Monday, April 6, 2009

Resisting the Temptation to Buy Gold

From the Asia Times' Inner Workings blog:

In terms of purchasing power, gold has been a miserable performer over the long term. The following graph shows the price of gold divided by the Consumer Price Index.

Inflation adjusted, gold still trades around half its 1979 peak. The 1979 peak was registered, of course, over Christmas of that year, as the Soviet Union marched into Afghanistan, and therein lies a story. There are lots of ways to hedge against inflation without taking the time and trouble to buy physical gold, which has a number of deficiencies as an asset (it costs money to store rather than paying interest, it is subject to odd supply and demand shocks such as central bank sales). But there is no way to hedge against a collapse of a superpower such as the United States. In 1979 most of the world had taken the measure of then President Jimmy Carter and concluded that Russia would win the Cold War. When Russia marched into Afghanistan, it capped an aggressive campaign by the Soviet Union to assert its influence. Just as important if less dramatic was the so-called Ostpolitik of Germany’s Social-Democratic government and the construction of a Russian natural gas pipeline to Western Europe....MORE

As I said in "Hey Gang, Is That a Double Top in Gold?":
...The answer, I've come to believe is yes, gold does store value.
It does not, however, produce wealth. The first point is well made in The Golden Constant: The English and American Experience, 1560-1976*, by Roy W. Jastram, late professor of business at the University of California, Berkeley:
"Gold maintains its purchasing power over long periods of time, for example, half-century intervals."
The second point is as well made by Econompic as anybody, plus it's in color.

*The book has been out-of-print and commanding $4-500 second-hand. In April it will be re-printed by Edward Elgar Publishing, with new material and updated to 2007.
See also last September's "The Financial Times Sings Praise of Gold. They're wrong."