Gold Hits New High

Concerns about the stability of European banks drove gold to a new all-time high on Tuesday, September 7, 2010. The Wall Street Journal ran an article on Tuesday suggesting that the stress tests for European banks may have understated their exposure to government debt. The fear is that some European nations may yet default on some of their obligations. Gold closed at $1,257.30 an ounce.

So, is it time invest in gold?

Investors are rewarded for investing in gold only if they can find someone else who is willing to pay more for it than they did. This is not a problem as long as the price of gold is going up as it has been for the past several years. But when the price of gold is going down or moving sideways, investors who hold gold may not be able to sell it without incurring a loss.

This naturally leads to the history of the price of gold. Has the price of gold risen in a manner that has made gold an attractive investment?

The world went off the gold standard in the early 1970s. Previously the price of gold was controlled by the world’s largest central banks under the terms of the Bretton Woods system which was negotiated after World War II. So, we’ll focus our attention on the period that followed.

In 1975, 35 years ago, gold was priced at an average of $161 an ounce. Today gold is trading at roughly $1,250 an ounce. This is a growth rate of 6.0%.


Source: http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

However, notice the price of gold actually drifted lower for the better part of this 35 year period. How would you have felt had you purchased gold in the late 70s or early 80s?

To put this in some perspective, the Standard and Poor’s 500 Index returned 11.7% from 1975 to 2009. (Source: Standard & Poor’s Index Services Group)

Based on this data alone, gold does not appear to be a particularly attractive investment.