Sunday, February 10, 2008

Gold Goes Mainstream

"The new gold rush is on. As inflation has picked up and the stock market has tumbled, investors seeking a safe haven have piled into gold, driving the metal to all-time highs. ... The precious metal has been a horrible hedge against inflation. To keep pace with inflation going back to 1980, gold futures would need to be above $2,228 today. Believers see that as a sign that gold has a lot of room to rise, and predict it will surpass the $1,000 mark this year. ... It is highly unusual for traditional investors such as mutual funds and trust companies to invest so much in a commodity they once viewed as a non-productive asset. ... Brett Galagher ... at Julian Baer Investment Management [said], 'We don't feel the dollar is a good store of value'," WSJ, 31 January 2008.

No, the dollar isn't "a good store of value", hence it's not money. As for gold being an inflation hedge, go back to 1913. Gold was $20.67, it's $903 as I write, 44X as high. That's beaten inflation over the long run.


W.C. Varones said...

That's only about 4% annual growth since 1913. But the dollar was on the gold standard until 1971.

When Nixon took the dollar off the gold standard in 1971, gold was $35 per ounce. The current price of over $900 per ounce means more than 9% annual growth -- or, more accurately, 9% annual destruction of the value of the dollar.

Independent Accountant said...

The dollar price of gold was $20.67 until 1933 when FDR devalued the dollar, raising gold's price to $35 and making it illegal for US citizens to own. The US has not been on a "true" gold standard since 1913, when the Fed was formed. That's why I started with 1913. Nixon "closed the gold window" to foreigners in 1971, setting the dollar free to "float" or "sink" as you choose. If you wish to start measuring the dollar's destruction from 1971, feel free.