The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

The New Gold Standard

For another Question One myth and reverse truth, consider William Jennings Bryan. Remember him? The Populist with the booming voice and his famous “Cross of Gold” speech and his indifferently supported campaign to move to a silver standard as 1900 approached? (Read more about him in Appendix F.)

America abandoned the gold standard (again) in 1971, but a new standard has arisen—the widespread belief gold is the ultimate portfolio hedge. The belief cycles in and out of fashion, but when it’s in, you endlessly hear that when gold is up, stocks are down, and vice versa. Gold is pitched as a good hedge against downside volatility. A long-held derivative theory is gold will protect you when capitalism inevitably fails. Something like that.

Folks also sometimes say gold is a good inflation indicator. Rising gold prices should signal bad news all around for stock investors because stock prices will drop and rising inflation will stagnate growth. But is it true? The love affair with gold comes and goes but naturally intensifies if gold prices do well for a while.

The Golden Hedge

The gold hedge belief, like many entrenched investor beliefs, appeals to our common sense. Gold is a commodity—it has weight and heft you can see and feel, and you can take possession of it. Stocks are slips of paper—nowadays, barely even that—just bits of data in a wireless cloud. It seemingly makes sense two such different asset classes might behave differently. And because of prior long ...