Gold bears suddenly appear, more emboldened than ever

Congrats to the gold bears and stock bulls! After being slaughtered for the majority of the last decade and more, they finally won a victory. Golf clap for you gentlemen. Now you can have your day in the sun once again. U.S. stocks are at all-time highs and gold sucks again! You won’t have to listen to your clients bitch and moan about how you ignored, avoided or were underweight the bull market of our time. Time to crow!

I awoke last Monday to a link from a subscriber. It was an editorial titled, “The Day that Gold Died.” The author cited the usual, clueless and baseless arguments both to why folks buy gold and why gold sucks as an investment. It is nothing more than a flimsy rant.  He also cited a“marvelous takedown” by Barry Ritholtz, a formerly humble and generally impartial commentator who is now enjoying mainstream notoriety.

The worst and most natural, instinctive error these chaps and all gold haters make is to immediately refer to gold is an end of the world investment. This would be the most bizarre and ridiculous argument for gold. If the world ends, then how do you collect on it? If society breaks down for a period of time, then what good will gold do for you, ahead of a farm?

Do central banks buy gold because they think the end of the world is coming? If gold is an “end of the world” investment, then why the hell do western central banks own the vast majority of their reserves in gold? And why are emerging central banks buying gold?

It’s because gold is money and has been the only form of money to last for thousands of years. Not too long ago it was legally part of the monetary system. Since that change in 1971, the S&P 500 has advanced from 88 to 1541 while gold has moved from $35/oz to $1,395/oz (as I pen this). Even with the latest slide in Gold, it has still crushed the S&P 500 by rising 40-fold compared to just 17.5 fold for the S&P 500.

Gold’s tremendous increase in value (since its removal from the monetary system) over a long period of time shows its value as a speculation but more importantly, a currency. Though it fluctuates greatly during each cycle, over the very long-term it is the strongest reserve asset. This is why central banks buy it, hold it and accumulate it. It’s a no-brainer. Jim Grant put it best when he said gold is a hedge against monetary disorder.

Now let me get back to this supposed “marvelous takedown” from Ritholtz.

First he cites that the U.S. dollar is at a three-year high and that gold rallied when the buck fell from 2001-2007. First, let me note what few analysts know. When it comes to important market moves, gold usually leads the U.S. dollar. Does Ritholtz know that the dollar bottomed in late 1978 while gold soon advanced 400% until its top in early 1980? Does he know that each of gold’s recent major bottoms (2000, 2005, 2008) occurred before the dollar topped? The U.S. dollar is at the same level it was in late 2004 when gold was trading below $500/oz. So should gold be at that level? Surely, a strong dollar is a negative for gold. However, history shows us that gold is far more than an anti-dollar bet.  

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