/ 19 September 2011

Gold rush: An exercise in futility

Gold pushed past the $1 900/ounce in the first week of September for the second time in as many months as the precious metal’s popularity gained further traction in uncertain financial times.

By September 6, the spot price of gold was $1 905.30oz, just under the all-time high reached in August of $1 913/oz.

We speak to analysts and traders on the viability of gold as an investment as markets fluctuate wildly in the midst of global economic turmoil.

Although dropping back slightly over the following two weeks, to stand at $1 775.50/oz when markets opened on September 16, the yellow metal still has upward momentum, judging by the poor financial data coming out of the world’s economic powerhouses.

The market is ripe for a further run on the yellow metal, with growth figures out of the world’s biggest economy, the United States, still sluggish at best and the European Union struggling with mounds of sovereign debt.

As such, investors are scurrying for a haven to stash their cash and for the moment gold is seen as the safest place. But before you put your life savings into gold, consider how the metal is really faring.

Looking good
If you had bought an ounce of gold in October 2009 at $990.20/oz, and kept it until September 6 closing price of $1 873/oz, you would be enjoying a tidy profit of $878/oz which equates to a whopping 88.2%.

Better still if you had bought way back in 2006 at $568/oz and sold as the closing bell rang on September 5, you would be smiling with a return of over 190% — $1 236.50 in money terms.

You could go even further back and see how much money you’d be sitting on had you bought in 2001, but you get the idea and may already be kicking yourself.

So while the could-haves and should-haves run through your mind, let’s examine why it’s not so bad to have missed the gold rush.

Back to the future
In January 1980, the last time the price of gold soared exponentially to a then high of $850/oz, the Soviet Union was invading Afghanistan, oil prices were high and the world was feeling the effects of extraordinary inflation.

Although the problems now — the enormous debt levels and sagging growth of previously prosperous nations — are quite different, the effect has been the same: people are unsure where to keep their money safe, so they put it in gold.

But as fast as the gold price soared back then, it slowly plummeted in the following years to hover between $300 to $500/oz up until the end of 2005 with the price only breaking the $850/oz mark in January 2008.

In effect, if you bought into gold the last time there was an exponential rise, you would have waited close to three decades to get your money back.

Of course, the value is all relative: $850 in today’s terms is far less than it was worth in the beginning of the 80s.

Even though gold might be on the up and up now, where will it be in 20 years, after you have re-mortgaged your house to stock up on krugerrands?

Share your own way
Unquestionably, a commodity that has soared by over 200% in less than two years is attractive, but the long-term viability of gold as an investment medium is in some ways flawed.

Besides the fact that increases in the gold price have been understated — even muted — for the past two decades, the precious metal offers no intrinsic value.

Although it does have industrial uses in medicine, electronics and even glass-making, gold is still and will forever be used primarily as a symbol of status.

So while gold looks shiny on your ring finger and around your neck, there might be some better ways of investing your money.

For instance, while company shares would not have grown at the rapid rate the gold price has over the past three years, gold offers no yield and no dividends.

Apocalypse now
Nevertheless, despite all the evidence to the contrary, there is a school of thought that you will never go wrong with gold, no matter how futile it seems in the short term sense of making a quick profit.

Doomsayers will have you believe that should the world suffer some sort of catastrophe, where the world’s economies crumble and paper money will be worth nothing, they will be safe from danger with their cache of gold.

But, before you start digging a hole in your back garden for your treasure chest, think about how safe your stash will be in this post-apocalyptic futuristic world of economic doom.

It won’t be as easy as dialling 10111 if someone comes along to Mad Max you out of your treasure dome, will it?

Keep in mind that while you stockpile your baked beans and gold coins in the bunker beneath your front porch, there might be ten other members of tomorrow’s broken world who have been saving up for the biggest gun they can find to take it all away from you.