Gold Hits $1,000 Per Ounce

The gold bugs are out now that the metal has crossed the $1,000 an ounce mark. Sell everything and buy the yellow stuff, they advise. Sadly, memories here are long, and the truth remains that holding gold long-term is almost as good as flushing paper dollars down the toilet except one has the storage costs to consider as well.

Before this year, the top price for spot gold was $850 an ounce, and the COMEX futures record contract was $875. This was back in January 1980, when economic conditions were also pretty shaky. Adjusting for inflation using the Consumer Price Index as a guide, $850 dollars from 1980 would be worth about $2,315 in 2008 currency. In other words, long term holders of gold who bought in January 1980 are still out of the money and will be until gold doubles from its current record price. Amazing that a hedge against inflation hasn’t kept pace with inflation, isn’t it?

Gold, though, acts like most other commodities. The retail buying frenzy starts when new records are set. It’s at that point that the pros are liquidating their positions and booking their profits. Although the falling dollar is making gold a one-way bet right now, the folks who got into gold as the year began are probably quite happy to sell off a portion to ensure a tidy profit. The amateurs who are buying now for purposes other than making jewelry aren’t going to profit very much.

After all, gold is up a bit over 17% for the year, and 17% ROI isn’t bad at all. However over the last 28 years, it has seen the very same rate of return on investment, up just over 17% from $850. So, who’s making money in gold? People who buy and sell; that is traders, not the buy-and-hold gold bugs.

Buy-and-hold makes sense in stocks and, in the right economic conditions, bonds. It doesn’t make any sense in commodities. No one advises to buy baser metals and hold them for years. No one advises buying computer chips and hanging onto them until 2050. Gold is different, though. Gold just brings out the weird in some people.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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