Friday, October 23, 2009

Will Gold Reach $2000 Per Ounce?

photo credit: Contando Dinheiro by Jeff Belmonte

The bad new is that it already did. Gold last peaked at about $850/oz in 1980. Adjusted for inflation, that equals well over $2000 in 2008 dollars (much more according to some measures). Anyone who bought gold in 1980 and has faithfully kept it somewhere safe, has lost at least 50% of their investment if they sell now.

Some may say that is unfair. I have picked an absolute peak from historical data. Why not pick something like the 1983 low of $300/oz? OK, let's do that. Adjusted for inflation according to the Consumer Price Index (which may be conservative), that means we invested $690 2008 dollars.
So with gold at 1000 dollars per oz this year, we made $310. Break out the champagne. Oh, wait a minute, if in 1985 we had bought $300 dollars worth of 8% treasury bonds, we would now have about $1900 in 2008 dollars. We would have made about 4 times as much with the bonds.

Of course, were these calculations widely published, folks could find any number of ways to nitpick them. Math was never my strongest subject. But they would be missing the point. If I get to look back and choose my starting point, I can make most investments (gold, stocks, bonds, real estate) look wonderful. However, when I invest today, I don't know where things will be in 25 years. I am kidding myself if I think I do. And to those who say they wouldn't wait 25 years to cash in, I ask when will you cash in. When will gold (or whatever) reach that wonderful peak price in the next couple of decades? No one knows that either. So one must guess when it is a good time to sell.

I haven't even talked about what happens if you need to draw some income during the term of your investment. Things get much more complicated.

Can't we look at long term trends and extrapolate? Yes, but it will be small comfort when the year to year fluctuations are large. It will always be a wild ride.

Here is one estimate of how gold has performed over the past 400 years:

My precision calibrated eyeball estimates a long term trend of zero interest. Of course, that may be a lot better than this estimate of gold over 600 years (sorry my eyeball can't extrapolate from this):

My apologies to the author of this chart, I can't seem to find my original source so that I can give credit. I will try again soon.

What am I saying? Is there no way that we can judge what is the best investment right now for any given person ? Exactly, there is no way. I comfort myself with all sorts of conventional wisdom, but I can't see that any of it can be trusted.

However, I have found one reference that seems to be holding up very well over the centuries:

1Now listen, you rich people, weep and wail because of the misery that is coming upon you. 2Your wealth has rotted, and moths have eaten your clothes. 3Your gold and silver are corroded. Their corrosion will testify against you and eat your flesh like fire. You have hoarded wealth in the last days. 4Look! The wages you failed to pay the workmen who mowed your fields are crying out against you. The cries of the harvesters have reached the ears of the Lord Almighty. 5You have lived on earth in luxury and self-indulgence. You have fattened yourselves in the day of slaughter.]" style="font-size: 0.75em; line-height: 0.5em; " 6You have condemned and murdered innocent men, who were not opposing you.

James 5:1-6 (New International Version)

How we use what we have is infinitely more important than how we will get more.

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