Gold as an investment

by Philip Brewer on 30 August 2007 comments

There are those who point to the 1980 peak gold price of $850/oz and observe that the price would have to go up to $2149/oz just to get back to that point (after inflation). I say, take a second look at the data.

The graph above shows the inflation-adjusted price of gold in dollars per ounce from 1913 to 2006 (adjusted to 1983 dollars). I don't think any sane reading of the data supports the 1980 peak as the "normal" price to which gold will inevitably return. The long term average price of $209/oz (again, 1983 dollars) looks like a rather more reasonable "normal" price to me. In today's dollars that would be $436/oz.

This makes sense, given the nature of gold as a store of value.

I think there's a good case to be made for holding gold as a hedge against both inflation and catastrophe. But I think any purchase of gold should be made with the expectation that prices will tend toward the historic average price. Since gold is trading well above that price now ($664.75 at yesterday's London fix), buying gold today only makes sense if you expect your next-best investment option to lose more than a third of its value.

Gold price data from wrenresearch.com.au

Inflation data from the Bureau of Labor Statistics

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Gold is more liquid today than the paper market. Though its price keeps fluctuating, investors know that in the long run, they will reap the benefits of investing in such a prime commodity.

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Victor

I see gold as a wealth insurance. With a swoosh of an economic catastrophe, everything in your portfolio – stocks and bonds – will take a nose-dive, but gold appreciates in value during such times. This is why I rolled over my 401K to gold-backed IRA. It reduces the vulnerability of your portfolio against stock market crash and plummeting purchasing power of dollar. This infographic explains it really well http://www.meritgold.com/ira