And even in nominal terms, gold's gain over the last 30 years isn't very impressive. A checking account has outperformed the metal. The average interest-paying checking account returned 92 percent between 1983 and December 2009 alone, compared to 68 percent for gold over the full 30-year period. Remember that gold doesn't provide any income, unlike many checking accounts.
Historically, the jewelry industry and a few central banks, including China and India, have accounted for two-thirds of global demand, with the rest coming from investors, some manufacturing industries and dentists. But gold's surge over the past four years has turned the market over to investors -- although speculators might be a better word. Private investors/speculators now own more than 30,000 tons of gold, surpassing the combined holdings of all the world's central banks.
The fundamental reasons cited for gold's sharp gain over the past few years don't pass muster. First there was the credit crisis. But that's been tamed, though obviously the financial system remains fragile. Now it's worries about inflation and the dollar's recent decline that are supposedly driving gold higher. As gold is priced in dollars, there's a natural inverse relationship between their prices. But earlier this year, European debt woes were seen as a reason to buy gold, and those woes sent the dollar soaring.
As for inflation, the massive fiscal and monetary stimulus the U.S. government and Federal Reserve have embarked upon since the financial crisis broke in 2008 may one day push consumer prices higher. But that day isn't today. Consumer price inflation is running at a 1.1 percent annual rate, down from 2.7 percent at the beginning of the year.
What's happening now is that investors/speculators are buying gold because other investors/speculators are buying gold. Legendary economist John Maynard Keynes said that investing in stocks is like trying to judge how others will judge a beauty contest. The same is true with other financial markets such as gold. Investors hear that hedge fund icons John Paulson and George Soros are buying gold, so they want in too. Tom hears that Dick and Harry down the street are buying gold, and he wants in too.
So gold's intrinsic value now stems from the fact that many people are buying it. But as we've seen with other financial markets over the years, bubbles eventually burst, and this one will too. It's a fair bet that Tom, Dick and Harry are a lot more likely to lose money in the process than Paulson and Soros.