Writing for the Vangaurd Blog, John Ameriks offers these thoughts about how the world’s smartest investors are foolishly piling into gold and how some of the richest people in the world are deluding themselves if they think the metal will help preserve their wealth.
We’ve been hearing a lot about gold over the last few months, related to concerns about inflation, the creditworthiness of various governments, and fallout from the financial crisis—all against the backdrop of what is the most significant increase in inflation-adjusted gold prices since the early 1980s.
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Over this entire 140-year period, the average price of one ounce of gold was $480 (in 2010 dollars). If the gold price remains stable through the end of this year—not a given by any means—there will have been only one other year in the last 140 (1980) in which the inflation-adjusted average daily price of an ounce of gold was higher than in 2010.
In other words, there was only one year in the last 140 when it would have cost you more in terms of foregone alternative goods and services to become the owner of an ounce of gold. These data show that during some periods of extreme inflationary or broader economic distress, gold prices have increased sharply, only to recede back to lower levels as things return to normal.
Of course, what is conveniently omitted from the discussion above is that gold was money during 100 of those 140 years – that’s kind of important. As for the future, somehow, it’s not clear to me that, this time, the gold price is going “back to lower levels as things return to normal” – whatever “normal” is these days.
![[Most Recent USD from www.kitco.com]](http://www.weblinks247.com/indexes/idx24_usd_en_2.gif)
I suppose his recommendation is I that should be piling into US STOCKS. I guess he could be right, production is way up and costs are way down and South Africa has more electric than Iraq.
It’s hard to argue with the statement “gold is money” statement, but one could still argue that gold is money, and always has been. Perhaps you meant to say that gold was currency?
Because, you know, there was paper currency back then too. Yes, yes, it was backed by gold…. well for a portion of time, it was actually backed by silver for a much longer time.
I guess I see the question of “money” to be much more universal. I’d like to see gold priced in bushels of corn, porkbellies, or some other commodity. Perhaps a more durable commodity like portland cement or steel. What about copper? What about median wage/hours?
Maybe it’s just my opinion, but your definition seems quite narrow with respect to money, at least in this context. I thought it was just a medium of exchange.
Chuck
I could have said that paper currency had a fixed exchange rate based on gold (i.e., there were limits on the amount of money you could create), but, I thought when I said “gold was money” everyone knew that is what was meant. If not, then there you have it.
I think the relevant part of the chart is from 1971 to present. This was when Nixon severed all ties between the dollar and gold.
I think trading you bills for bullion remains a good investment for the long term (10+ years). Worst case scenario is that you leave a pile of gold to your children.
Only a ridiculous mind would say that.
The life is not a statistical stuf related to the past. And if it was what would this blog says at the eve of the soaring price at 80’s?
Now, the welthy society will buy gold because they have a huge money that is been threatning to loose its value.
The confidence in the agents of the financial market has plunged.
There’s no one to believe. The credit crunch is just beginning and the troubles will be so much worse than now. There’s no easy way out of this mess. We’re here after used all the financial instruments of the 1929 crisis. It will be not simple to manage the economy out of the crises.
The economical models are no efficiency anymore. So, probably we’ll have to change the economical rules. By changing rules there will be a lot of loosers.
If you don’t want to be a looser it’s beter you decide righ now how to avoid the financial chaos.
I think the gold rules will not be change, because it’s not simple to change it.
Since Vanguard’s blogger John Ameriks clearly has a bias for what he calls “alternative goods and services” (in other words, stocks), a look at how the Dow has performed relative to gold would seem to be more relevant than his arbitrary 140-year inflation-adjusted time frame.
As it happens, Stocks-For Beginners.com has a very nice set of charts on this at http://www.stocks-for-beginners.com/gold-market-price.html that includes nominal and inflation-adjusted prices and annual returns since 1900 as well as the Dow-gold ratio over that time frame. The site’s reasonable conclusion:
“You will notice that Dow Jones is generally outperforming the price of gold. Very approximate conclusion could be that every 20 years of Dow Jones outperforming the price of gold (shaded in light blue) is followed by around 10 years of gold outperforming the Dow Index (shaded in light orange). Average historical Dow/Gold ratio is 10.13. This means that based on historical average it takes 10 ounces of gold to buy one share of the Dow Jones index. At the moment (05-29-2010) currently Dow/Gold ratio is 9.46, which is already below historical average. Will gold market price stop rising at this point? It could, but even more probable is that it will grow a bit more, so that Dow/Gold ratio will touch historical support at around 5, before the cycle will turn around again.”
Actually, pegging an end-to-trend at a ratio of 5 is probably way conservative, given markets’ propensity to overshoot and the seriousness of the current debt crisis. The ratio bottomed at 2:1 during the Great Depression and close to 1:1 in 1980. Since we have debt levels comparable to those at the end of the Roaring ’20s compounded by resource constraints and really bad demographics, 2:1 is probably about right. So if the Dow busts its March 2009 low of 6,440 and goes to, say, 5,000, gold probably goes to 2,500.
Disclosure: Long gold, short the S&P and no affiliation whatever with Stocks-For-Beginners.com.
Long gold, short the S&P500 – it’s hard to disagree with that…
Vanguard hasn’t found a way to make money selling a mutual fund for gold with healthy management fees. Therefore, gold = bad investment. Pretty transparent.