Fisher Investments Editorial Staff

The Bling Fling

By, 09/10/2009

Story Highlights:

  • Gold has been hovering around $1000 per ounce the past few days.
  • Some folks fear it means runaway inflation is coming; others, a deeper recession.
  • But history shows gold isn't an indicator of inflation or recession—it's just a commodity, and supply and demand drive prices.
  • Long-term gold returns are lackluster—despite volatility, stocks have historically been a much better option.


Ever notice how people really like round numbers? Caller number 10 wins concert tickets. The millionth shopper wins a spree. Beijing started the Olympics on 8/8/08. The Beatles launched a videogame on 9/9/09. And naturally, with gold hitting $1,000 per ounce once again, everyone's looking for meaning in the bling.

Never mind that $1,000 per ounce doesn't, on its own, mean much—round numbers are nice, but they're arbitrary—there's no real difference between $1,000 and $999 or $1,001. Still, gold near an 18-month high is creating a stir. Some, assuming gold is an inflation hedge, think the run-up means runaway price increases are coming. Others, thinking it can hedge against stock volatility, are bracing for the market to discount a deepening recession. Is pricey gold warning of hyperinflation, a deeper downturn, or both?

Not either, necessarily. Gold's been rising since the global stock market's March low—believing rising gold is a sign to exit stocks back then could have meant missing a nearly 60% global stock move. And gold has been a lousy inflation indicator for years. For example, inflation was historically low from 2003-2006, while gold climbed steadily. Gold's last peak was March 2008—just before a slightly deflationary period!

If gold isn't a harbinger of inflation or recession, what is it? Simple: A commodity. Like all commodities, its price is driven by supply and demand pressures. Supply has been constrained—a 9.5% drop in annual production since 2001 has offset global central banks adding supply on the open market by slowly reducing reserves since the gold standard ended in 1971. Meanwhile, demand has increased since 2003, tied largely to the introduction of gold ETFs making gold easier to buy. Demand did increase tremendously in early 2009, most likely as a delayed reaction to last fall's financial panic, but like stocks, short-term swings don't say much about future direction. Fickle investors in any arena make demand trends tricky to nail down, causing rapid, short-term swings.

If anything, this latest burst shows how volatile gold can be—just like stocks. Folks think gold's safe because it's tangible, but so are baseball cards and beanie babies. Fact is, gold may be high now (10 years ago it was just $250 per ounce), but today's levels are still well off 1980's inflation-adjusted all-time high of nearly $1600. Investors who stayed in gold the whole time were rewarded for their patience with a nearly 40% inflation-adjusted loss—hardly the epitome of safety.

Over short periods, gold can certainly be very volatile, acting rather like any, single, volatile stock. But long-term, it's had miserable returns—practically flat over the last 30 years, even including the recent run-up, while stocks have nearly always outperformed similarly liquid alternatives over long periods. If you are going to get near-term volatility, why not enjoy better long-term odds? Forget the bling—stocks still have a lot more green.


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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