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