Mettle Trumped Metal

Author's Avatar
Apr 14, 2013
Article's Main Image
Fundamental Investing Won Again as Mettle Trumped Metal

For some reason April 15th always makes me think of money. Paying taxes means totaling up gains and losses. It’s a time for seeing what investments worked well and which failed. One of the big themes two years ago was the case for precious metal versus holding cold cash or owning stocks.

Cash did what was expected. If you put money in a CD or a money market you have pretty much what you started with 24 months ago. After inflation your purchasing power has been slightly diminished if you believe the official CPI-U numbers.My real life bill-paying experience suggests things have been much worse than the BLS is admitting.

Gold bugs were clamoring to own the precious yellow as a hedge against expected inflation as well as devaluation of the U.S. dollar due to QE programs. Debt ceiling negotiation along with expectations of a European banking failure briefly pushed gold to an all-time high of over $1,900 per oz. True believers in gold didn’t sell as they were sure this was just a preview of the $2,500 - $5,000 price tag that was just over the horizon.

That scenario might play out eventually but, so far, it has proven to be fool’s gold. The gold ETF (GLD, Financial) showed a two-year cumulative total return of less than one-tenth of 1% from April 14, 2011 through April 14, 2013.

From the peak close of $185.85 on Sept. 6, 2011, GLD holders have lost 22.54% while receiving no cash distributions. Euphoria has morphed into depression.


Intrepid equity investors experienced almost the reverse set of emotions. From April 14, 2011 through the Oct. 4, 2011 intra-day low, the S&P 500 dropped 18.3%. If you hung in there though, things got remarkably better. Since that fateful and fearful bottom the SPY has risen by 47.82% including dividends.


Holders of cash slept worry-free while suffering small losses in buying power. Owners of gold felt brilliant before frustration set in. They also have wasted two years in terms of any net wealth accumulation. Buyers of stocks might have suffered panic attacks for the first five or six months but have seen their portfolio values far outpace inflation.


What was perhaps the most surprising result of the past two years? Despite massive money printing by our Federal Reserve Bank the trade-weighted U.S. dollar actually gained about 8.1% against the world’s other major currencies.


That increase was more due to being ‘the best house in a bad neighborhood’ than a true measure of the dollar’s absolute value. In a world of rapid international capital flows, it doesn’t matter why. The dollar has held up better than the euro and yen so far which favors American consumers while crimping the competitiveness of our exports.

Will gold make another comeback? Can the dollar retain its status as the world’s reserve currency? Stayed tuned to find out.

Disclosure: No positions in GLD or SPY