The gurus in grey suits are elated to inform us that our gold investments have lost all of the gains they made this year. Not to belabor a point, but gold has lost nothing. It hasn’t lost anything in millennia.
More apropos is how things are going on their beat. Let’s compare notes on year over year returns for May 10th:
The S & P 500 had a particularly wild ride. After plunging some 20% last summer it came back with a vengeance. The losses were wiped out and the index had its strongest first quarter showing in 14 years. The net result? A gain of $0.81 for the year. No, that’s not a typo and it works out to a 0.06% return.
The DJIA did a little better, returning 1.34%. Of course, even against the headline CPI that is a sizable net loss.
Gold investments, on the other hand, grew 6.6%. That’s well above the CPI but remarkably close to widely accepted estimates of “real inflation.” That is as it should be because money doesn’t set the value of gold, gold sets the value of money.
Using gold as a basis the S & P fell 6.2% over the year and the DJIA lost 5%. If everything were well in the financial world, that would not be the case. But all is far from well.
“J.P. Morgan Chase has taken $2 billion in trading losses in the past six weeks,” says the Wall Street Journal, “and could face an additional $1 billion in second-quarter losses.” It happened because the bank was “betting on a continued economic recovery.” They were long on delusion and short on common sense.
Traditional asset classes have only begun to respond to the real extent of this crisis, despite their value steadily falling for years in terms of gold. Gold, by definition, hasn’t changed a bit.
That is the essence of gold investment. In periods of real economic growth wealth is created. Gold investments, which “only” retain their worth, need protect only against a substantially reduced risk of losses in traditional assets. The risk level present today, however, cries out for a much stronger position in gold.
Without doubt there is money still to be made in stocks and bonds, especially for those who correctly time the next round of QE. The odds, however, are lopsidedly against it. Even J.P. Morgan Chase has to feel the $3 billion sting from underestimating the reality of today’s economy.
The longer the odds are against winning with traditional assets, the stronger your position in physical gold should be. The best gold investment strategy is one that, in light of real world risks, strives to keep the desire to not become poorer in balance with the desire to become richer.