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Aug
6
Jonathan Yates
Listen to Buffett and Buy Stocks, not Gold
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As the stock markets continues to soar with the Dow Jones Industrial Average (NYSE: DIA) and the Standard & Poor’s 500 Index (NYSE: SPY) setting records, gold (NYSE: GLD) is officially in bear market territory, down more than 20%.

The exchange traded fund for gold, the GLD, is down more than 22% for 2013.  Over the last week of market action, the GLD has fallen by 2.16%.  By contrast, the exchange traded fund for the Dow Jones Industrial Average, the DIA, is up 20.85%.  For the same period, the exchange traded fund for the Standard & Poor’s 500 Index, the SPY, has risen by 21.04%.

The contrast in performance of the SPY, DIA, and GLD is shown by the chart below.

The inverse relationship between the performance of the GLD, the SPY, and the DIA are more than just sheer coincidence.

Gold is a traditional “safe haven asset.”  When economies are performing poorly, more will buy gold.  If an economy is performing poorly, then the stock markets should be off, too.  That did not happen in recent times as the American economy was still weak with a roaring bull market.

But now the US economy is continuing to recover.

Certainly the data is mixed, but there is enough to create many more bulls.  That is especially true with Europe and Japan is such dire shape.  Economic growth is also down in China, India and other emerging market countries.

As a Financial Times article described it, gold is a classic “greater fool” holding.

To make a profit, you have to find a “greater fool” to sell the gold.  There is no business behind gold that grows and kicks off income to justify it rising in price.  As Warren Buffett stated about gold in 2010, “You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what it’s worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

That alone explains the superiority of stocks as an investment, as Buffett so often does.



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