Let the great gold debate rage on!

I've been saying for a decade that gold's a great investment -- and over that time it has about quintupled. My old friend, investor James Altucher, says gold is never, ever, a good investment. He prefers stocks. Stocks have gone nowhere over the last decade.

I took on James's views in this column last week. Since then, James and I debated the matter on CNBC's "Kudlow Report," and James wrote two online columns for The Wall Street Journal refuting my points. Now in this column, I'm carrying on the debate yet again -- from James's first column this makes the debate's sixth media event in less than two weeks. Is this a great country, or what?

I especially enjoy this because James has made my job so easy for me. He's made the mistake of making a claim so preposterously vast as to be intellectually indefensible. In his first Wall Street Journal column, Why Gold is the Worst Investment Now, he said gold is "a worthless rock." Not a worthless rock now, or a worthless rock under thus-and-such circumstances -- but simply a worthless rock.

Yeah, right. Like the "Mona Lisa" is a worthless piece of canvas.

So all I have to do to win the argument is to prove that gold is at least sometimes more than worthless. You'd think that wouldn't be a problem with the price of gold having more than quadrupled since 2000. But I'd like to make my point on principle, not just recent performance -- which, as they say, is not a promise of future returns.

Over these last 10 years, my case for gold has been based on its sensitivity to inflation. A decade ago the United States was in the midst of a mild deflation, which the Federal Reserve finally acknowledged in public in 2002, with Ben Bernanke's famous speech about "dropping money out of helicopters." For a Fed official to make such a statement, and for that official to be subsequently elevated to the chairmanship of the Fed, tells me that there's inflation in our future.

All the more now what the Fed and the other central banks of the world are keeping interest rates low for what the Fed calls "an extended period." Who knows when the inflation will show up in consumer prices? The point is that it's out there over the horizon, and you can profitably invest in gold based on that, because gold is sensitive to even the prospect of future inflation.

To counter that, James has had to argue that gold is not a good inflation hedge. He's gone further, and said that stocks make a better inflation hedge. He's wrong on both counts.

In our encounter on CNBC Monday, James said that gold and the CPI are not historically correlated -- he says they have a statistical correlation of just 0.14 over the last 40 years (for those of you not familiar with correlation stats, that's a very low number). On the air I called that statistic "laughable" and challenged him to prove it by emailing a spreadsheet. He said, "I will absolutely do that." He never did.

But he repeated it in his most recent Journal column, specifying there that it covers the period from 1968 to 2007. That's easy to fact-check. And what do you know? Over those years, the correlation of the gold price to the consumer price index is a powerful 0.70, not a measly 0.14. Now that is a high correlation.

Oh well, James was only off by a factor of five. No wonder he never sent me that spreadsheet.

But actually, that's doing it the wrong way -- by simply comparing the gold price to the level of CPI, which is what James said on CNBC he had done. What you really should do is compare the change in the gold price to the change in CPI. Makes sense, right? You hold gold as an inflation hedge because you want its price to change to offset a change in the CPI.

In fact, what you should really do is compare the change in gold to the change in CPI in the future, since you are trying to hedge now against a future event. If you do it that way -- the right way -- the correlation of gold and CPI, based on one-year price changes in gold compared with one-year changes in CPI two years ahead, turns out to be 0.44. Still a respectable correlation, and more than three times higher than James said.

James claims that stocks are a better inflation hedge than gold. But while he uses statistics (incorrect ones) to diss gold, he offers none to support stocks. And no wonder! Using the same technique I just described, the correlation of stocks and inflation is actually negative -- it's minus 0.13.

But who needs statistics? The fact is that during the period in our lifetimes when we really needed an inflation hedge -- the 1970s -- stocks didn't keep up with inflation, and gold did. As I pointed out last week, during the great inflation from 1973 to 1980, the CPI went up 91%, almost a double. The S&P 500 didn't keep up at all, returning only 28% including dividends. Gold rose 728%.

But James says this time it's different. He argues, "In the 1970s, about 10% of the S&P 500 s revenues came from abroad. Now it s about 40%. So U.S. companies do a lot better now than they did in the 70s when the dollar weakens." Wouldn't that depend on whether their foreign business is dollar-denominated or not, and whether they currency-hedge or not? Even setting those little realities aside, wouldn't it matter when the inflation in question is exclusively a US phenomenon or a global one? If there's inflation everywhere at the same time, as I believe there will be in the coming years, then the dollar won't necessarily weaken. Even abstracting from all that, at most it means that maybe in the next inflation stocks won't perform as badly as they did in the 1970s inflation. But that doesn't make them as good a hedge as gold.

Without realizing it, James does concede one value for the "worthless rock." He calls it a "fear metal," which means that you buy it when you are afraid of every other investment." But he's demonstrably wrong. In 2008, when the whole world was gripped in fear as we risked going into a global depression, gold went down, not up, falling as much as 34% that year. James answers that critique by saying that "It was a liquidity crisis more than a fear crisis."

Oh yeah? I was plenty afraid then; more than at any time in my career as an investor. And James, don't tell me you weren't, too. But do you see the pattern? He says gold isn't an inflation hedge, but when put the test with serious inflation in the 1970s, gold soars. He says it's a "fear metal," but when put the test with serious fear in 2008, gold goes down.

In another one of James s columns, he accuses gold investors of following "the whims of the latest religion," and warns that "It s best to avoid in-depth conversations with the orthodox " I don't consider my advocacy of gold now to be religious at all. Religion is non-rational. My reasons for being bullish on gold may be wrong, but they are based on solid reasoning backed up by real evidence of history.

Isn't it non-rational to base one's opposition to gold on statistical errors and historical misinterpretations? Isn't the worst orthodoxy to call gold a "a worthless rock"?