COMMENT
Gold: A Poor Long-Term Investment

Exactly twenty five years ago today gold hit its historic high of $835 an ounce. Today, it is worth around half that, just $421 an ounce.

It is reckoned that the surge in the price of gold in 1980 could be one of the most spectacular moves in commodity prices ever. Within a period of 12 months, the price of gold almost quadrupled from $225 to $850.

The appeal in gold at that time was largely fuelled by runaway inflation. Sky-high interest rates were put in place to stem surging consumer prices. In the UK, for example, base rates rose from an already painful 14% to an excruciating 17%. Stock markets around the world were weak, and gold was thought to be the best investment around.

However, the popularity of gold quickly evaporated after it reached its all-time high. Within two years it had fallen back to around $400, a level that it has largely remained at in the two and a half decades since.

Unlike other metals, gold only has limited applications. It is used in the manufacture of coins such as krugerrands. Gold is also used in the manufacture of certain electronics components where its remarkable resistance to corrosion is unparalleled. It is also used in dentistry and in the manufacture of some invasive medical devices. Recently, gold has also been found to be handy in the burgeoning nanotechnology sector.

However, the biggest use of gold is in the production of jewellery. This absorbs almost 65% of the world's gold supply, with consumers buying gold trinkets both as adornments and also as a store of wealth. This latter reason for buying gold tends to be more prevalent in the East, where jewellery is priced according to its weight in gold shops.

There is little doubt that gold will remain in demand. However, demand is likely to be dictated by consumer requirement for jewellery.

Whether gold deserves to be included in an investment portfolio is an interesting question. Some investors view it as a useful diversifier for their portfolios because gold is said to move in the opposite direction to shares. In my view, gold may appeal to those investors who want to introduce some stability into their portfolios. However, the price of that stability could be lower returns if gold's lacklustre long-term performance continues.