Gold Keeps Shining

Gold made new all-time highs again this week, above $1,120 an ounce. My long-standing "best idea" investment continues to be the best-performing asset in the world.

Yes, stocks have performed well -- very well -- since the bottom in March. Up 64.8% as of the high-water mark for the rally at Thursday's close, if you include dividends.

At the same time, gold is up almost as much from its bottom -- 57.4%, to be exact. But there's a difference. Gold bottomed way before stocks did, exactly a year ago last November. So gold led the way while stocks continued to collapse this spring.

But there's more. At the worst of it last November, gold was only off 29.1% from its previous all-time highs. Stocks, on the other hand, had fallen 55.3%. That's why, even after one of the greatest rallies in the history of the stock market, stocks are still 26.2% off the 2007 top, while gold has moved on to make a record-breaking all-time high.

Get it? Gold went down less. It bottomed earlier. It has rallied almost as much. That makes it way No. 1.

And yet every day I get emails from readers second-guessing my gold call. It seems most investors just don't trust gold. They think it's a "barbaric relic," as John Maynard Keynes called it many decades ago. They think it's only of interest to crazy "gold bugs" spinning their conspiracy theories from the safety of their fall-out shelters. So when the gold price soars, to most investors it's pretty much irrelevant to anything going on in the real world -- so, by construction, it has to be a "bubble."

One reader asked me specifically to respond in this column to two critiques of gold. First, he notes that we can't explain the record gold price as corresponding to an increase in the industrial demand for gold -- that is, its use in jewelry, dentistry, electronics and so on.

That may be true. It's impossible to know. Gold has very few industrial uses compared to other precious metals -- for example, platinum, which is used widely in pollution-control equipment. So you wouldn't think that changes in industrial demand could matter much. On the other hand, fairly small changes in demand can have surprisingly large effects on price. Look what happened to oil last year.

But I'll concede that point, because I don't think it's important. In my view what moves the gold price is inflation expectations. That's because gold is seen as a hard-asset substitute for paper money. When paper money becomes less trustworthy, hard-asset money becomes more valuable. Right now paper money is looking pretty shabby -- look at the fall the U.S. Dollar has taken since March. So it's no surprise to me that gold has done what it has done.

But this brings me to my reader's second critique. He argues that gold isn't really a money substitute as I claim it is. It is not used as money anywhere in the world. And it's been decades since any nation's paper currency has been convertible into gold on demand. In other words, there's no such thing as a "gold standard" anymore. Without such tangible linkages, how can the price of gold be related to perceptions about money?