A Rally for Rocks

Daniel Gross has a good article in Slate on the gold rally. Over the past five years, the yellow metal has been on a tear.
I’m not a fan of investing in gold. Remember that gold is simply a rock (or element, I suppose). It doesn’t do anything. In 10,000 years, gold will still be a rock.
Stocks, on the other hand, are part ownership of a corporation. They really do something—they create wealth. A company is individuals coming together to use things, like rocks, to make things that people need.
This is a huge difference, and it’s why stocks always outperform any other asset class given enough time. It’s the same thing with real estate. A house doesn’t do anything by itself. It just sits there.
To be sure, there are periods when “hard assets” do better than “paper assets.” The 1970’s is probably the best example. Unfortunately, I’ve never been able to predict when these times come (or go).
Traditionally, gold does well during turbulent times. Sure, gold will become very valuable in some post-Apocalyptic future. If we’re all going to be riding around the Australian outback with Mohawks ala Mad Max, I wouldn’t mind having a few ounces on me. But even in its role as “traditional store of value,” gold has still been a flop.
Despite gold’s climb, the price is still below its high of $850 an ounce reached on January 21, 1980. (Like the Nasdaq and the Japanese Nikkei, markets like to peak around new decades.)
As a long-term investment, gold has been rotten. Some people are saying that gold will soon make a new all-time high. It could, but keep in mind that inflation has increased by over 150% since 1980. Just to keep pace with the stock market’s total return, gold would have to reach $20,000 an ounce.
Commodity spikes are really suite common, but it’s a mistake to read anything larger into it. If investors are willing to dump good stocks to buy a bunch of rocks, I’m more than happy to help them.
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Posted by on April 13th, 2006 at 3:29 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.