I hate this cheap data mining trick – don’t fall for it

When analysts tell you one asset is “better" than another, beware. It all rather depends, says Dominic Frisby. A sensibly diversified portfolio will serve you much better than chasing the “best” assets.


Which is the better asset gold or US stocks?
(Image credit: © 2015 Bloomberg Finance LP.)

I don't know if you can exorcise a bugbear, but that's what I plan to do in today's Money Morning. To mix another metaphor, I'm going to get a demon off my chest.

Specifically, the axe I have to grind sorry is with the way dates and data get misused to further an argument.

The trigger for this was reading the latest monthly report on gold from a well-known alternative asset manager.

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Which is best gold or stocks? It depends on the date

The report is authored by one of the company's senior portfolio managers. He makes the argument that all fund managers should be making allocations to gold (something with which I agree).

The first reason he cites for doing this is that: "Gold has been the best performing global asset for 18 years". Three lines later, in bold, he reiterates this point: "the single best performance of any global asset for 18 years running".

Now, he may well be correct in that. It is possible to find assets that have beaten gold bitcoin, for example but that has only been around since 2009, so perhaps it doesn't count.

The point is that it's true that gold has done very well over those 18 years. On the first trading day of January, 2001, gold was $274 per ounce. Today it is $1,285 4.7 times higher.

Compare that to US stocks. In January 2001, the S&P 500 was 1,340. Today it is 2,782 little more than twice the price it was.

But here's the problem I have: it's the arbitrary use of that date 1 January, 2001 (or the first trading day of that year).

Why don't we take January 2011 as a start date instead? Gold began that year at $1,420 an ounce. It has not only gone nowhere over the ensuing eight years, it is actually down by $35.

The S&P 500, on the other hand, was sitting at 1,255, so it is 2.2 times higher.

So since January 2011, gold has been pants.

Or why don't we take January 1980? Gold began that year at $566 an ounce. It's about 2.5 times higher today. The S&P 500, on the other hand, was 106. Today it is more than 25 times higher!

So, yes, gold may have been the best asset class to own over the last 18 years. But over the last eight years it has stunk. And over the last 39 years it has been totally eclipsed by the S&P 500.

Between 2001 and 2011, however, gold eclipsed the S&P 500.

So which is the better asset gold or the S&P 500?

The stupidity of saying one asset is "better" than another

The point is, It's a ridiculous question. There are times when one outperforms the other, and there are times when it is the other way round.

Being told that you should buy gold because over the last 18 years it has eclipsed the S&P 500 is as meaningless as being told that you shouldn't buy bitcoin because since its high at $20,000 in December it has fallen by over 80%. Or that you should buy bitcoin because since its low in November 2010 at around $0.001, it is up almost four million times.

All these arguments depend on what you choose as your start date. January 2001, and January 2000 even more so, tend to get used a lot as they are the start of the century. But they also happen to be close to the lows of a 20-year bear market in gold, and not far off the highs of a secular bull market in stocks.

January 2011, on the other hand, was not far off the highs of a secular bull market in gold and barely two years into what would prove to be an epic bull market in S&P 500.

I think you get my point. It's all rather arbitrary.

The problem I now have with this particular manager's gold report is that I am now cynical when I read the rest of his thoughts, when in fact a lot of the later arguments he makes for gold are actually quite sound.

That said, they're largely based around the US fiscal position. And that has looked precarious ever since I started writing this column 13 years ago (is it really that long?). The extraordinarily high level of US government debt is one of those things that never seems to matter.

One day we are going to wake up and it suddenly will. The question though, is whether that will be in my or my grandchildren's lifetime. (They haven't even been born yet).

So there we have the message of today's Money Morning: beware when people tell you that one asset is "better" than another. There are times for one, and there are times for the other. Sensible diversified portfolio allocation will mean that you should have all bases covered: so that when, say, gold has its summer, or bonds, or stocks, you have some exposure; but when they have their winter you are not too badly hit.

If on the other hand you are out to make fortunes, or you have extraordinary market timing skills, then perhaps diversification is not for you. If you focus on specific assets in a bull market, and you are able to exit before the bear grips, then that is the way to make extraordinary gains.

The downside, however, it that if you don't get out, you make extraordinary losses as well.

Dominic Frisby

Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.

His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.

You can follow him on Twitter @dominicfrisby