CNBC Bashing Gold 101

Posted by Ray on October 6, 2009 under cnbc | Be the First to Comment

CNBC dislikes gold for the obvious reason, it doesn’t advertise on its station and is the anti stock play, for the most part. Every day you will hear a rant from someone on the station on why gold is a bad investment from the station. Mostly from Rick Santelli, who I respect immensely I might add, mostly because they say it is a poor investment against inflation, which is not true.

Typically, the argument goes like this, the inflation adjusted high price of gold is $2,044, or somewhere close to there, and it is at $1,040 currently. Clearly equities have outperformed gold because the S&P 500 has done so much better because it has appreciated so much more since the 1980’s. That is only somewhat true. The point I would first like to make is this, gold is the only investment that is ever inflation adjusted in order to be judged as a good investment. It is also the only investment that is judged from its all-time high to its current price and judged to whether or not it is a good investment or not.

Perhaps we should do that with the NASDAQ? No, that wouldn’t be fair not would it. Sorry, back to the facts. If we look at the price of gold from when Americans could legally buy the metal it has done very well, it started trading at about $35 an ounce and is now at $1040 an ounce, not too shabby. So, it is fair to say that it has kept up with inflation over that time period, but if you bought it at the absolute high and sold it at the absolute low you would have done poorly, just like with stocks. That is why, like with any investment, you need to have a strategy and a long-term time horizon.

Now, since everyone wants to inflation adjust gold to judge it as a good or bad investment I figured that what is good for the goose must be good for the gander. So, I looked far and wide for an inflation adjusted chart of the S&P 500 over the long-term. Well, I found one and you may be surprised by what you see. Actually, what makes it even worse is it does not include the 2008 crash or taxes which would have significantly impacted the rate of return, much lower I might add.

It might be kind of tough to see, so I apologize, but I was shocked and if you don’t believe what you see, Google it yourself. However here is what it says. The S&P 500 from 1966 to the present (2007 when this was made) had a nominal annual rate of return of 6.9%, but your real rate of return was only a mere 2.2%. The most bullish period of time, 1982 to 2007, for the S&P 500 would have a nominal return of 11.4%, but your real return was only 8%.

Again, minus taxes from this equation and the picture gets even worse. So why is it that inflation only seems to impact gold, but not equities? It makes no sense at all that we do not look at the impact that inflation has on all of our investments and not just a select few investment options. Not to mention that it is clear that the Fed is clearly pushing investors into riskier assets in order to keep up with the rate of inflation which should begin to worry everyone, especially since the value of the dollar is being questioned more and more every day.

So, the next time someone says gold is a bad hedge against inflation, tell them they do not have the facts. Even with all of today’s new investment options available that supposedly fight inflation at the end of the day they mean nothing if the value of the dollar is being called into question or if they do not have a real track record during inflationary times. Gold works, it has worked for thousands of years and while the value will fluctuate it is safe to assume all asset values fluctuate, but it is one of those investments that will certainly never go to zero and will always have value.