Posted by MarkB_MI on May 04, 2014 at 05:31:12 from (75.219.48.99):
A number of my friends here continue to insist that gold is a good "investment", their primary argument being that it consistently beats inflation. Actually gold is more a commodity or inflation hedge rather than an investment, but never mind that. Does it actually beat inflation?
It's a bit tricky to look at gold in the long term because we don't actually have a lot of history to work with. Gold ownership was illegal in the US until 1975. For the next ten years, gold prices fluctuated wildly until they stabilized in the mid 1980s. So let's look at how gold has done since 1985.
In January 1985, gold was trading around $400/ounce. It's now at about $1300, so gold has risen 433 percent over the past 19 years. Inflation has risen about 220 percent in that same time period, so gold did beat inflation. But that's mainly because of the gains gold prices have made since 2002. Gold prices were flat or even negative between 1985 and 2002. Gold would have been a lousy inflation hedge in the nineties.
But what happens if gold continues its current downward trajectory? If gold drops below $900 an ounce, which is definitely possible, that would erase the gains which gold has made against the dollar.
Now if we're going to treat gold as an investment rather than a hedge, this is all a bit silly. Investments should be compared against other investments, and the US dollar is not an investment. Let's compare gold against the S&P 500: In January 1985, the S&P was around $170. Today it's at $1880. That's a gain of 1100 percent! To match that gain, gold would need to be trading at $4400/ounce. Not only that, the performance of the stock market has been very consistent over most of the past century. While gold was stagnant in the nineties, for example, the stock market did quite well.
Now if you like the shiny stuff, go ahead and buy it. But don't delude yourself into thinking it's a sound investment.
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