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I Love Gold

Robert Aronen
February 13, 2007

Gold has been maligned as an investment for the past 25 years. Jeremy Siegel points out the lousy investment returns gold has produced in his books, Stocks for the Long Run and The Future for Investors. Who am I to question such thorough research and indisputable facts? Perhaps I'm just a Fool in love.

Better than Google
It all started when fellow Fool Rick Aristotle Munarriz posed the question, Google (Nasdaq: GOOG  ) or gold? Rick took Google, because he believes its long-term earnings growth will cause shares to outpace gold. He even created an online poll, where the vast majority also chose Google. I'll take the gold, however. I believe the yellow rock will hold its own in what I believe will be an inflationary environment, while Google will have to fend off competitors, avoid shareholder dilution, and grow earnings even as its lofty valuation falls in line with other mature technology companies.

Solid gold
Look, I don't like polyester any more than you do, but I think it's important to remember the 70's. Even Professor Siegel points out that investing in gold would have protected your portfolio during the inflationary period of the 1970's. Rising interest rates, oil shocks, and political turmoil sent stocks tumbling and gold soaring. Which would you rather own if the same conditions return?

Stocks vs. Gold: 1968-1981



Real Return 1968-1981



Value of Portfolio 1968



Value of Portfolio 1981*



* Value in 1981 reflects real returns adjusted for inflation in 1966 dollars.

Better than a dollar
Today, we find the dollar losing its value relative to foreign currencies, oil prices and other commodities near record highs, our country loaded with debt, and a housing bubble that's deflating every day. What does this have to do with gold?

First, the falling dollar and high commodity prices are linked. Most commodities trade in dollars, and as the dollar falls, commodity prices increase. In 2002, gold was trading at around $300 an ounce, and the dollar/Euro exchange rate hit a low of $0.95/Euro. Today, the exchange rate is $1.30/Euro. If the price of gold had remained constant in Euro, it would now be $411 an ounce--accounting for roughly one-third of gold's recent price increase. For the past five years, at least, gold has been far better than the dollar.

Furthermore, with our massive debt and vast trade imbalance denominated in dollars, there are huge incentives for the metaphorical printing presses at the Federal Reserve to run full-time. Furthermore, with the housing market in a tumble, the Fed will have a tough time tightening credit. Beyond current conditions, the presses at the Fed rarely stop. Over the past 50 years, the money supply has steadily increased, constantly draining the dollar's purchasing power.

Money Supply 1959-2006

M1 Money Supply

M2 Money Supply