I have heard many arguments over time for why gold is a bad investment – but today I stumbled across this gem from Noah Smith, world class economic bloviator, who takes the recent cake:
“If it's obvious that central bank money-printing will drive up the value of gold, why isn't that fact already incorporated into gold prices?”
A few things to say.
First, for anyone who has been paying attention for the past 10 or 20 years, shouldn’t it be fairly obvious that the markets’ character as a discounting mechanism has just up and vanished. It’s why we see bubble after bubble. But, more than that, market sentiment is greatly important. As Fleckenstein observes, the predominant fear has been deflation, which I don’t think is a permanent feature. So, continuing to own some gold now allows me to get in front of and to profit from that eventual shift. Professor Blowhard – err, Smith – is welcome to disagree and take the other side of that trade. But, his position (reliant on the idea of efficient markets) on its face is just foolish and flies in the face of what is actually going on in financial markets.
One other point. He observes that the S&P has outperformed gold in any 30-,40- or 50-year period. What a bizarre thing to crow about. For starters, until 40 years ago, there was a dollar-gold peg, which meant that gold and cash tracked. So, should we be shocked that stocks did better? But, after 1971, depending on whether you’re focused on the Dow or S&P, stocks are up 1,400% to 1,500%. Gold, you ask? Nearly 5,000%, even after the year-plus of recent consolidation.
My takeaway: there continues to be plenty of reasons to believe that gold is far from a mainstream investment choice and fully priced. When that day finally arrives, I will try to be keen to it and disembark accordingly.
Update: So, looks like I might be a bit of an internet maroon today also. I forgot to bake in dividends in comparing gold to the indices. If someone held the S&P since 1971 and reinvested every dividend, they would be above 5,000% return. Nevertheless, the larger point still stands -- the commentary about efficient markets is absurd.
