Does gold live up to its hype?

Recent concern over the 2008 stock market crash, potential inflation and doubts about the strength of the dollar have led many investors to buy gold. Indeed, gold is at its highest price in history, over $1,400 an ounce, says Pamela Villarreal, a senior fellow with the National Center for Policy Analysis.

Gold has many advantages: It tends to rise in price when other investments are falling; it protects against inflation; and it provides liquidity. Gold investments can be used to diversify one's portfolio. But does gold live up to its hype?

Over the past 35 years, the average annual real (inflation-adjusted) rate of return on gold was 1.56 per cent.

It has fluctuated over shorter time periods: the largest gain for gold in one year was from 1978 to 1979, when the price doubled from $208 to $459, for a return of 98 per cent.

However, if an investor had bought gold that year and sold it in 1984, the five-year real rate of return would have been – 14 per cent.

If the investor held the gold 10 years and sold it in 1989, the real rate of return would have been –6.5 per cent.

Over the past two years, gold and gold-related stocks have generally outperformed the S&P 500. Indeed, the past 12 years for gold have produced double-digit returns. But it remains to be seen how long this growth will continue.

Saving for retirement or other long-term goals means giving careful consideration to where money should be invested in order to receive the best possible returns. While investing in gold is one of many options, it has not historically performed as well in the long-term. It is a hedge against inflation, but like any other investment gold should not be the only egg in the portfolio "basket," says Villarreal.

Source: Pamela Villarreal, The Return(s) to Gold, National Center for Policy Analysis, June 16, 2011.

For text: http://www.ncpa.org/pub/ba747

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 21 June 2011