Gold vs. Goldman…?

Given gold’s apparent deficiencies, which will you choose: Gold or Goldman Sachs…?

SINCE THE DEPTHS of the credit crisis hit last November, the price of Goldman Sachs’ stock (NYSE: GS) has soared 178%, writes Eric Fry in the Rude Awakening.

The price of gold, meanwhile, has advanced a mere 25% against the Dollar. Is Goldman, therefore, the new gold? An investment acolyte could easily draw that conclusion. In fact, most experienced investors have reached a similar conclusion.

These sophisticated investors know that Goldman is a far better investment than gold, not merely because CNBC worships the former and despises the latter, but also because Warren Buffett took a $5 billion position in Goldman Sachs, not in Gold Bullion.

That said, a few experienced investors are also slow learners. We do not comprehend as rapidly and facilely as most folks do that Goldman is better than gold. We are slow to understand that a highly leveraged trading operation – subsisting on short-term financing, friendly accounting conventions and intermittent governmental coddling – is a better vehicle for preserving wealth than a Gold Bullion bar.

Sure, we understand that speculations sometimes succeed, and that leveraged speculations sometimes succeed in spectacular fashion. But we have a hard time making the leap from “leveraged speculation” to “prudent long-term investment”. Therefore, we have a hard time making the leap from “pinstriped crap shoot” to “better than gold”.

Admittedly, over the last eight months, Goldman has performed seven times better than gold. But if we extend the time frame of our analysis, back to May 1999, when Goldman Sachs first became a public company, we discover that gold has produced twice the return of Goldman Sachs’ stock.

Which prompts the question: Which of these pasts will be prologue? The last eight months? Or the last 10 years?

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