If you are one of the folks who habitually buy gold bullion as a hedge against inflation, current gold prices are a little disconcerting. Investing in gold was all the rage in the first years of the century as gold rose from $300 an ounce to $1,900 an ounce. After peaking in 2011, gold has lost a third of its value against the US dollar and trades for just over $1,200 an ounce in January of 2014. At current gold prices anyone who bought gold bullion in 2000 at $300 an ounce still can sell at a handsome profit. Should one sell at current gold prices? Let us look at history.
When Gold Was the Standard and then Not
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. In essence, when a country had the gold standard as its monetary system it promised to redeem currency with gold coins. In the USA a twenty dollar gold piece contained an ounce of gold. Thus gold was pegged at $20 an ounce. When the Great Depression hit, President Roosevelt decreed that all gold coins be turned in at the standard rate and exchanged for non-gold currency. Americans were forbidden from owning gold. This was the case for forty years. Then, as inflation took its toll President Nixon took the USA off the gold standard in 1971 when the standard was $30 an ounce. President Ford signed a law allowing Americans to own gold bullion and coins in 1974 as gold climbed against the dollar to nearly $860 an ounce by January of 1980. It subsequently crashed and settled in the $300 range from where it eventually fell to around $200 an ounce until the beginning of this century. When considering current gold prices remember the history of gold prices over the last forty years. This is the start of sound fundamental analysis of gold as an investment.
Comparisons to Buying and Holding Gold
Gold is great when it is going up and not so great when it is going down. Gold does not sent you a quarterly check like dividend stocks. The sole rationale for buying and holding gold is that one does not trust the economy or the government to maintain a stable economy. One believes that war is imminent and therefore buys gold to hoard. When the US dollar weakens and interest rates are low gold is popular. When inflation is rampant like in the 1970s gold goes up in price and everyone buys. When the economy stabilizes gold goes down and stays there for a decade or two, or longer. If you purchased gold in 1980 and held it for twenty years you would have received no dividends on your investment and the value of your investment would have fallen by half in the first year. If you purchased gold in 2000 and held until early 2011 you could have sold for a profit of $1,600 an ounce. And if you bought instead of sold at the high point in 2011 you would have lost nearly $700 an ounce by today at current gold prices. It is best to beware and to pick and choose carefully when deciding to buy or sell at current gold prices.