Pretty much everyone seems to agree that gold prices are in a bubble right now, so the only question left to ask is: when will the bubble burst? We put that very question to our readers last week, and the consensus centred around $2,500 an ounce.
Investors are rushing to gold for a variety of reasons. Some see the yellow metal as a hedge against central banks’ inflationary printing presses; others consider it a safe haven from the doomed financial sector; and plenty more are just hoping to time their exit at a tidy profit.
With few signs of good news emerging from the world’s biggest economies, the speculators have good reason to expect that fears about the strength of global growth will continue to burnish gold’s allure for some time yet. After all, governments cannot print more gold.
That might be true, but history suggests that gold has not been a very reliable store of value. One of the gold bugs’ most popular arguments in favour of owning the yellow metal — that its price is still well below the inflation-adjusted 1980 peak — also demonstrates that investors who bought back then have earned nothing in 30 years. The longer-term outcome has sometimes been even worse.
“A fifteenth-century gold bug who’d stored all his wealth in bullion, bequeathed it to his children and required them to do the same, would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90% over the next 500 years,” wrote Dylan Grice, chief global strategist at Societe Generale, in a 2009 report.
And if a financial apocalypse does indeed wipe out paper money, good luck swapping a lump of useless metal (or a share certificate in your gold ETF) for a tin of beans. Cigarettes and alcohol will probably be more valuable.