Good As Gold

August 16, 2007

What are you missing? A LOT. Rarely have I seen such a convoluted tangle of reasoning and mixed metaphors. It really is hard to imagine gold bugs singing kum-bay-yah.

Where to start? It doesn't take a nuclear event or a return to the gold standard to see gold prices rocket. All it takes is a little bit of fear about the economy, or raging damand from an emerging economy to stoke up the fires for gold.

Your arguments have an embarrassing ring of "new paradigm" in them. Indeed, the reasoning that gold had lost its luster reminds me of the pronouncements from a few years back by certain brokerage research houses that international correlation benefit was dead, and that you'd be a fool to put more than 5% of your portfolio into international.

Patently absurd.

Usually when things seem self-evident, they are. And just as it's absurd to think that if a national economy like, say, China's gets on a good run, that its equity returns will mimic those of U.S. Large Cap, you TELL me that if the markets run scared that people won't be pouring assets into gold as a safe haven...while just about everything else slides into the abyss. It's THAT eventuality that you're hedging against, and it's hard to picture a more firm-feeling hedge.

And did I mention that you could fit the entire global supply of gold into a gymnasium?

If we look at the recent correlation of gold to the S&P 500, there have been time periods when there's been some inversion, but by and large they've moved in tandem. Why? There's been no FEAR in the markets.

Now:

 

But check out even the 5-Year spread:

 

You really don't need to go back to the great depression to see that correlation benefit emerge. Try, um, just the last five years. If you think it's not coming back sometime, someday, you're nuts. We could already get a glimpse of it watching CNBC over the last couple weeks as the adolescent cheerleaders rapidly metamorphosed into whimpering little girls.

The proof is in the pudding, and the time will come - we all know it - when a lot of correlation pudding with be flowing through the angst-filled streets.

And yes, Schoenfeld tells me he's ready with an armada of charts and logic around gold. You're right that there's a club around gold. It's the club of logic. And if you don't watch out it may hit you on the head as the Dow touches 10,000.

I, for one, own a little gold to ease the blow.

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