This article has been adapted from our sister site across the pond, Fool UK.
During my lunch break, I sometimes go to the British Museum, which is just a Neolithic axe's throw away from the Fool's U.K. offices. And while I mainly go there to swap earnings for Egyptians and tickers for totem poles, my visits do occasionally yield insights into investing.
For example, tucked high up in Room 41 (Europe AD 300-1100) you'll find artifacts retrieved from the Sutton Hoo burial mound.
Believed to belong to an Anglo-Saxon king who was laid to rest in a ship shortly after AD 600, the haul includes everything from deteriorating cooking implements and disintegrating glassware to a rusting iron sword. Oh, and sparkling bright gold buckles, shoulder clasps, and jewelry.
The king is forgotten, his possessions are rusting away, and the Anglo-Saxon realm he ruled over was conquered by the Normans in AD 1066.
But the gold persists, perfect as the day it was fashioned more than 1,400 years ago.
Such is the stuff of gold bugs' dreams, as well as their investment thesis.
Gold can't be printed ad infinitum like paper money, and it won't fall down like a house or go bust like a stock. Durability and scarcity means gold has been used as a store of value for thousands of years -- and that hasn't changed just because we've invented electronic money.
While there's an element of truth in all this, some -- including me -- suspect it has been blown into a bubble in the past decade.
The price of an ounce of gold, around $250 in 2000, hit $1,400 in December. Appeals that this new high is well below the previous peak of $850 in 1980, provided you adjust for inflation, seem rather self-defeating, given how gold is supposed to protect us from spiraling prices -- it obviously did an appalling job of that in the two decades to 2000!
What's more, the relentless march upward of the gold price -- which began several years before the financial crisis -- seems suspiciously correlated with the invention of gold exchange-traded funds. These now dominate gold trading, yet they were only launched in 2003. Gold ETF holdings rival the reserves of all but the largest central bank hordes. It's hard not to suspect this sudden accessibility of gold as an asset has moved the price too far, too fast.
Hedge fund managers like John Paulson have been too busy making money from the gold boom to worry about such frippery. His massive bet on gold pretty much doubled his returns in 2010, swelling his assets under management by $8.4 billion.
Yet could the gold bears' day finally be nearing? The gold price fell to its lowest level in 10 weeks on Tuesday, after gold's worst monthly performance in more than a year. As I write, the price of an ounce of gold is down to $1,324.
The effect on some gold miners' share prices has been more marked. A few months ago, I heard veteran investor Jim Slater explain how he picks the good ones. But with the gold price falling, later arrivals to the gold rally might have done better to steer clear altogether.
Shares in $7 billion Randgold Resources (Nasdaq: GOLD ) are down 20% over the past three months, and U.K.-listed Centamin Egypt and Norseman Gold have slipped by similar amounts.
Since it costs money to dig gold up, regardless of the prevailing price of gold, a miner is effectively a geared bet on that gold price -- increases above the cost of production are all extra profit, but a falling price can equally devastate margins. Higher prices for oil and other commodities are also bad news for miners, since they increase the cost of production.
Not all miners have been hit. FTSE 250 member Petropavlovsk has held its value over the past three months, while Medusa Mining is up a healthy 22%. The latter switched from AIM to the main market in late October, though, which may partly explain its outperformance.
Half sold on gold
I wondered in September (I won't say presciently yet!) whether news that central banks were buying gold again marked the top. The gold price kept rising, but is now falling back to around that level.
Let's face it, though, a few months of gains or losses is just noise. True, there's speculation that growing risk appetite and the improving situation in Europe is making gold less attractive, but it's too early to call an end to its rally -- particularly while record low interest rates make it relatively cheap to own.
Curiously, even as gold loses its luster, I have slightly shifted my own view on the metal in the past six months or so -- not least after hearing Slater outline its virtues last September.
Part of me still sees gold as a Keynes' barbarous relic. But it's a relic I wouldn't mind having lurking in a dusty corner of my portfolio.
However, while it's impossible to say what the "right" price is for gold, my hunch is that buying in at the end of a decadelong rally where the price has advanced fivefold -- most recently against a backdrop of economic despair -- isn't likely to be conducive to grabbing a bargain.
I won't pretend to know where the gold price will be in a year's time. But when serious newspapers stop writing about gold every day -- and they will -- then perhaps that will be the time to start a mini hoard of my own.
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Owain doesn't own shares of any company mentioned. The Motley Fool has a disclosure policy.