By Martin Fridson
When market pundits are asked by television interviewers whether the time is right to buy stocks, they do not first have to defend the proposition that equities are a legitimate investment category. It is a different story when the subject is gold. Before offering a Buy or Sell opinion, pundits usually have to fend off objections to the asset itself: “Gold represents no productive activity.” “It has value only because people believe it does.” “Gold generates no income stream.”
Erudite financial author and gold enthusiast Jim Grant has an answer for that last point. He facetiously remarks that gold is now a high-yielding asset, at 0% in a world of negative interest rates on many countries’ sovereign debt. The other two objections are irrelevant. What matters is not philosophical questions, but whether owning gold today advances some worthwhile financial objective.
If that objective is hedging against routine inflation, gold is not the solution. The table below shows that gold rose by a mere 7% during a quarter-century in which the Consumer Price Index more than doubled. While CPI was rising at a compound annual growth rate (CAGR) of 3.34%, gold appreciated at a paltry 0.30% a year.