The Economist has helpfully published a chart that should help resolve two age-old arguments:
1) whether gold is good inflation hedge, and
2) whether gold is a good investment.
Based on this chart of inflation-adjusted prices since 1800, the answer to the first question is “yes–gold’s a good inflation hedge.”
Photo: The Economist
Of course, being a good inflation hedge is not the same thing as being a good investment.
Yes, gold has been a better investment than currency over the past 200 years, but that’s not saying much. For most of this period, gold has done vastly worse than the stock market and worse than most bonds and real-estate. Basically, it has done about as well as T-bills, which generally offset inflation but provide little return beyond that.
Specifically, on an inflation-adjusted basis, gold has generally traded between $300 and $600 an ounce for the past 200 years.
And so how does gold look now, relative to that level?
Less than the peak in the 1980s. But still about 2.5X overvalued.
In other words, if you’re buying gold today, you believe the following (whether you know it or not):
1) Gold is going to trade to a much higher level than it has traded for most of the past 200 years and stay there because the world has changed (“This time it’s different”)
2) Gold is in the early stages of a crazy bubble that is going to briefly drive prices into the stratosphere before they collapse back to normal $300-$600 levels (“Yes, it’s a bubble, but I’m going to be smart enough to sell before it bursts.”)
Those, by the way, are the two beliefs that are common in every investment bubble. Some people think the world has changed and that it’s “different this time.” (It usually isn’t.) Other people think that it’s just a bubble but they’ll be smart enough to get out ahead of the crowd. (Most don’t).
So now you know!
(By the way, if you buy gold now thinking it will be a good inflation hedge and gold prices collapse to their normal levels, gold will not have been a good inflation hedge–unless the currency collapse is even worse. Your entry price matters…)