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Gold: Misconceptions vs. Reality


Debunking yellow metal's many myths.

In response to some recent inaccuracies I've seen repeatedly portrayed as "facts" about gold (which were in fact merely "made up" or the result of poor research), I thought I would try and clear up some common misconceptions about gold by discussing a few facts:

Misconception #1: Gold underperforms equity investments because it doesn't pay dividends.

Reality: Gold has outperformed the Dow and S&P 500 since 2000, including dividends. And more importantly, gold can't go bankrupt. Gold mining stocks have also outperformed the Dow and S&P 500 when looking at a mining index like the AMEX Gold Bugs Index (HUI) or AMEX Gold Miners Index (GDM) since 2000. (See the ratios of the Dow/gold and the SPX/HUI below).


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Misconception #2: Gold and gold stocks will protect you from a stock market crash.

Reality: Gold and gold stocks are not put options on stocks and never have been. They are bets on future inflation, which is typically the Fed's response to financial market dislocations.

Misconception #3: Gold is a "crowded trade".

Reality: Ask yourself if you own some gold. Then ask the guy next to you if he owns any. Odds are the answer is "no". The GLD gold ETF (the largest gold ETF in the world) has a market cap of just $16.7 billion. Compare that to the S&P 500, which has a market cap of $11.63 trillion (and that doesn't even include equities outside of the S&P 500 or overseas equity markets obviously). Which asset seems overowned: equities or gold? You don't have to be a rocket scientist to know the answer to that question.

Nobody owns gold, just as very few owned "stocks" in the early 1980s when you wanted to actually be buying them ahead of what would be the biggest and longest secular bull market in equities in history. Instead, people were loaded up with oil and gold back in the early 1980s, and then lugged them around for the next 20 years in a secular bear market. The fact that gold is so under-owned as an investment is precisely the quality one looks for in trying to find assets that are just beginning big secular bull markets and why gold has much further to go to the upside than anyone can currently imagine.

Consider that the Dow is down nearly 70% when denominated in gold since 2000, and bonds are paying interest rates far below the actual rate of inflation. In other words, both stocks and bonds have been in secular bear markets when adjusted for inflation since 2000. Yet, the herd continues to lug around stocks and bonds and think they are "ahead" while inflation eats away at their returns. Meanwhile, gold's current secular bull market continues right under their noses and has now even broken out of a nearly 30-year trading range...

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No positions in stocks mentioned.

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