Are the Golden Days Over?

“I hate gold. It does not pay a dividend, it has no value, and you can’t work out what it should or shouldn’t be worth… It is the last refuge of the desperate.”

— Jeremy Grantham, U.K. value investor and money manager

Has gold seen its better days?

The yellow metal is off 25% from its highs ($1,900 in late 2011), and investor sentiment is negative. The bubble appears to have burst in gold, just as it did in real estate. Gold is priced in dollars, and the dollar is rallying. Is it time to sell?

Actually, I recommended selling the gold and silver exchange-traded funds (EFTs) back in late 2011, a good call. I felt that gold had risen too far, too fast, and it was time to move into traditional stock and bond markets.

But does gold have any intrinsic value, or is it just a “barbarous relic” of the past? Warren Buffett expressed the following negative view of gold a few years ago, “I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money.”

Buffett added that it is much better to have a goose that “keeps laying eggs” than one that sits, eats insurance, storage and other things. The idea of digging something out of the ground in South Africa or someplace else and then transporting it to the United States and storing it in the Federal Reserve of New York “does not strike me as a terrific asset,” Buffett explained.

Several years ago, I met Buffett in New York and showed him a Mexican 50-peso gold coin. “My dad owned a bunch of them,” he said, referring to the conservative Republican Congressman Howard Buffett. “I don’t invest in gold, I invest in businesses.”

I see gold as an insurance policy, a hedge against chaos, runaway inflation and bad government policies. Most of your portfolio should be in profitable businesses, as Grantham and Buffett suggest. But gold has several features worth noting. First, investors tend to squirrel it away in a safe deposit box, and thus it serves as a good long-term asset to fall back on in times of need. I’ve asked many audiences “how many of you have bought gold?” and maybe half the attendees raise their hands. Then I ask “how many of you have sold your gold?” and almost every hand goes down. Thus, gold is a great forced savings plan. It’s troublesome to sell it.

Second, gold and silver interestingly have proven to be superior inflation hedges since we went off of the gold standard in 1971. The precious metals are worth 2 to 3 times more in purchasing power since then.

Let me end with this quote I use whenever someone says that gold has no intrinsic value: “Every piece of gold jewelry or coin ever made still has value. Can you say the same thing about stocks or bonds?”

You Blew It! Why Can’t Academics Pick Winning Stocks?

“Nothing in the toolbox of economists makes us good stock pickers.”

— N. Gregory Mankiw, “What Stocks to Buy? Hey, Mom, Don’t Ask Me,” New York Times, May 19, 2013

In Sunday’s New York Times, Harvard professor Greg Mankiw wrote an op-ed about his 85-year-old mother who asks him from time to time, “O.K., Mr. Smarty-Pants, what stock should I buy now?” Being an academic, he admits he doesn’t have a clue, and ultimately, he copped out by urging her to buy the Vanguard Total World Stock Index Fund (VT) — an exchange-traded fund that has returned only 15% since 2008 (plus dividends). Talk about dismal. Professor Mankiw wouldn’t last as an investment newsletter writer if he only recommended broad-based funds like VT.

Professor Mankiw is a friend (he endorsed my book “The Making of Modern Economics” as “anything but dismal”), so I told him he could have done a lot better by doing a little research, or subscribing to my newsletter. We have a host of stocks since 2008 that have doubled and tripled in value. Even the conservative Aberdeen Asia Pacific Income Fund (FAX) has more than doubled in value since 2008, when you include dividends.

Basically, Professor Mankiw and most academics don’t understand the value of entrepreneurs in the financial marketplace and their ability to beat the market. Only a relatively small number of such elite investors exist, of course, like Warren Buffett, Peter Lynch and John Templeton. But they are around.

Nobody gets excited about investing in a broad-based index fund like VT. Stories about individual companies rule. I recommend both no load funds/ETFs and individual stocks. I guarantee you, individual stocks are where the action is. People love stock stories. Investors get excited about stocks that have the potential of doubling in a year or two years. They are difficult to find, but they are there, and I’ve had quite a few successful “ten baggers,” as Peter Lynch calls them.

There’s an old saying on Wall Street, “Go big or go home.” I quote it in my latest book, “The Maxims of Wall Street.” Warren Buffett loves it. You can order a copy by clicking here.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

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SPECIAL NOTE: At this year’s FreedomFest, July 10-13, Caesars Palace in Las Vegas, we are going to have a debate, “Which is the Best Asset Class: Stocks, Bonds, Gold/Commodities, or Real Estate?” with experts making their case for each. Don’t miss it. Go to www.freedomfest.com, or call Tami Holland at 1-866/266-5101.