Why I Was 100% Wrong On Gold

Joe Weisenthal

“The gold hater.”

That’s what Robert Wenzel of EconomicPolicyJournal calls me, and a lot of commenters here feel the same way because over time I’ve voiced scepticism about the role of gold in a modern monetary system, and I don’t have a blood-curdling hatred for the Fed.

Of course, the recent slide notwithstanding, it’s been a steady march higher for the yellow metal, and full-on gold bulls have been rewarded handsomely (Disclosure: I own some of the GLD ETF).

And to be fair, the gold bulls have had an excellent line of logic on their side: As the world’s biggest economies get mired in deflation, the pressure increases on central banks to expand the money supply, with *spit* fiat currency in the world, the appeal of a 5000-year old form of “hard” money only grows.

Add in huge demand from the developing world, diminished supplies, low carrying costs, and voila, gold should go up. And it has!

So where did I go wrong? After all, all those pro-gold arguments make a fair amount of sense.

The problem is, I misunderstood the real nature of the real way the precious metal is trading. It’s a high-beta stock.

Here’s an update to the chart we posted yesterday, comparing the silver ETF to Apple (also a big high-beta name). That’s kind of weird, isn’t it? Gold is similar


Here’s the GLD vs. the S&P 500. Notice some similarities:


So my being wrong about gold was basically a function of misunderstanding how it was trading.

Historically gold probably moved in some ways with the money supply and other aspects, but thanks in large part to the outsize presence of ETFs, it’s basically a high-beta stock. Not so mysterious.

Click here for SocGen’s guide to valuing gold >

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