Gold’s best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought the most malleable of metals coveted for at least 5000 years during the last peak in January 1980.  JASON REPLIES: HA, FOR GOLD TO "OUTPERFORM" FROM THE PEAK IN 1980 WOULD MEAN THAT GOLD HAS OUTPERFORMED EVERYTHING SINCE 1971, 39 YEARS AGO!  SINCE GOLD HAS NOT OUTPERFORMED, THAT MEANS IT'S STILL CHEAP, AND NOT YET AT ALL TIME INFLATION ADJUSTED HIGHS.

Investors who paid $US850 an ounce back then earned 44 per cent as gold reached a record $US1226.56 on December 3 in London. The Standard & Poor’s 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average US checking account rose at least 92 per cent. On an inflation-adjusted basis, gold investors are still 79 per cent away from getting their money back.  JASON REPLIES:  NOT ALL GOLD INVESTORS BOUGHT AT THE PEAK IN 1980.  MANY BOUGHT IN 1971 WHEN THEY REALIZED THAT THE GOVERNMENT WAS PRINTING WAY TOO MUCH MONEY TO BE ABLE TO CONTINUE TO BACK THE DOLLAR WITH GOLD.  THAT'S WHAT SMART GOLD INVESTORS TODAY ARE REALIZING.  IF YOU COUNT RETURNS FROM $35/OZ. IN 1971, GOLD INVESTORS HAVE GOTTEN A 35 FOLD RETURN ($1226 / $35 = 35), WHICH IS MORE THAN ALL OTHER CATEGORIES.  AND GOLD PRICES ARE STILL MANIPULATED LOW TODAY, LIKE THEY WERE IN 1971!

“You give up a lot of return for the privilege of sleeping well at night,” said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. JASON REPLIES: NO, YOU ACTUALLY GAIN QUITE A BIT MORE OF RETURN, IN ADDITION TO SLEEPING BETTER AT NIGHT! “If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. FUNNY!  NOBODY EVER WENT BROKE HOLDING TOO MUCH GOLD! From my experience, the world has not ended yet.”  OH, SO YOU BUY GOLD AFTER THE WORLD ENDS?!

While gold’s nine-year bull market is attracting hedge-fund managers John Paulson, Paul Tudor Jones and David Einhorn, strategists and fund managers at Barclays, HSBC, SCM Advisors and Brinker Capital say buy-and-hold investors shouldn’t always own bullion. The accumulation of gold is part of a record $US60 billion Barclays estimates will flow into commodities this year.

The SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has amassed more metal than Switzerland’s central bank, spurred by a plunging dollar and concern that the at least $US12 trillion of government spending to lift economies out of the worst global recession since World War II will spur inflation.

The US Mint suspended production last month of most American Eagle coins made from precious metals because of depleted inventories. The UK’s Royal Mint more than quadrupled production of gold coins in the third quarter. Harrods, the London department store, began selling gold bars and coins for the first time in October.

Those sales contributed to a 32 per cent rally in gold this year, JASON REPLIES: AH YES, THE 1 MILLION OZ. MINTED BY THE US MINT IS DRIVING THE GOLD PRICE WHEN THE WORLD PRODUCES 70 MILLION OZ. ANNUAL GOLD?  THAT WOULD BE THE FLEA DRIVING THE DOG! the most since 1979, beating the 25 per cent gain in the S&P 500, with dividends reinvested, and a 2.4 per cent drop in Treasuries. Investors bought gold as the US economy, the world’s biggest, shrank 3.8 per cent in the 12 months ended in June, the worst performance in seven decades. Gross domestic product expanded at a 2.8 per cent annual rate in the third quarter.

A weakening dollar also contributed to bullion’s longest winning streak since at least 1948. The US Dollar Index, a measure against six counterparts, dropped in six of the last eight years, including a 6.6 per cent decline in 2009, bolstering demand for a hedge. JASON REPLIES: YES, BUT THE DOLLAR DID NOTHING AS GOLD RALLIED FROM $438 TO OVER $700/OZ.  THE GOLD STORY IS ABOUT A SHORTAGE OF GOLD, NOT ONLY EXCESSIVE DOLLARS GOING DOWN IN VALUE.  GOLD HAS BEEN GOING UP IN ALL MAJOR CURRENCIES SINCE 2001.

Buy-and-hold investors may not have done so well. One dollar put into a US checking account in 1983 would be worth at least $US1.92 today, based on annual average interest rates from Bankrate.com. The Federal Reserve target rate from 1980 to 1982 was 8.5 per cent to 20 per cent. Banks were paying 5 per cent on the accounts in January 1981, according to a report in the New York Times.

The S&P 500 returned 2182 per cent from the beginning of 1980 through the end of the third quarter this year, according to data compiled by Bloomberg. The calculation assumes dividends reinvested on a gross basis. Treasuries returned 1089 percent through the beginning of this month, according to Merrill Lynch’s Treasury Master Index.

JASON REPLIES: SAYING GOLD HAS NOT DONE WELL SINCE THE 1980 TOP, AS A REASON TO NOT BUY IT, IS A RIDICULOUS ARGUMENT.  ARE THEY TRYING TO SAY THAT THEY WOULD ONLY BUY GOLD OR RECOMMEND GOLD IF GOLD OUTPERFORMED EVERYTHING ELSE SINCE ITS PRIOR PEAK?  THEN THEY ARE REALLY SAYING THAT GOLD WILL BE A SCREAMING BUY ONCE IT GETS TO ABOUT $7,000/OZ., THE INFLATION ADJUSTED HIGH.

“Gold is a useless asset to hold long term,” (JASON REPLIES: USELESS UNLESS YOU WANT TO PROTECT YOUR WEALTH, AND GET SOLID RETURNS LIKE 387% SINCE 2001) said Charles Morris, who manages more than $US2 billion at HSBC Global Asset Management’s Absolute Return fund in London. “I’m not a gold bug who believes that you want to own this thing in your portfolio at all times. We should own it when the going is good, and the going right now is great.”

Those who bought gold when it reached a two-decade low of $US251.95 in August 1999 have seen a 387 per cent return, more than four times the 82 per cent gain in Treasuries. An investment in the S&P 500 lost 0.4 per cent through the end of last month. Interest on checking accounts shrank to 0.14 per cent this year from 0.89 per cent in 1999.

Since the S&P 500 peaked in October 2007, investors in the index lost 25 per cent, holders of Treasuries made 16 per cent and gold buyers are up 64 per cent.

“There are people that just stayed in very conservative investments in cash and government bonds,” said Larry Hatheway, global head of asset allocation at UBS in London, who recommends investors hold about 1 per cent of their assets in bullion. “Surely they would have been a lot better off being in gold.”

Buying bullion at $US35 when US President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.

Gold will average $US1070 next year, according to the median in a Bloomberg survey of 19 analysts. The metal may jump to $US2000 in the next five years, said HSBC’s Morris. Ian Henderson, manager of $US5 billion at JPMorgan Chase, said he’s adding to his gold-related holdings because of “the momentum behind it.” Jim Rogers, the investor who predicted the start of the commodities rally in 1999, has said bullion will surge to at least $US2000 over the next decade.

“Our sense is that this bubble is more at the beginning stages than on the brink of collapse,” said Thomas Wilson, head of the institutional and private client group at Brinker Capital.

Bloomberg