Is Gold Today's Safest Investment?

It appears Ron Paul fans aren't the only gold bugs roaming around out there. 

For the second straight year, an annual Gallup poll has found that a plurality of Americans believe gold is the single best* long term investment option. Better than savings accounts. Better than real estate. Better than stocks. A full 28 percent of adults ranked gold as their top choice, down from 34 percent last year, a drop just outside the five point margin of error. It was most popular among older Americans, those without a college a degree, and individuals who earned between $30,000 and $75,000 a year. 


Unfortunately, Gallup doesn't ask its survey participants why they have such faith in gold, so we can only speculate about their reasons. Maybe Glenn Beck really did convince a vast swath of the country to stock up on bullion to prepare for the dollar's impending collapse. Maybe, after years of economic turbulence, gold just sounds safe. But forget the thinking. Is there a chance the country's collective intuition is right? 

First, a stipulation: These days, there is no safest asset, other than -- maybe -- an inflation protected Treasury bond. So in a sense, there is no right answer to this question. But we can look at Gold's past performance, and the factors that might influence its future returns, to see if it's at least a reasonable answer. 

For the past thirty years, whether you made any money investing on gold has depended greatly on when you decided to buy it. In that respect, it's been like any other asset. The graph below charts the price per ounce in dollars since 1970. Currently, Gold is selling at $1,649 per ounce, down from a nominal peak of $1,895 last September. And as Bloomberg pointed out back in 2009, people who invested in gold at it's last peak, in 1980, would have gotten a better return on an interest-bearing checking account. But if you bought gold at the low, low price of $277 in 2000, you've done fabulously, earning a 495 percent return. If you'd parked your money in an S&P 500 Index fund, you'd just about have broken even. 


So fine. Gold's price rises and falls. But why? Gold's fervent devotees like to think of it as a hedge against inflation. They believe that when the government starts the printing presses, and the dollar starts losing value, investors will fly to what's tried and true. And indeed, when the greenback depreciates, gold's dollar value does rise. But so does the price of any commodity traded on an international market. Buying wheat or copper would offer the same benefit. Others consider gold a safe haven asset, meaning that when the markets are in turmoil, gold is the option of last resort. The problem with this approach is that the dollar is also considered a safe haven asset. That's why, even as our markets seemed to be collapsing during the financial crisis, its worth jumped. So problems in the world economy, or even the U.S. economy, can also bring down the price of bullion. 

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Jordan Weissmann is a senior associate editor at The Atlantic.

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