Avoid Gold as an Investment

Is it time to embrace or avoid gold as an investment? Gold bullion has been rising in price for over a decade. Is there no end in sight? Will the world economy collapse taking all fiat currencies with it? Or, will the situation of the late 1970’s and early 1980’s repeat itself. Whether to choose gold, or avoid gold as an investment, will depend on an assessment of the economy going forward and a clear sense of investor sentiment. Much success in investing in gold has to do with timing.

Here is a quick look at gold prices over the years. Obviously prices fluctuated during each year while here we only have the high price for the year. When the USA went off of the gold standard in 1971 the price of gold in dollars started to climb. Throughout the inflation driven 1970’s the price of gold increased nearly twenty fold. At the same time, however, bank CD’s were yielding 14% and more at the end of the 1970’s. Then gold hit its upper limit around $600 an ounce and fell to half that price. It languished in the $300 range for nearly twenty years before falling into the $200 range. It was from that low point that the current, more than decade long, bull market in gold began. If one compares the 70’s and early 80’s to the last ten years one might wish to avoid gold as an investment. We are a decade into a bull market at a time when the world economy is starting to mend. Although gold has done well for more than ten years the real question is, is Gold a profitable investment today?

A Quick Look at Gold Prices


Gold in Dollars per Ounce

1970 $37
1975 $140
1980 $590
1985 $327
1990 $391
1995 $387
2000 $273
2005 $513
2010 $1,410
Current (February, 2012) $1,774.84

But, before you totally avoid gold as an investment let’s think about how the US and other nations intend to work their way out of the financial collapse and recession that began in 2008. Trillions of dollars in equity disappeared when markets collapsed in 2008. Stimulus programs by many governments have kept credit flowing but at the expense of simply printing money. The US Federal Reserve is buying US Treasuries in order to drive down interest rates. This is part of the so called Bernanke Doctrine. Europe and China are following suit. If the way out of the recession is to print money then the gold bugs are right, buy gold and retain value while fiat currencies fall by the wayside. On the other hand, take look at the path of gold for the last thirty years and compare to strong stocks. Procter and Gamble and Exxon/Exxon Mobil are selling at more than thirty times what they sold for in the 1970’s and have paid continual dividends as well. And, these companies did not go into hibernation for nearly twenty years like gold did from 1981 to 2000. As always, if you are looking to invest in gold or avoid gold as an investment, pick stocks to invest in, or wondering about picking up some cheap real estate do your fundamental analysis first. And avoid investments that you do not understand.

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