Put all your money in gold.

Gold is going to $2000 dollars an ounce.

Gold has outperformed the Dow by 3 times for the last 37 years.

We’ve been hearing a lot of this kind of stuff lately and that is worrisome. First of all, there is nothing wrong with gold. It is even more liquid worldwide than currency. It should be a part of any diversification strategy for well-to-do investors. A portfolio of two million dollars owned by an ultra-conservative octogenarian should be maybe 20% liquid. Gold should be a part of this liquidity. But of course it pays 0% interest. Oh, and gold has no place in your portfolio if you are not very well off financially (well maybe 5% if you just like the idea of having it). After all, if you don’t have enough money to retire, making the dearth liquid makes things worse. It can no longer grow then.

Sorry, if you don’t have enough money, you have to gamble some. Fortunately gambling means investing. It’s not that hard. Mutual funds are especially not hard to figure out. I’ve beat the market every year that I’ve invested and I am not “Joe Pro”. If a person has $1000 he can buy an ounce of gold, have money left for dinner, and maybe double his money (but doubtful). He can alternatively buy 300 shares of Ford and maybe lose $1000 or make…(who knows?).

Now, in our current sleeping bear stock market gold is exactly the wrong thing to buy and is strictly a running scared strategy. When the Dow was at 14000 a lot of geniuses said it was going to 20000 (BUY STOCK WHEN THE DOW HITS 14000!). That was a running while floating on air strategy. Always remember, every market is cyclical. Buying a lot of liquidity at the top of the stock market (where’s the top again?) is smart. Right now it’s dumb. Is gold going to $2000 an ounce? Not in your lifetime if you don’t believe that the DJIA is going as low as 2500 points. In a global economy that is possible and doubtful.

“Gold has worked for 5000 years”. Yes it has and so has maize, which additionally has the advantage that some types are edible. Gold is pretty, it’s always worth something, and it makes lovely temples which can be recycled. I love gold, I love cash, I love commodities, I love stocks, I love mutual funds, I love treasuries. I don’t love the hard asset (meaning a possible encumbrance) aspect of real estate, but prices are attractive. DIVERSIFY completely, but if you are not ultra-conservative no more than 10% of assets should be liquid (collectibles, gold, silver, cash, etc.). As of two years ago, well actually 1 1/2 years, gold had underperformed the Dow “for the last 35 years”. So you see, you can use any time period to make what you are selling more attractive.

FOR THE LAST 5 DAYS THE DOW HAS KILLED GOLD! Here’s the hard statistics-

Since 1972 (37 years) gold has increased in market value about 16 times. Since January of 1972 the Dow Jones Industrial Average has increased 8 times. So I guess 8 X 3=16 if gold has outperformed the Dow 30 by 3 times. Now these comparisons come from straight graphs which don’t account for stock dividends being reinvested (always reinvest dividends by the way).

Dividends are currently under pressure (especially for companies involved in TARP), but have been quite an additional money maker since 1972 for investors in the Dow 30. Also, there are many stocks which have increased much more than 16 times in 37 years. I won’t prattle on much, but let’s take Boeing as an example, which is a Dow component. In January of 1972 this stock traded for 78 cents. If it can get back to $39, that would be a 50 times increase. And Boeing pays a dividend! They just increased the dividend in a bear market! What should we have bought 37 years ago?

What would have brought more profit since 1972, Boeing or gold? Granted, there are also some bad plays for the last 37 years in the Dow 30. Here is the most important statistic: At the end of the last bear market in 2002, the INITIAL SURGE in the DJIA was from 7600 points to 10400 points (or 37%). The same percentage gain from the current low point of 6547 would yield a DJIA of 8969.

The difficulty is in knowing if there is a bear market or a bull market rally happening. Don’t buy into a stock market high (where is the top, somebody tell please). Don’t sell into a stock market low. Do two things. 1) Watch Warren Buffett. Is he all in gold? Is he increasing liquidity or exposure? Here’s what he tries to do: 2) Watch the crowd and go against them. So when there is blood in the streets (admittedly this can be a little bit of an inexact thing) get the big straw out. And diversify, DIVERSIFY.

Take some of your own responsibility for the economy by impulse saving instead of impulse buying. Your predicaments are not caused by anyone elses shortcomings.

Jim William, email: maven@winterlakeresearchcenter.org, is an avid investor who has made plenty of mistakes.