Ditch the fool’s gold and buy stock in Michael Moore’s favorite punching bag

People have been buying gold to protect their wealth – at record highs. Since gold has historically been used as a currency, gold buyers believe the indebtedness of the US government will cause further devaluation of the dollar and therefore a dollar will be worth more in the future if bought at over $1,200 for 100oz futures in gold than if held in cash. The first part of their thinking is likely true, indebtedness will lead to dollar devaluation, however, the assumption that gold will be the world’s “substitute or emergency currency” again and that it will be higher in the future is a gamble whose odds are very uncertain.
The below excerpt is featured on Goldline.com
"Dr. Kaplan explains that basic rules of supply and demand are driving gold higher as investor demand for currency diversification and capital appreciation combined with increased demand from central banks such as China and India create a "perfect storm" for gold. "I would argue that any time the consumers of the two largest countries in the world are competing for a scarce asset, the rest of us should consider owning it."
According to Dr. Kaplan, "Gold has been the safest and most profitable financial asset in the world over the last decade" and investors and bankers now recognize gold's value as an asset with intrinsic value that is not dependent on obligations from other parties to pay off. ("Gold Will Keep Going Up", Forbes.com, May 24, 2010)

If trying to diversify one’s currencies and compete for a scarce asset, why wouldn’t China and India seek an asset that has more practical value than gold, such as oil, other metals, other hard assets or housing, construction materials, commodities, financial securities, etc. Further, the fact that gold had an amazing decade is not proof of a further amazing decade to come, quite the contrary as we thought the same thing about oil not too many years ago, and in these situations we usually find that trees don’t grow to the sky.
First, the assumption that gold will be the back-up currency is not guaranteed by any world government. So gold investors are really betting that other gold investors will be willing to buy their gold at even higher prices. And for what reason? To make jewelry? Wiring to be used in industry? No, they believe others will buy it from them at higher prices for the very same reasons they bought it: for fear of dollar devaluation and the hope that still other investors will be willing to buy it from them at even higher prices in the future. And those investors? You guessed it. Any number of children’s fables come to mind – wanta buy these magic beans? Wanta buy these great clothes that you can’t see? Wanta play musical chairs? Gold even has its pied pipers in the form of conservative commentators exploiting legitimate fears to sell gold. Last I checked, fear is an emotion and emotions are not wise guests to invite to an investing decision.
The average investor (a person who has a day job but makes enough money and is practical enough to plan for the future) receives no practical value for buying gold. In fact, it is a hindrance- a very costly hindrance. First there are broker’s fees/transaction costs. Second there are delivery fees. Third, there are storage fees. After all, it wouldn’t be a good idea to store gold bars under the mattress. Further, buried in the costs somewhere are also certification fees: we need a professional organization to examine and certify that it is indeed gold and not fool’s gold.
Another point worth mentioning is that gold is a favorite investment as part of a doomsday scenario survival plan. If doomsday situations were to really occur, in such as an absolute failure of the paper currency, and therefore a failure of government, who would be there to enforce the rule of law? In other words, you better have that gold buried in a secret safe where only you and your trusted circle can gain access, and have your own security plan. Doomsday and looting are historically best of friends.
Having said this, I have to wonder whether the rise in gold is more psychologically driven than practically driven.
Could there be a solution to protection against dollar devaluation and other worst case scenarios in the stock market? In the midst of the volatility of the stock market since the housing-turned-finance related market crash which cut the major indices in half, and the subsequent market rise, the stock of a large, stable company with significant assets and cutting edge logistical systems traded with extremely low volatility between about $45 - $55. In fact the stock has traded around $50 for just over a decade now. This stagnating share price must imply that this is a company with no growth in sales and earnings, perhaps a newspaper company that is slowly losing business to digital-based news. On the contrary, sales have consistently grown around 8% annually and earnings have grown slightly higher. Further, return on equity has consistently been in the low 20s. The stock is Wal-Mart. True, the US business is in slow growth mode, but it is a cash-cow and there is opportunity to improve growth slightly (the US is too saturated to move the growth needle too much too easily) through store formatting and demographically driven product offerings. However, the international business is a double-digit grower for as far as the eye can see or as far as an analyst’s crystal ball can predict.
To sum up: Wal-Mart has been growing their business at 8 to 10% over the past ten years, and the stock price has stayed flat. That means it has been getting more valuable every year. It is not hard to predict that US growth will remain low and that international will grow 15% or more annually. So Wal-mart will continue to become more valuable every year as their business continues to grow. That can only mean one thing: a rising stock price. An investor purchasing Wal-Mart shares currently at $51.50 is getting a 7% return on the $3.72 2010 earnings per share. The one investing criteria that is not in plain sight is a catalyst – in other words, what will make the stock move? Surprisingly the answer is: time. Time has not worked thus far, I know, but the longer the stock remains around $50 (remember the business is growing) the more time becomes a catalyst – a coil that is compressing ever tighter.
Returns: With a company of Wal-Mart’s size I am not aiming for a double or anything eye-popping. However, I do believe conservatively estimated returns of at least 8% annually are in store, and at a very low risk. With the interest earned on savings being about equal or even less than the current dividend of Wal-Mart stock, it seems reasonable to put at least a portion of one’s long-term savings on a safe 8% return – a much better risk than purchasing gold which has a guarantee of a positive return that is equivalent to a gamble, and then paying someone else to broker, certify, store, and protect it.