Monday, July 12, 2010

Should Gold be Compared to the Indicies?

The following musings relate to James Altucher's WSJ blog post from today, Why Gold is the Worst Investment Right Now.

First, and most importantly, I respect James Altucher's opinions even if not always agreeing with them.  He has made some incredible calls over the past 18 months, not the least of which was identifying Genworth as a potential 20 bagger when it traded for a dollar and some change.  However, I do not believe one can accurately compare a single asset like gold to the Dow, an index of companies regularly rebalanced in order to insure that the quality of the underlying meet the standards of the name.  As long as there is money in the game the Dow performs as a self-fulfilling response to belief in the confidence that underpins the equity markets, and indeed, our entire economy.  Further, forecasting from historical performance analysis inherently reduces the bleakest outlier risk metric to zero since there came no events large enough to completely wreck the system.  If gold were only a rock, an asset naked of inherent value, it would have held, or decreased in time adjusted pricing over the quoted periods.

In the past I have described my sentiments toward gold as "insurance against the insurance."  You can buy stocks or bonds, and you can buy CDS or option strategies against them for protection, but what happens during a world-wide strike against confidence in the buying power of paper currency?

We, he and I, can agree that gold seems silly when compared to arable land, survival skills, or well preserved food in the above instance, however, if philosophizing about end-times I charge that one should consider the operant conditioning associated with trading in currency, rather than straight-up barter.

To James gold may be the worst investment right now, but I speculate that the pace of information flow correlates to the speed at which civilizations rise and fall.  With fiber-optic cables we now move information worldwide at the speed of light, where in 1972, radio waves over concentrated areas were the first source of news.  According to my own logic then, outlier risk is actually increasing while Mr. Altucher makes the case against the metal.

If given the choice between a wholly owned house and hunting skills, or four-score bars, give me the former, but let me know who took the bullion ... just in case.