Jason Zweig, who a year ago called Gold a "pet rock" is doubling
down. He reiterates his belief, albeit a misguided one that Gold
is a pet rock and justifies it with the usual anti gold bug propaganda.
Unfortunately, Zweig along with many gold-bashers and ironically some
gold bugs continue to either neglect Gold's major fundamental driver
or have no clue about it.
Roughly year ago, I wrote my first book, The
Coming Renewal of Gold's Secular Bull Market. Numerous readers and
subscribers praised the book for being the best book ever written on
the subject of Gold and gold investing. Unlike other present books on
the subject my book is not typical gold-bug fluff with $10,000 price
targets and such. Readers loved the book because it was based on objective
facts that could be verified by real historical data and not opinion
and ideology.
It is a fact that the trend is Gold is inversely correlated to real interest.
In other words, negative real rates or declining real rates is what drives
Gold higher. Conversely, when real interest rates rise (as they did from
2011 to 2015) Gold declines.
Take a look at the chart below in which we plot the real fed funds rate and
real 5-year yield. Over the past year both have declined and gone negative.
That explains the fundamental change driving the new bull market. (We also
highlight the four bad bear markets in Gold during which real rates and real
yields increased strongly and/or were strongly positive).
It makes perfect sense. Gold is money and an alternative currency. When short-term
bonds, CD's and savings accounts can earn a positive real return there is
no need for Gold and alternative currencies. However, when real rates of
return are negative or declining, Gold outperforms as it is now.
Zweig fails to mention anything about the importance of real rates and instead
resorts to the typical anti-gold arguments. It is a poor inflation hedge.
It is down 35% adjusted for inflation since 1980 (its absolute peak). It
didn't do well for part of 2008. Yada yada yada.
While he correctly notes that Gold is not an inflation hedge, his other arguments
and facts are extremely disingenuous. Every gold hater typically picks 1980
as the start of every comparison (just as every gold bug picks 2000 as the
start of their comparison). While I think 40-50 year comparisons aren't that
important, isn't it interesting that Gold has actually outperformed the S&P
500 over the past 45 years! Did you know that Zweig?
Furthermore, he notes that Gold did not perform well during September 2008
and October 2008. Dude, from 2001 to 2011 that is literally the only time
Gold had a major decline. That would be akin to a gold-bug pointing out the
20% decline in stocks during 1998.
Zweig concludes by arguing that investors are rushing into Gold because the
chaos will only worsen and if Gold shoots higher from here it will only violate
the precedents of the past.
By now, you know this is bullshit. Investors are rushing into Gold because
the global trend in real rates and real yields is favorable for Gold. They
can't earn a positive real return on cash, CD's and bonds. Moreover, these
investors realize that the only palatable short term and long term solutions
to the global debt crisis (which is constricting growth) are super bullish
for Gold.
The bottom line is Gold is going much higher because the macro fundamentals
are bullish and because historical valuation markers (which
can be found in my book) easily justify Gold going to $3000-$5000/oz.
Zweig and his ilk would be best advised to better educate themselves on Gold
before writing another column. Ultimately, Gold's secular bull market will
end early next decade and stocks will outperform for many years. But we are
far, far away from that point.