Long-time Wall Street Naysayer Now Buying Gold

Gold has had its share of detractors over the years, many of them longtime denizens of Wall Street. The motive for these swipes at the yellow metal boils down to two words: vested interest. But it seems now that every day we hear of more high profile Wall St. players coming to the realization that the stock market no longer serves their vested interests.

A once-robust brokerage industry traditionally thrived on the buying and selling of stocks. And a broker’s best clients were those who’d already bought a stock from him. Yes, it would help if that client had made money on his very first purchase, but a broker with smarts and plenty of audacity knew what to say even if the client lost money based on his recommendation.

The broker’s follow-up pitch can take one of several turns. Here are two examples:

1.   “You know, Mr. Investor, I know you’re disappointed over that last trade. But my clients have always discovered persistence can really reward them if they hang in for a good opportunity. Right now, ABC Corporation is looking excellent. It has solid financials, and its new product offering can yield the lucky shareholder three times on his money if he gets in at the current price. Can I put you down now for fifty thousand dollars?”

2.  “Investor, let’s get revenge on the market for that last trade…(insert above spiel and request for fifty grand).”

The point is that stock markets flourish on continual liquidity – easy in, easy out. And brokers get paid either way. Gold, on the other hand, just sits there in your portfolio or retirement fund doing its quiet work as a hedge against the decline of your paper assets.

So it’s interesting, if not disquieting that more and more noted investors of paper assets have declared a new-found fondness for gold. Billionaire investor Stanley Druckenmiller and bond king Bill Gross have abandoned stocks and bonds in favor of the gold market. Back in May, Druckenmiller told attendees at the Sohn Investment conference to “sell their equity holdings” and buy gold. And in a Bloomberg interview just the other day, Gross remarked that, with its “considerable store of value,” gold is a better investment than stocks and bonds.

The latest financial notable to join the ranks of Druckenmiller and Gross (and George Soros and David Einhorn) is Richard Bernstein, a former chief investment strategist with Merrill Lynch who now runs his own investment firm. Bernstein’s new-found attraction to gold represents quite an intriguing shift in his thinking.

When he used to teach at the Stern School of Business at New York University, he’d mockingly equate gold to wampum (shell beads American Indians used to trade). But at a recent conference, Bernstein changed his tune big-time. He remarked, “You buy real assets when inflation expectations are starting to go up ….” Interesting.

In the current climate Bernstein now likes the fact that gold is now somewhat negatively correlated to stocks. “It adds extra ballast in a portfolio to hedge against volatility.” Not a bad deal at all for an investor looking to protect his or her retirement savings.