Once again we see another bearish piece on gold in the WSJ. Rather than attack the author personally, we want to illustrate how the article is another example of the lack of any quality gold commentary both in general and in mainstream publications.
First, its important to note why you won’t see much quality gold-related commentary (or any positive commentary) in publications such as the WSJ and the Economist. It’s because these publications can’t make any money (yet) selling gold-related advertisements. If I’m advertising something related to stocks or bonds, I don’t want to see any gold advertisements in that publication nor do I want to see any gold-friendly content. This is similar with the television networks. When CNBC can make lots of money advertising gold, you’ll see them become friendlier to gold. Why does Fox News talk up gold? It’s because they are selling gold advertisements.
Secondly, most professionals in today’s world are biased towards stocks because they grew up during a historic bull market. The only people who really saw and experienced the last bull market in gold are 60+ years old now. Go back to the 1970s and most professionals were skeptical of stocks and saw the value of gold. Today’s 40-year old professional, just three years ago had barely seen anything other than low inflation and a stock and bond bull.
This illustrates why it is pointless to compare stocks to gold. Both are different asset classes and there is a time and season for each. To try to say one is better than the other just shows bias. Gold bulls will start their comparison in 1971 while stock bulls will start their comparison in 1980. There is a time and season for everything.
Moreover, it’s important to understand why the stock market rises over time. It is because market indexes have a survivorship bias. The Dow of today is not the Dow of 1980 or 1920. It is always changing as stronger companies replace weaker companies. Hence, it is designed to go higher over time.
Now if the WSJ's Altucher wants to make a good argument against gold he should do some more research. He starts off picking 1980 (as a comparison date), which any stock bull does. That immediately shows bias. Secondly, he can’t figure out a “use” for gold. This is where stock bulls really fail.
Centuries ago Aristotle said gold and silver were money because they fit the five properties of money. Kings and governments used gold for international transactions. JP Morgan, 100 years ago, said gold was money and nothing else. If gold has no use or utility, then why do central banks own it? Why does the U.S. own gold and no paper reserves? It is because gold is money and the ultimate backstop to our monetary system. Throughout history no currency other than gold and silver has kept its value. You can’t get a stock bull or gold bear to admit to this, because it defeats their central argument against gold.
Altucher makes more mistakes. He talks about “recent spikes” in gold due to hedge fund money. Where has this guy been? Gold has been rising for 10 years. It is actually up every year since 2000. Recent spikes aside, seems to me there were some buyers five and ten years ago.
Gold has been rising for a variety of reasons but the main reason is that there are serious questions about the creditworthiness of governments. That is the “fear trade” that no one cares to clarify or explain. Unless you think the U.S., Europe and Japan can grow out of their debt problem, then there is little reason to be bearish on gold. Every major debt crisis, credit contraction and depression has seen a rise in the real price of gold. Gold will continue to outperform until there is a new monetary system or until the world can grow its way out of the debt problem. This isn’t doom and gloom. It is probable based on the facts.
The facts also tell us that stocks are not a good inflation hedge (as Altucher tries to assert). Look at the data. Commodities always outperform in periods of rising inflation. Altucher thinks that the stock market has grown greater than inflation, consistently for 200 years. How is this relevant to our lives? What is relevant is the next five or ten years. Stocks are in a bear market and will continue to suck wind for another five or seven years.
In the meantime, precious metals are the only asset (aside from bonds) in a full-fledged bull market. Bears often say “everyone is bullish on gold” but this is simply not the case. The bears provide zero research to back this claim, because there isn’t any! Barely anyone owns precious metals. Take a look at the charts in my last editorial. Less than 1% of global funds are invested in the precious metals sector. By the way, that figure was 26% in 1981. Given that statistic, it is obvious that too much money is in stocks and bonds and not precious metals. Furthermore, it is obvious that we aren’t even at the outset of a big move into precious metals.
Moreover, as we recently showed our subscribers in a report, bull markets typically accelerate in the ninth or tenth year and then begin a final acceleration three to four years later. It is not difficult to see why we are on the cusp of acceleration in the precious metals. European banks still need to rollover $1.65 Trillion in debt by the end of 2011. Our big states are likely to need bailouts by the end of the year. The Fed will begin a new round of quantitative easing in a desperate attempt to help the banks recover so they can lend again.
Furthermore, it is just a fact that the U.S., U.K., Europe and Japan can’t grow their way out of the debt mess. A new currency regime is coming. It is only a question of when. It could be five years or ten years if we are lucky.
Precious metals will continue to crush stocks for another five to seven years. However, a portfolio of quality emerging gold and silver stocks will outperform gold. Eventually silver will outperform gold. While we are bullish on the metals, we do agree with Altucher that silver is preferred and stocks are the way to go- as long as they are gold and silver stocks.
Hence, while we analyze the short and long term developments in the metals (in our premium service) we also focus on about 50 gold and silver stocks.
Disclosure: No positions in GLD