Seldom has there been an asset class so despised by investment professionals and the modern banking establishment as gold. It does not provide a yield. Its supply is limited by forces outside of our control, and there is no clear formula upon which investors can readily rely to calculate its value. It is, therefore, common practice by said investment pros to rebuke gold’s potential as a sound investment by relying on the widely held misperception that it performs well during periods of inflation and poorly during periods of deflation. It is also an ironic feature of such a tangible asset that its valuation carries with it so many characteristics of the intangible, and herein lies the problem for the institutional investor. In a recent article penned by Alexander Green, investment director of The Oxford Club, the esteemed stock picker makes his case for why he has turned bearish on the yellow metal for the past two years, after being bullish on gold since 2003. In his piece titled The Truth about Gold, the author seems to imply that the bull market in the precious metal is over, but does so by leaning on the same flimsy caricature on which everyone who takes shots at gold relies. Namely, he cites the "perma-bears” as though this were a species of animal that dominates any investment space that does not include stocks and pompoms. It is a remarkable fact of the current bull market in gold that speculators and investors in this asset class, despite their huge returns, are seen as somehow being pessimists by nature. Alexander Green also makes the classic mistake of assuming that gold is an inflation hedge. Gold performed terribly during the moderate inflation that we saw during the ’80s and ’90s. I would first challenge this notion that gold is an inflation hedge. It is certainly a hedge against run-away inflation, the kind that we saw last during the ’70s, but it is also a hedge against a deflationary environment where property rights and the ability to safeguard one's cash and cash equivalents are in question. All one has to do is look at gold’s resilience during the tremendous asset price deflation that we saw post-2008. Relative to other asset classes that are supposed to do well during inflation, and get hammered during deflation, gold only retreated for a short while before rebounding to new highs, and it began its rebound well before stocks. But Green takes his case one step further, advancing the notion of "rational self-interest" as being bearish for gold. In the first instance, people are not rational, and this can affect the price of an asset either way. This is why all bull markets end in manias, and this is also why bear markets bottom out far below the levels that fundamentals would otherwise suggest. Secondly, why would self-interest be bearish for gold? If anything, the lack of trust in others, and the reliance on one's own interests would be bullish for assets that are not simultaneously someone else’s liability. Lastly, it should be noted that Mr. Green, as early as one month ago in an article titled, Enormous Opportunity in Blue-Chip Gold Stocks, called gold stocks a “screaming buy,” writing that, although gold prices themselves are “totally unpredictable,” the metal would “rally again,” making purchases in the miners a good investment. With all due respect to Mr. Green, expecting gold stocks to rally while simultaneously claiming a “bearish case for gold” is a stark contradiction, and one that should make any investor wary.
