Gold over the last two years
Two years ago, gold was trading for the bargain price of $877.00 an ounce according to Kitco.com. At yesterday's closing price of $1,501 an ounce, that represents a 71 percent gain. While there's no denying this great gain, a broad US index fund like the Vanguard Total Stock Market Index ETF (VTI), clocked in an almost identical 71 percent gain. And because the long-term capital gains tax rate is not available on gold, the index fund actually outperformed gold on an after-tax basis.
Gold since 1980 - The long-run
It's somewhat arbitrary to pick a date to measure the long-run. I use the beginning of 1980 since that happens to be when I bought gold coins at $664 an ounce with the absolute certainty that it wou7ld hit $2,000 in a year or two. Despite the fact that gold has more than doubled, my return still amounts to a very unspectacular 2.6 percent annual return. It also lagged inflation, which means that I can buy less today than when I made my investment, even before Uncle Sam takes his cut of my nominal gain.
While my $3,320 college graduation money investing in gold in 1980 is worth $7,500 today, I probably would have been far better off if I had invested in American capitalism. Because with the US stock market racking up an 11.6% annual return, my $3,320 would have been worth $102,853. A $95 thousand greater return than my gold, how depressing is that?
My take on gold
While gold has not been a better investment than US stocks in the long or short-run, it's trounced the stock market in the mid-run. It's risen from $290 an ounce in the beginning of this century, clocking in a 15.7% annual return, and has far outpaced the 1.7% annual return of the US stock market.
My advice is not to bet the future on the recent past. If you believe that gold's 15.7% annual return will continue for another two decades, then you'd better believe in the possibility of gold at $27,700 an ounce. I'd be willing to bet that it's pretty unlikely. In fact, I'm willing to make a prediction and say "no way!"
I think that most people are buying gold right now for the same foolish reason I did in 1980 - the unwavering belief that they'll get rich. And that would be exactly the wrong reason to buy gold.