Jim Cramer Wrong on Gold, Again

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 |  Includes: GLD, IAU
by: Kevin McElroy

Headlines like the following one always make me nervous:

Jim Cramer: Buy Gold Before Price Spikes Amid Mining-Stock Rally.

That's a headline from MoneyNews.com - quoting Jim Cramer on a recent episode of his show Mad Money on CNBC.

I don't especially relish picking on Jim Cramer, because he's clearly an entertainer. There's no question about it: his show is as much about entertainment as any other show on television. But when he wades into the commodity space, I see it as a personal duty to take him down a peg. A gold investor might actually take him seriously - and that's something I can't abide.

Mr. Cramer and I actually agree on gold's direction. But I want to emphasize the point: knowing why you're invested in a certain sector is at least as important as knowing which sector to invest in. And it's my personal belief that Jim Cramer's over-the-top, made-for-TV investment analysis could be detrimental to someone who invests in gold on his advice.

His reasoning to buy gold now has almost nothing to do with gold's main trend. I'll quote Money News quoting him:

"Gold stocks peaked 30 days before gold peaked," Cramer said on CNBC, referring to gold's record high of $1,432.50 an ounce on Dec. 7.

"Now look at gold stocks going up, even though gold (itself) is doing nothing."

Okay, I have several problems with Cramer's analysis. The biggest one is that it's not really true at all.

I've used three different benchmarks for gold stocks, and none of them shows the gold miners peaking a month before gold.

For the sake of brevity, here's the most commonly used gold miner index, the Gold Bugs Index [AMEX: HUI], plotted against the price of gold.


The index is in black, and the price of gold is in gold.

It looks to me that gold's peak on December 7th was actually preceded by a dip in the gold bugs index about six weeks previous in mid October.

More likely, there's no discernable relationship between gold mining stocks and the price of gold, except to note that their movements move pretty closely together.

Before I go on, you should know that I'm using the Gold Bugs index because it tracks the 16 largest gold mining companies in the stock market. If this index doesn't reflect what Jim Cramer is talking about, then the onus is on him to show us some other index that proves his point.

In any event, I don't know what Jim Cramer is talking about, but even if he knows of some other index, his analysis is still bogus.

He doesn't provide any reason for this tendency in the market, and it almost doesn't make any sense. You might expect that gold miners would see a pop in their stock price AFTER spikes in gold's price - for the simple reason that higher priced gold would likely increase their earnings.

But the opposite? I don't see how that works.

More importantly, that's no reason to become a gold investor. The real reason to become a gold investor has nothing to do with some technical chart, 30-day trend or special indicator.

I buy physical gold for capital preservation. I buy gold mining companies for the potential to multiply my investment.

And the thesis behind these investments is the same one I've been researching, updating, amending and writing about for years now: central bankers and governments around the world have no plans or ability to pursue the kinds of strong money policies that won't result in inflation and devalued currencies.

Until those folks change their ways, it's likely that I'll continue to buy gold and gold stocks.

But it won't likely have anything to do with what Jim Cramer says, that's for sure.

Disclosure: Author is long gold.