Zweig: Gold Is Not All That Glitters

In the summer of 2015, Jason Zweig wrote an article for The Wall Street Journal in which he claims that investing in gold (which was trading at around $1,130 an ounce) was a “leap in the dark.” In a WSJ blog earlier this month, he writes “Gold is up 20% since I ridiculed it; the U.S. stock market, measured by the S&P 500 with dividends reinvested, is up less than 1%.”

But that’s not the end of the story. The fact that the price of gold has risen, says Zweig, doesn’t necessarily negate his original position. He argues that an investing decision is only wrong if “the price moves against you and your original rationale no longer makes sense.” But he doesn’t think that’s the case here. While gold has preserved its purchasing power over long periods of time and is an implicit form of money (central banks around the world hold about 33,000 metric tons), Zweig notes that its dramatic fluctuations in the short term make it “a surprisingly poor hedge against increases in the cost of living.”

The “yellow metal” as Zweig calls it, is a “partial, not perfect, hedge against chaos.” He recalls how in October of 2008, when U.S. stocks and corporate bonds fell by 16.8% and 4.5%, respectively, gold dropped by 18.5%. In September 2011, stocks tumbled by 7%, bonds gained 1%, and gold fell by 11.4%.

As investors rush toward gold as insurance against uncertainty, Zweig circles back to his original position that it might not be the answer. “If gold shoots far up from here, it won’t be following the precedents of the past. It will be violating them.”