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Minyan Mailbag: Crazy for Gold

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Why the yellow metal inspires trader madness.

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Dear Professor Lewis,

Any idea why people go a little crazy when they talk about gold?
Your article yesterday was slammed by a few people, when clearly gold was the only sector that performed well through all of 2008, as well as during the first 5 weeks of 2009.

What is it about gold that brings out the devil in people?

Minyan Michael

MM,

I wish I knew. It could have something to do with the fact that many people have obviously been beat up badly by the bear market in stocks. Thus when they see someone else point out an asset class that is working, they tend to lash out at it due more to jealousy than rational thought.

If they were thinking clearly, they'd simply get long gold or gold stocks. If you think about it, gold mining stocks may even be the only sector that will actually see substantial earnings growth in 2009 given the sick state of the global economy.

More inflation is the only way the equity market is going to rise in nominal terms. In real terms, the S&P (SPX) continues to crash, as we can see in the crashing SPX/Gold ratio (see the chart below). The mob may not realize it, but stocks have been in a secular bear market when adjusted for inflation since 2000. And that bear market continues as we speak.


Click here to enlarge.


There will be a time to be long equities again and short gold, but that's not the case at the moment. Rather than lash out at gold bulls, angry stock bulls should simply embrace the reality of the situation. They'll be much better off both monetarily and mentally.

Yours,
Professor Lewis
Positions in gold and gold stocks

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