A piece of research highlighted by CXO Advisory really gets to the heart of what gold is — a collectible, ie. a non-productive asset that has shared psychological value among humans due to established beliefs.
Thing is, according to the paper, other collectible hard assets, such as old stamps and art, have outperformed the yellow metal on a 108-year time frame:
Using Stanley Gibbons stamp catalogue prices to construct a value-weighted British stamp price index/returns and returns for other asset classes over the period 1900-2008, they conclude that:
Stamps generate a nominal (real) annualized return of 7.0% (2.9%) over the entire sample period, worse than equities, better than bonds and comparable to art (see the charts below and the blog entries of 1/29/10 and 11/13/09). The volatility of stamp prices approaches that of equities.
Nominal stamp prices decline by 1% or more in only four years, but are flat over extended intervals (1949-1957 and 1983-1994). Strongest nominal gains occur at the start of the 20th century, from the mid-1960s through the 1970s and during the 2000s.
Over the entire sample period, the 2.7% annualized real return for art is close to that for stamps. There is a boom in stamps (but not art) in the 1970s, and a boom in art (but not stamps) in the 1980s.
While the annualized 0.7% real return for gold over the entire sample period is much less than that for stamps, price patterns for gold and stamps are similar.
Gold owners can even preserve their bearish instincts by buying the bull vs. bear collectible pictured above. In fact there are all kinds of hard assets with well established psychological value all around us. Thus gold isn’t that unique deep down. Even if it was used as currency in the past, if you own something that people value, they’ll simply give you whatever currency you ask from them for it and then you can go pay someone with that currency. Deep down, currencies are just intermediaries for the exchange of value, they aren’t value in and of themselves. That’s why if I’m worried about inflation I’d rather just own the Mcdonald’s brand or something else that is both well entrenched in people’s minds and actively grows its value.
The author owns shares of Mcdonald’s.
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