Investing in Gold

It’s not uncommon for my clients to ask three things: 1) Where is oil going? 2) Where are the markets going? and 3) Where is the price of gold going? Sometimes I feel they may regard my answer as overly flippant, but my response to all three questions is “I don’t know, and anyone who does isn’t working for a living.”

Well, except when it comes to gold – then I add in a little extra commentary. I still don’t know where it’s going but as a long term investment it hasn’t done much as far as I can tell. The price of gold back in 1800 was just a tick below $20 USD per troy ounce. By the time gold reached $1,000/oz about 208 years later that translates to less than a 2% annualized average rate of return according to my handy financial calculator. Which seems in line with the thinking that gold is a store of value as it’s growth is in line with inflation. Of course, that is another way of saying that the real return (inflation adjusted return) is pretty close to 0%.

If you look at the inflation adjusted price of gold, it’s all time peak was still in 1980 when the price was the equivalent of over $2,000/oz when adjusted for today’s dollars. In other words, gold would have to be trading at over $2,000/oz today to be at it’s all time high, but currenty it is close to $800/oz.

To be fair, gold’s price hovered around $20/oz for about 130 years, so if you only look at the last 78 years, it’s a bit of a different story. However it seems to me that there are other investments will give you higher rates of return with less volatility – investing in gold seems more of a speculative strategy and I have no clients with direct investments in gold.

Interesting Side Note: I read somewhere that if you took all the gold that has ever been mined in history, you would only have a cube that measured 19 metres on all sides.

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • Michael James

    Your article prompted me to read Wikipedia’s entry about gold. Gold prices weren’t allowed to fluctuate until 1968. Since then gold has gone from $200 (in 2006 dollars) to about $760 today (in 2006 dollars). This is a real compounded return of 3.4%. I share your feeling that gold isn’t likely to be a good investment in the future, but given the history of government price fixing and the fairly short history (40 years) of market-driven prices, it’s hard to be sure of gold’s long-term prospects.

    The stat about all the gold ever mined would fit in a cube only 19 meters on a side is interesting. According to Wikipedia, “in 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes.” At 19.3 tonnes per cubic meter, this is a cube only 6 meters on a side. This is a factor of 30 times smaller than your cube. Perhaps the discrepancy comes from most of the gold ever mined having been used for various purposes and lost?

  • Preet

    @Michael James – I agree that since gold’s price has been released from fixing it has had a positive real rate of return which is why I put in the note about looking at the shorter time period, however even at 3.4% and the volatility you take with it – I’m happy to wait for another few decades to see how it plays out without any skin in the game. For those who want to speculate – by all means, there is the potential to make lots of money if you make the right calls but I think we both avoid that game for the most part.

    Since 1980 it’s had a negative real return, so for the last 28 years it hasn’t looked so rosy – but of course that’s data mining in that I looked for the peak.

    I think the discrepancy is that the “global gold supply” is different from “all the gold ever mined”. Wikipedia indicates that at the end of 2006 there was 158,000 tonnes of gold ever mined in history (that they know of). This is confirmed by The World Gold Council as well.

    It is also interesting to note that the same article estimates that the gold supply will last another 45 years at current consumption rates. Perhaps with a limited supply and seemingly increasing demand there is some hope for gold as a long term investment/speculation? Again, I’m happy to watch from the sidelines.

    However, an additional consideration is that the transaction costs, but more importantly the storage and insurance costs, will eat into the returns as well. So if gold continues at 3.4% real gross of costs, then the real returns after costs will be less than half of that I would guess.

  • Patrick

    @Michael James – Gold has been used since before Roman times, so there is no lack of data. My understanding is that it has essentially held its value since then, so in the long run, I think it keeps equal with inflation. However, I’ve looked around the internet and I can’t find any references to back up that claim…

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