Gold Skeptic Attempts To Debunk Gold Rally

Raymond Kerzérho, the Chairman of the Investment Committee and Director of Research of PWL Capital Inc., lists the three reasons given by mainstreamed gold proponents and attempts to rebut them. Those three reasons will be familiar to goldbugs:

1. Gold has high historical returns.
2. Gold offers protection against inflation.
3. Gold serves as a useful diversifier in a portfolio.

He's actually more charitable than the typical gold skeptic. He does concede that gold's return since President Nixon's ending of the gold standard in 1971, 9.4% in Canadian dollars, is close to the Toronto Stock Exchange's composite index's return of 10.3%. Needless to say, the TSX composite has been more influenced by gold than the American S&P 500.

[Nixon closed the gold window on August 15, 1971. Using today's date in the same year for gold in American funds and the S&P 500, and using the London AM fixings, gold's annual percentage return over the last thirty years has been 12.95%. The S&P 500's has been a more modest 8.90% if dividends are excluded.]

However, he makes the oft-repeated point that someone buying gold at the top of the market in 1980 would have only had a 1.9% annual return. The TSX/S&P composite yielded 9.4% in that same timeframe.

That same calculation ties in to his second point: that gold's protection from inflation is quite loose over all but the very long term. He concedes the third point, that gold does offer good diversification, but he then unveils his opinion that gold's bull run is going to come to an end soon.


The last argument is pretty odd if you see gold as portfolio insurance. "The cost of insurance is too high right now, and you don't need it anyway. Self-insure!" I don't think his argument is going to convince a lot of people unless they're already convinced on other grounds.

As for his first two points, it really revolves around when you buy it. The stock mavens who keep bringing up 1980 to knock gold haven't had the argument turned around on them. Buying gold in 1980 was like buying the S&P 500 stock basket in March of 2000. Anyone who did so would be sitting on a loss right now if dividends aren't counted. Been a long and sometimes unnerving eleven years, hasn't it?