The “Pet Rock” Critic Strikes Again

gold-bars-1Last year at this time, The Wall Street Journal’s Jason Zweig – who calls himself “The Intelligent Investor” – called gold a fetish (a “pet rock”) more than an investment.  In his weekend column this year (July 9-10, 2016), he wrote a new column in his defense, titled “Gold: It Remains a Pet Rock.” First off, he admitted that his timing looked bad as gold is up over 20% since last July vs. just 2% for stock indexes, but he responded by making the same major mistakes that he made last July.

#1-He is blind to gold’s major virtues.  He only calls gold an “insurance against chaos.”  This is like the blind-folded man who only touches one part of the elephant – the ears, trunk, legs or tail.  He argues that the “the world is certainly in chaos,” so gold’s rise is temporary.  However, gold is primarily a hedge against currency erosion, not just a crisis hedge.  Currency erosion includes high inflation (as in the 1970s) or deflation (now), very high interest rates (as in the late 1970s) or negative interest rates (now), money printing (1970s) or “quantitative easing” (now).  Gold is a proven winner against every currency ever printed, including the 1,000-year-old British pound and the 225-year-old U.S dollar, which has shrunk 98.5% to the price of gold in the last century.

#2-He continues to use 1980 as a base price for gold’s performance.  He takes the absolute peak day of gold in January, 1980 (adjusted for inflation) to show that gold has gone nowhere in the last 36 years.  A more impartial (“intelligent”) analysis would take gold’s fixed price of $35 from 1934 to 1971 as a base price, or he could pick a random price from 25 years ago or 10 years ago for a fair comparison, as we do in this newsletter.  For instance, gold is up 317% since 2000 vs. 45% for stocks (using the S&P 500).  Since 2005, gold is up 213% vs. 86% for stocks.

#3: Gold is still the only commodity officially included in national reserves.  The central banks of the world can only hold cash (official currencies) or gold.  No other commodity is included in the official foreign exchange reserves of major nations.  Currently, global central banks hold 33,000 metric tons of gold and they are adding about 500 more tons each year.  They may not officially subscribe to the gold standard, but they are smart enough to invest in the one commodity that beats all paper currencies over time.  Private investors are also making the same choice, exchanging their increasingly worthless paper money for the proven benefits of gold.

As a result of this bullish sentiment on Wall Street and worldwide, the SPDR Gold Trust (GLD) – the largest gold exchange-traded fund (ETF) – took in a net $12.2 billion in the first half of 2016, more than all U.S. stock ETFs combined.  In June alone, GLD took in $3.3 billion new money.

In the last year, Japanese interest rates have turned negative and European interest rates have turned more negative than they were back then.  In addition, U.S. Treasury long-term rates reached all-time (225-year) lows.  This gives gold more than an “even playing field” with cash.  It gives gold a clear advantage.  How can an “intelligent investor” ignore this new reality in 2016?

Ignoring $12 trillion in negative interest rate bonds is like ignoring the elephant in the room.


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