Jason Zweig Is Wrong About Gold
By Roger Nusbaum, AdvisorShares ETF Strategist
Jason Zweig’s latest post is titled Let’s Be Honest About Gold: It’s A Pet Rock and attempts to debunk most of the reasons people own gold but oddly skips over the one I believe to be most important and is still wholly intact.
First up is criticism that gold has not been able to go up in the face of a Greek default and the “stumble” in Chinese equities. While the headlines have been sensational and the impact on the ground, especially in Greece, could be serious these aren’t epic threats. Greece’s GDP is less than ¼ that of the state of Mississippi ($21 billion vs $88 billion). And for all the volatility in China, and it has been significant, the Shanghai Composite is ahead of the S&P 500 by about 1900 basis points this year.
He then goes on a long riff bashing gold bugs but it is not clear why the “grip of cognitive dissonance” experienced by however many gold bugs has anything to do with the merits or lack thereof for owning gold. Investors have irrational sentiment toward all sorts of asset classes and investment niches and all of them will go up and down based on some combination of fundamentals and emotion regardless of the viewpoint of the zealots.
Zweig does not address what I believe to the biggest reason to own gold, for anyone interested in owning it, which is that it tends to have a low to negative correlation to domestic equities. Zweig does concede that it has done well during some panics to which I would again note Greece and China didn’t rise to the level of true panics or things to really worry about.
Again a big reason to own gold is that it tends to have a low to negative correlation to equities. Zweig notes the 39% decline since August, 2011. Since that time the S&P 500 is up 80%. If an investor is attracted to gold because it tends to look nothing like the stock market then it is simply a matter of impatience to complain that gold has suffered in the face of a substantial rally in equities. I’ve regularly said that if gold is the best performer in your portfolio then chances are things in the world aren’t going so well.
This relationship between gold and domestic equities is not infallible, there are no guarantees with anything but the above is the argument for gold. Anyone for whom that argument resonates probably owns a little gold and for people for whom it does not resonate probably don’t own any.
Back in 2010 and 2011 there were many articles averring for a 20-25% weighting in gold which made the Harry Browne Permanent Portfolio a very popular discussion point. While I have always found the Browne portfolio intriguing I was very consistent in saying what a terrible idea that much to gold would be. I believe the popularity to suggest 25% was a form of recency bias attached to how well gold was doing back then and then extrapolating that forward. I don’t think saying “you should not own any gold” after years of it doing poorly is that different from saying you should back up the truck after years of doing very well.
Own it, don’t own it, but if you are going to take the time to figure out whether to hold it or not you should then also take the time to frame the issue correctly.