(MoneyWatch) You may have noticed that you haven't heard many infomercials lately preaching fear and why you need to buy gold today because prices can only go up -- I suspect you know that's because gold prices have dropped big time and those pitching gold have a much harder sale now. At the time of this writing, the price of gold was plunging $113 to under $1388 an ounce. It's down more than 25 percent from its all-time high in 2011.
All predictions to the contrary, the US dollar hasn't collapsed; in fact, it has recently gained ground. We don't have rampant inflation. Those betting that gold would soon hit $3,500 an ounce will have to wait a bit longer. Why were the predictions of ever rising gold prices wrong? Despite the technical garbage you may have heard in the morning news shows, the obvious answer is because nothing rises forever.
Gold loses out to stocks (again)
When you buy stocks, you buy capitalism, which tends to outperform a glittering metal with limited uses and no dividends. Since the beginning of this decade, gold prices are up an average of 8.35 percent annually. While attractive, US stocks turned in a 14.23% annual return.
Gold bugs would be correct to respond that gold has done quite well since the beginning of this century. Since 2000, gold clocked in a 12.67% percent annual return compared to a paltry 3.21 percent for stocks. But if you go back further, stocks have trounced gold. Since the beginning of 1980, gold has returned only 3.44 percent annually compared to 11.35 percent for stocks. If you invested $1,000 in gold on December 31, 1979, you'd have $3,222 today. If you invested the same $1,000 in US stocks, you'd have more than ten times that amount or $35,816 today. I'm painfully aware of this comparison: I bought gold around that time with my college graduation money. I was sure it was the way to wealth.
Why gold is a lousy investment
Gold is very pretty. But it doesn't produce anything. When I bought gold in 1979, I never dreamed of the Internet or that I couldn't live without my iPhone. Companies produce things that people need and enhance their lives. They produce profits and owning stocks owns that wonderful global capitalism. My gold has barely kept up with inflation, meaning that it returned nothing in real terms.
Gold has had a good run and, for all I know, gold may hit $3,500 in two years, as was predicted back in 1980. A couple of years ago, I made another prediction: that we would not be showing up at a supermarket to buy a gallon of milk with gold. I stand by that call.
Whatever is the next hot investment, my advice is not to board that train.