Given the enormous appreciation of gold from $250 an ounce in 1999 to $500 an ounce five years ago and $1,452 an ounce presently, it’s no wonder that there are so many proponents of a gold bubble, particularly after witnessing the stock bubble ending dramatically in 2000 and the real estate one, ending as dramatically in 2006.
Investors usually try to understand gold rates behavior by comparison with inflation rates or fiat currency developments because the first have been noticed to either increase or decrease according to the latter. It’s a fact that between the end of the 1970s and early 1980s, when the inflation rate had gone up by double digits, so did gold prices, enriching prompt gold traders. Well, it would be hard to connect presently the two, given that the inflation rate in the US right now is just 1.2%.
Of course, there is no denying the dramatic depreciation of the dollar over the last ten years, particularly as a result of the trillion-figure quantitative easing intended to counteract the increasing domestic deficit, debt and servicing interest. And it’s quite a provable fact that any depreciation of the dollar is accompanied by an appreciation of gold. For instance, since June, the American currency has decreased by 10% against other major currencies, whereas gold rates have increased by 14%.
Concerning a comparison between gold and bonds or stocks, gold seems again to fare better. Its present price of $1,452 an ounce means, if compared with its price of five years ago – $500 an ounce -, a 23% annualized return. Or, the return on stocks during the same period has been 1.1% and on bonds 6.1%. Still, this doesn’t indicate a bubble because, unlike bonds, gold doesn’t pay interest, and, unlike stocks, it doesn’t generate earnings, so no one could speak of the ratio of its price to generated earnings being too high and risky.
Besides, for most of our recorded history, gold has been a reliable store of wealth. At the same time, how could an asset that represents just 1% of global assets become a bubble at all, and not the immense amount of the rest – in majority toxic derivatives and leveraged assets? With central banks and retail investors alike asking for more and more gold, it’s more likely that gold prices will soar by comparison with fiat money, so, buying gold would be a wise investment alternative.
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