, but yet, not use the low of gold as an alternate comparison point? I really need to find out what he is buying so I can go short those same securities, no questions asked.

This post has been republished from Moses Kim's blog, Expected Returns.
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1 comments:

September 19, 2010 at 10:42 PM mikerickin said...

Investing in gold is a popular investment returns for many investors. After all, gold continues to reach an all time high, thanks to currency volatility in the euro area and less in recent times, the American economy (and even money) problems. Of course, gold will provide some stability in the currency of the portfolio. In order to cover the coin, it might make more sense. But it is not as long-term investment portfolios of the individual.

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