Gold: The Last Cheap Asset Class?

The year is 1980. While everyone else has been losing money, you’ve made an absolute killing. You’ve made so much money in fact that you move out of your $75,000 house into a $150,000 mansion. You also treat yourself to a couple designer pin stripe suits with extra large shoulder pads. What’s your secret, investment genius? One word: GOLD. While everyone investing in stocks watched their portfolios get decimated— last year BusinessWeek published its legendary cover “Equities Are Dead”— you rode gold from $35 to over $650. You even flirted with an all time high of $850. Your stake has increased more than five fold in two years - while the S&P 500 languished around 130.

Fast forward to today. The S&P 500 has risen ten fold. Today it trades around 1,360. Similarly, housing prices have more than doubled to $195,000 - and that’s after the housing bubble’s collapse. Emerging markets, which barely even existed in 1980, are near all time highs today. Just about every investment you can name has exploded upwards in the last 27 years. Except gold.

In 1980, gold peaked at $850 per ounce. Today it’s only slightly higher. Name one other investment that trades where it did 27 years ago. You can’t. There are none. And bear in mind, inflation has been eating away at the dollar over the last 27 years. So 2007 dollars are worth a lot less than 1980 dollars.

I know, we’ve all heard the claim before: based on inflation gold would have to trade above $2,000 an ounce to match its 1980 high. However, it’s only when you really consider the precious metals’ performance relative to other assets —stocks, real estate, etc— that you begin to see what value gold has even as it hits record highs.

Since 2001, gold has outperformed stocks, bonds, and just about every investment you can name. And it’s done this with no yield, no cash flow, and no Wall Street gurus pushing it on their clients. Yet I would wager that less than 1 in 10,000 investors actually own the stuff. Only 10% of worldwide demand for gold is for investment purposes. This won’t last for long.

Globally, entire gold markets that didn’t exist in 1980 are now beginning to buy the precious metal. Vietnam started trading gold futures in June 2007. Already the exchange trades around $100 million in gold futures a day. China’s Shanghai Futures Index started trading gold futures just a few months ago. The latter country has already surpassed the U.S. as the second largest consumer of gold behind India. Gold is a great inflationary hedge.

However, in light of the growing number of gold investors, it’s going to be a great investment simply due to supply and demand as well. Sure, $2,000 gold may sound ridiculous. But $1,000 gold sounded ridiculous just three years ago. And we flirted with that level earlier this year. I strongly suggest buying gold during this recent pullback if you haven’t already done so. Bear in mind, I’m not a trader. I’m an investor. I look for investments of value. And to me, gold remains one of the last cheap asset classes relative to its historic levels.

Disclosure: Author holds a position in GLD

Comments

[egel:]

If Gold is such a good inflationary hedge why did it not fulfill this characteristic in the past 20 years (gold still being at the 1980 level)?

2008 Apr 09 08:48 AM

[Hugh:]

I'm sick of hearing about the very, very short lived spike to $850. Seems like everyone keeps returning to this novelty as though it has meaning.

The fact that it didn't last more than a day or so proves that it has no meaning.

What gives a price meaning is SUPPORT. If, in 1980, the price of gold held $800-900 for several months, then, and only then would it have meaning.

Also, the idea that gold will return to the $850 price in real dollars, (inflation adjusted) is without any merit. A one day spike (or was it five minutes?) 28 years ago tells us zero (nothing, zilch) about what the market will do tomorrow or next year.

Come on, get real.

2008 Apr 09 06:19 PM

[TERN:]

I agree partially with Hugh and Pangea. I tried to sell at the top of that 1980 spike myself and the best I could do was 650-670, that is how fast it vanished.
However, I do not agree that that spike tells us nothing. Its history tells us about how the spike formed: an oil price spike, collapsing confidence in the USD and geo-political tension on the boil.
Precious metals typically spike under such conditions.
I do expect a repeat--in inflation adjusted prices.

2008 Apr 09 07:23 PM

[Hugh:]

What the spike of 1980 tells us is that a very, very, very small number of people had a vision of the future that lasted a very, very, very short period of time.

What this all means is that the spike was meaningless.

2008 Apr 09 07:57 PM

[praha1:]

We are in a secular bull market for commodities. Additionally we are now 'well' into a secular bull market for commodites. It really doesn't matter which commodity you research. They are all in a bull market. Paper assets will 'likely' continue to decline for some time and tangible assets will 'likely' continue to appreciate (with or without the current salient macroeconomic stimulus). Tangible assets include gold.

2008 Apr 12 12:19 PM

[maher:]

$195,000 Home? Where do you live, Mars? You can't get anything below $800,000 where I live!
I find your article trite and boring.

2008 Apr 14 01:44 PM

[jjason:]

I wouldn't pay $100.00 an ounce for anything. Nor would I pay 11 million for an automobile ( someone did recently). Nor would I buy a house below sea level.

Be careful following people who try to make you believe that they know better about how to make money for you. Half of them are wrong and half of them are right. The prices for everything have gone up and down over time.

Investing and making a profit is not easy. I look for companies in the US that pay dividends over 4%, have potential for capital gains and that have proven, successful, track records.

So far, I have not found a company involved in gold that meets my criteria.

2008 May 25 06:41 AM