Gold Still A Better Idea Than Mainstream Asset Allocation

With gold making its expected pullback we needed a chuckle so we checked the New York Times and found this article from yesterday…

No one I spoke to would venture a guess as to how high gold would rise before it hit its peak. But most stressed that people forgot that gold’s value was driven by sentiment.

“Gold doesn’t have any intrinsic value,” said Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. “It’s this era’s wampum. At one point you could buy Manhattan for beads.”

(Mr. Elkin said what bothered him the most about investing in gold was how irrational it was, unlike buying a blue-chip stock whose value rises and falls based on what the company produces.)

That said, having gold in a portfolio is still a good buffer against swings in other markets. Mr. Fisher calculated that over a 43-year period ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor’s 500-stock index. Gold, however, was 28 percent more volatile.

“The smoother the ride, the more likely the investor is going to stay in his strategy,” Mr. Fisher said. “That produces a better result.”

He said that from the perspectives of both return and volatility, a better strategy would have been to put 10 percent in gold and split the rest 60-40 between stocks and five-year Treasury bonds. Rebalancing the portfolio to maintain those ratios would have meant an average annual return of 4.66 percent, with more than half of the volatility of gold alone.

For those who fled to gold and Treasuries, the hardest part will be deciding when to get back into other securities. The best way in uncertain markets may be to go slowly in small chunks — a practice known as dollar-cost averaging.

They might have asked us. We have lots to say on the matter!

First, gold isn’t supposed to “do” anything. That’s why we like it and why it has been used for money for as long as there’s been the need for money. It is a store of value, not a value-creating business or a head of cattle or an acre of fertile land

And during times when the government and central bank have been doing plenty…running unpayble deficits, artificially inflating asset values by means of interest rate manipulation and by expanding debt and the currency supply…you want something that will “do” nothing.

Second, gold buying based on sentiment? And irrationality? Yet lending money to the government or buying overpriced stocks are both reasonable acts?

Lending money to the U.S. government to protect your savings is like running to an armed assailant for comfort. The government is doing everything in its power to make sure you are paid back in dollars that are worth less than the ones you lent…at an interest rate that doesn’t begin to make up for the rate at which your purchasing power is being destroyed.

Stocks meanwhile may represent ownership in productive businesses…but the costs of those earnings are currently too dear. They are not a good buy. Eventually those earnings will be on sale again. If you buy now, that means you are almost certain to lose money.

It’s about more than smoothing out volatility. It’s about recognizing what’s happening now. It’s about giving the Fed’s actions their due respect and a wide berth.

You have to understand that the very existence of a central bank is the problem. Minus a central bank and government propaganda, gold and silver are very naturally perceived as money, while economic growth is based on savings that aren’t discouraged in the first place by inflation.

With a central bank mucking around with the price and supply of both currency (we hesitate to call it money) and credit, you’re bound to get booms with the busts baked in and all the attendant distortions. You get bubbles moving through asset classes: through the currency, then stocks, then real estate, then commodities and precious metals.

This makes the advice about a having a “balanced portfolio” a bit of a joke. That’s like telling you to inject yourself with both steroids and Ebola and hoping the two will balance each other out. When you have a busybody central bank creating serial bubbles, you need to move from one investment class to the next.

You should have been trading your rising stocks for sleeping gold for the past decade. You should have been selling off your real estate and buying silver too.

We’re going to keep trumpeting the “do nothing” metal and its more industrious companion silver. Especially as the New York Times quotes experts who scratch their heads at this gold thing.

Gold has gone from under $300 to nearly $2000 in the last decade. What has the Dow done? It was around 10,000 ten years ago. It’s around 11,000 now. Yet these guys are still rolling their eyes at the people who were “all in” with gold, the price of which is now around sixfold more.

Sure there were a couple of dips in the Dow in the past ten years. You might have made a little money if you bought and sold at just the right time.

Gold took a lot less timing and a lot less effort. Those recommending gold were begging people to take advantage of gold’s years of dormancy. They begged them to keep accumulating while gold was cheap.

The price of gold is more than mere “sentiment”. That price is trying to communicate something. Gold’s price is declaring that fiscal policy stinks, that government deficits are no laughing matter, and that the stock market on the whole is a sucker’s game right now.


Gary Gibson
Managing editor, Whiskey & Gunpowder