Clif Droke
June 16, 2008
©2002 - 2008 Publishing Concepts

Gold as a long-term investment?
[The following is excerpted from the June 2008 issue of Gold Strategies Review]

On the contrarian sentiment front, we find an article in the June 2 issue of Business Week entitled, “All that Glitters is Not a Great Investment.” The article was accompanied by a statistic, which noted that adjusted for inflation, gold is down in price from its 1980 summit.

The article pointed out that the yellow metal’s 37% rise from $662 to over $900 in the past 12 months compares favorably with the S&P 500 performance over the same period, and that gold is up 150% in the past five years. However, the article also referenced a report from Wharton School of the University of Pennsylvania, which warned that gold “lacks luster as a long-term play.”

“Gold is a commodity, and it goes up with inflation,” says Jeremy Siegel, a professor of finance at Wharton. “But when you buy at a period of high anxiety, it’s a terrible investment.”

Actually, Professor Siegel, you have it exactly backwards. In times of great uncertainty over the financial system and the economy, gold typically reigns supreme as a safe haven investment. Investors line up to buy gold when anxiety over financial crises (real or perceived) is highest. This accounts for much of the strength in the gold price in 2007 and early 2008 as the sub-prime crisis was reaching its apogee.

Gold also tends to outperform almost every other major investment sector during times of late-stage runaway deflation, which occurs during the final 3-5 years of the 120-year cycle. This should mean another huge out-performance for gold coming up between the years 2011-2014. In fact, the final years of the current Kress 120-year cycle may even witness gold outstrip its percentage gain during the 2002-2008 period.

As for gold performing well during inflation, well that’s not entirely accurate either. It’s true that the price of gold tends to benefit during the final “hard up” phase of the K-wave, such as occurred in the late ‘70s and up to 1980. But during times of “normal” inflation (i.e., non-core inflation), gold doesn’t perform as well as other investments adjusted for the prevailing inflation rates.

If you’d like to see some good research and more in-depth discussion of this topic, I recommend the article available on the InflationData.com web site, entitled, “Gold is a ‘Crisis Hedge,’ Not an Inflation Hedge.”

Long story short, the writer summarizes his findings thusly: “As a crisis hedge Gold is excellent. But as an inflation hedge it has a very spotty record although it has had its moments.”

--Clif Droke
clif@clifdroke.com

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