The Case for Gold

As you may know, gold has become way too rich for my blood and have said as much on my blog in recent months. I have no interest in owning gold at these levels. That said, I could very well be wrong to think this way. I do have "stagflationary" in my name after all.

Therefore, to the delight of the gold bugs I thought I'd play contrarian today.

October 4, 2009
Gold Is Still a Lousy Investment

That brings us to the fantasy half of the equation, which seems to be the main driver of gold today. Gold is the asset class of choice for those who fear grim tidings ahead. A collapse in the dollar. Runaway inflation. Civic upheaval. Some gold bugs talk of stockpiling seeds, bullets and canned goods. It can get a little Area 51.

Hey, that's almost me they are talking about! From this point on I shall refer to my extended pantry as, drum roll please...

Area 5.1


Although you can't see it all in the picture, you'd have to agree that it can't be more than 10% of Area 51. In other words, it's at best a "little Area 51". Get it? Hahaha! I crack me up sometimes. Sorry about that.

I don't expect a complete collapse of the dollar or runaway inflation, but I am somewhat braced for higher long-term inflation than the bond market is (just 1.7% inflation expected over the next 10 years as seen in the difference between 10 Year Treasuries and 10 Year TIPS). Much of what you see in the picture has outperformed the stock market since 2000. I think there's a decent chance it will continue (even if we enter a deflationary spiral). That's all. I'm just not much of a believer that we can borrow our way back to prosperity.

Civic upheaval? Despite the acoustic device battles with protestors in Pittsburgh during the G-20 meetings, the notion of collapsing civic order seems increasingly far-fetched.

How can anyone argue that it is becoming increasingly far-fetched? As unemployment approaches 100%, collapsing civic order approaches 100%. That's the math as I see it. Therefore, let's reserve "increasingly far-fetched" for the point in time when unemployment actually starts to fall. Until that time, I'll be taking extra special care when using the ATM at my local bank (especially once it gets dark). Let's just put it that way.

So, if gold is a lousy investment then what would Barron's suggest is a good investment? Glad you asked!

For inflation, investors would be better served investing in Treasury inflation-protected securities, or TIPS. The risk of TIPS declining dramatically and becoming dead money for decades is exceedingly remote. Moreover, even if inflation doesn't surge, TIPS can still be a good store of wealth, while gold could do just the opposite.

Most of my nest egg sits in TIPS. What is said is all fine and dandy, but TIPS can only provide limited inflation protection. TIPS investors have to pay tax on the inflationary gains as they appear. Those taxes can really start to hurt if inflation picks up. Investing in TIPS is kind of like buying fire insurance for your house that refuses to pay if the house completely burns down. So are TIPS investors such as myself really better served? Only hindsight will know for sure. I can say this though. Inflation better not get too far out of hand or TIPS will financially ruin me. That's a risk I'm willing to take. It is a risk though.

So what else does Barron's suggest we invest in if gold is lousy?

June 11, 2009
California Pizza Kitchen Can Serve Up Gains

What's not to like? It's got both California AND the restaurant industry? Oh joy!

We also think a moderation in home price declines since early 2009 offers a glimmer of optimism for restaurant companies with heavy California exposure, and California Pizza Kitchen in particular as 40% of the company's sales are attributed to the Golden State.

A glimmer of optimism? Oh my. Sign me up. To be fair, I'm seriously underwater on my anti California Pizza Kitchen play so far. That glimmer of optimism seems to have transformed into something much larger than that based on the stock market's recent performance. I'm letting that imaginary money ride though. That's right. I'm a glutton for imaginary punishment!

March 1, 2009
A Risky Bet

I'll be tracking California Pizza Kitchen in the years to come. I've been watching California's economy. I've been watching the restaurant business. I'm ashamed of myself for not thinking of it sooner.

The risk as I see it depends on whether this is a cyclical downturn or a secular downturn. I didn't start a blog based on the former, but I could be wrong of course.