Over the past decade, the price of gold has risen from about US$270 to US$1358 per ounce. This is a staggering average compound gain of 17.5% per year. Human nature compels us to imagine this trend continuing, but such high prices should make us wary, not bullish.
If we cast our view back to before the most recent decade, gold actually lost value. For the 20 years ending 10 years ago, gold lost an average of 4% per year! This isn’t an after-inflation figure. If we take into account inflation, gold lost much more value than this.
The tough thing about valuing gold is that it has almost no inherent value. Stocks correspond to businesses that have profits, losses, and dividends. We can at least measure the price of stocks relative to the earnings of these businesses. In the case of gold, how do we measure value?
Of course, currencies have a similar problem. Why do we value dollars? The short answer is that governments act in a manner designed to stabilize the value of currencies.
Between the current high price of gold and a lack of confidence in the desire of world powers to maintain the value of gold, I’m not interested in it as an investment.