The business news channels are constantly talking about gold, and commercials on nearly every channel are telling you to buy gold now. Gold sounds exciting right!? I mean, it’s gold! But have you ever really thought about buying some? More importantly, should you buy some? We’ll take a brief look at some historical gold data and look at the reasons people really buy gold. Then we’ll give you our opinion, and remember, its just that…. an opinion.
First of all, unlike many other investments, gold is a precious metal and has its own intrinsic value. And because the supply of gold is limited, especially in the short term, the prices of gold vary mainly based on demand. Furthermore, the demand for gold fluctuates based on economic growth and stock market volatility. The riskier the stock market becomes, the more people that flock to gold as a safe haven. This sometimes causes the price of gold to go up when the market goes down. For this reason it can be a hedge to the stock market.
Another historical trait of gold prices is that it follows cyclical and sometimes bubble-like patterns. For example, in 1980 gold prices were around $400 per ounce, and because of macroeconomic and international factors, they quickly shot up to over $800 in just a few months. However, the bubble burst and prices soon fell back to the $400 level.
To get an idea of where long term gold returns are compared to stock returns, lets look at some historical data. Historical prices go back to the early 1800’s, when gold was around $20 an ounce. From then, it took the price of gold nearly 140 years to double to about $40 in 1970. Then, during the period from 1930 to 1970, gold grew at an annual rate of less than 2%. However, from 1970 to 2000, gold went from about $40 to around $290. This is an annual return of just under 7%. Since 2000, gold has been on a tear and has grown from $290 to about $1600 (as of today). This is an annual return of about 16%. So, looking at the long term trends in gold, it appears that gold grew very slowly during the 1800’s and through 1970, well below the stock market returns. From 1970 to 2000 gold grew at a quicker 7% rate, which was still well below the stock market average of about 11-12%. However, in the last ten years, gold has grown dramatically faster, at an annual rate of about 15-20% per year.
What to make of all this?
If you look at recent history and at current economic times, it’d be pretty easy to say that gold would make a great investment, as it has made a great investment during the past ten years. However, the reason gold prices are so high is because of the extremely high volatility in the stock market, very poor economic times globally, and one could argue, excessive speculation on gold. If you are thinking of buying gold – beware. It could very well be near the top of a bubble and could easily collapse to its long term trend price which is less than half of its current price. If you want to own gold for the inflation hedge and for diversification, it makes sense to add some to your portfolio. However, we see gold more as a speculation than a long term investment and would recommend that if you add gold to your portfolio, that you keep it to only a few percent.