Let the great gold debate rage on!
I've been saying for a decade that gold's a great investment -- and over that time it has about quintupled. My old friend, investor James Altucher, says gold is never, ever, a good investment. He prefers stocks. Stocks have gone nowhere over the last decade.
I took on James's views in this column last week. Since then, James and I debated the matter on CNBC's "Kudlow Report," and James wrote two online columns for The Wall Street Journal refuting my points. Now in this column, I'm carrying on the debate yet again -- from James's first column this makes the debate's sixth media event in less than two weeks. Is this a great country, or what?
I especially enjoy this because James has made my job so easy for me. He's made the mistake of making a claim so preposterously vast as to be intellectually indefensible. In his first Wall Street Journal column, “Why Gold is the Worst Investment Now,” he said gold is "a worthless rock." Not a worthless rock now, or a worthless rock under thus-and-such circumstances -- but simply a worthless rock.
Yeah, right. Like the "Mona Lisa" is a worthless piece of canvas.
So all I have to do to win the argument is to prove that gold is at least sometimes more than worthless. You'd think that wouldn't be a problem with the price of gold having more than quadrupled since 2000. But I'd like to make my point on principle, not just recent performance -- which, as they say, is not a promise of future returns.
Over these last 10 years, my case for gold has been based on its sensitivity to inflation. A decade ago the United States was in the midst of a mild deflation, which the Federal Reserve finally acknowledged in public in 2002, with Ben Bernanke's famous speech about "dropping money out of helicopters." For a Fed official to make such a statement, and for that official to be subsequently elevated to the chairmanship of the Fed, tells me that there's inflation in our future.
All the more now what the Fed and the other central banks of the world are keeping interest rates low for what the Fed calls "an extended period." Who knows when the inflation will show up in consumer prices? The point is that it's out there over the horizon, and you can profitably invest in gold based on that, because gold is sensitive to even the prospect of future inflation.
To counter that, James has had to argue that gold is not a good inflation hedge. He's gone further, and said that stocks make a better inflation hedge. He's wrong on both counts.
In our encounter on CNBC Monday, James said that gold and the CPI are not historically correlated -- he says they have a statistical correlation of just 0.14 over the last 40 years (for those of you not familiar with correlation stats, that's a very low number). On the air I called that statistic "laughable" and challenged him to prove it by emailing a spreadsheet. He said, "I will absolutely do that." He never did.
Trackback URL for this story: http://www.smartmoney.com/tb/Jdun.2BNI.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
The Case Against Gold Falls Apart (Ahead of the Curve) (source: Smart Money) http://nxy.in/5vxz9
The Case Against Gold Falls Apart (Ahead of the Curve) (source: Smart Money) http://nxy.in/hit6k
Gold Watch The Case Against Gold Falls Apart: I've been saying for a decade that gold's a great investment -- and ... http://bit.ly/af3hoi
Read Full Article »