MineFund Independent Natural Resources Analysis & Analytics

Altucher’s Slam on Gold Fails on Basic Facts

ST. LOUIS (MineFund.com) -- James Altucher, writing for the Wall Street Journal, slammed gold as aggressively as anyone has in recent years. We’ll give him kudos for being a genuine contrarian, but his arguments for being one are weak.

The most obvious fault in his analysis is its near-term view. If you extend the view to several centuries of inflation adjusted data, a very different view emerges that supports gold.

Curiously, Altucher pins gold to the mat by subtracting the “costs of mining and storing gold and what you have is basically a worthless rock that has a net negative return as an investment.” Yet he doesn’t venture into an equivalent measure of subtracting the costs of R&D, financings, capex and who knows what all in the equities he praises, such as Exxon [XOM], Apple [AAPL] and Google [GOOG].

How’s Google been working out for you this year, Mr Altucher? Care to talk about Microsoft [MSFT] vs gold bullion since the turn of the century?

We can sympathize with his view on the most simplistic basis. But we can also pick our time period.

Take the accompanying chart for example. How about equities from the late 1960s to 1983? If you had stayed true to the long-term, it would have taken another 10 years - until 1994 - just to break even! If you bought Dow and S&P 500 stocks in the run-up to the millennium bubble, you’re nursing a substantial loss and it’s ten years down the track.

The ratio charts below illustrate the same point a different way.

Yes, gold was a miserable investment if you were the sucker who bought the 1980 highs and had to sell in the late 1990s. But it underscores that Altucher is wrong, and dangerously so, for suggesting that investors can afford a bipolar choice between gold and equities.

He blithely ignores gold equities, whilst giving non-gold equities a pass in terms of their risks and failures. No investor can afford the linear view Altucher is peddling. Rather pay attention to the reciprocal relationship between gold and equities. Timing is extremely important.

Whilst Altucher might be touching on a truth that the reasons for gold’s appreciation may be maturing, the better point is that gold investors have been for more successful in a distressed economy - and we have yet to hit an inflationary wobble - than pure non-gold equity investors have been.

Altucher says, “Don’t put your money on a simple rock.” We say, don’t put your money just in stock.

© 2010, MineFund.com > Commodity Investment Analysis & Analytics

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