Why Stocks Beat Gold and Bonds
There are a lot of BS articles in finance, but I find the rationale for this to be particularly sound. The fundamental thesis is based on how risk is perceived and defined for a typical investor:
"The riskiness of an investment is (measured) by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk."
By his definition, zero beta assets such as cash, money-market funds, bonds, etc. are actually more risky due to the potential loss of purchasing power over time. They become by definition depreciating assets in low rates, high inflation environments. For people who are familiar with the basic concepts of investments, this is nothing new.
I find his second argument against holding non-growth assets such as Gold particularly interesting:
"Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."
I feel a lot of people who are buying gold today do not understand this. It is not a real investment as it does not grow. Its value correlates heavily with general market sentiment, the fear of regime collapse and inflation. I don't think the demand for inflation hedging argument can justify where gold is priced at today. There are other forms of real assets such as real estate that do just as well during high inflation, and are relatively cheap resulting from the collapse of the housing bubble. For investors who have a longer term investment horizon and are not in need of immediate liquidity in the portfolio, it makes very little sense to invest in gold compared to growth assets.
Of course, all these arguments rely heavily on the assumption that the holding period is long term. The goal is not to time the market, but to increase long term purchasing power.
P.S. I should probably contrast this article with an opposing argument for the sake of completeness:
Why are the Chinese Buying Gold?