Gold’s Days In The Sun Fade To A Precious Few

On the charts that track the ups and downs of the financial markets, the jump in gold prices that caused such a stir in the early weeks of 1996 is starting to look more like a molehill than a mountain.

When the price of gold climbed above $400 a troy ounce to its highest level in more than a year and a half, many analysts proclaimed that a “breakout” had occurred.

But a few weeks later, gold has fallen back to the mid-$390s, and now hovers once again within the narrow range where it has fluctuated for most of this decade.

Perhaps the gold market will spring back to life again soon. Action in the futures markets Friday, where the metal gained more than $1, was promising.

But for the present, the January spurt has so far been just another false start in a the long list of disappointments dealt to gold’s devoted band of followers over the past 15 years.

Gold has performed poorly - both in absolute terms and by comparison to the paper investments traded in the bond and stock markets.

In fact, if you look at all of modern financial history, says investment adviser Norman Fosback, the same kind of picture emerges, on a scale magnified by time.

When Fosback studied returns of a variety of investments over the past 125 years, he reports in the newsletter Market Logic, “perhaps the most shocking result is the anemic return from gold-bullion investment.

“A $1 investment in gold bullion in 1871 would actually have fallen in value by today, after adjusting for inflation and storage costs. In real terms, that 1871 dollar would now be worth just 80 cents.”

By contrast, according to Market Logic, $1 invested in stocks in 1871 would have grown to $22,270, compounding at an average rate of 8.3 percent a year. A dollar invested in Treasury bills grew to $9.38.

For the first 100 years of that period, the price of gold was fixed by government edict. But it has had the last 25 years to find its own level.

The letdown since a peak of $875 in 1980 has coincided with a turn in the course of inflation.

From double-digit rates in the 1970s, inflation in the United States has fallen back to the 2 percent to 3 percent annual range.

“Gold is the classic inflation hedge,” Fosback says. “Unfortunately, it is not much more than that.”

Gold mining stocks and precious metals funds will doubtless keep producing disparate results. But for a long time now, investment bets that depend on a rise in gold prices have been tough to win.