Gold is the original money. It was money before the US dollar and all paper currencies. But there is a good reason why we cannot use gold as currency. There isn’t enough gold in the entire world to back the currency of the United States—let alone all 23 developed nations. There is barely enough gold in the world as a whole to support the amount of $1 USD bills in circulation. Even after two record-breaking gold deposits were discovered in 2020 and 2022, there still isn’t enough gold (if extracted) to cover the circulation of all the $1, $2, and $5 bills circulating in the US.
Gold is a commodity—and its long-term performance is driven by supply and demand. The supply of gold is largely predictable and increases over the long term at an incremental pace of about 1% annually (outside of the large one-off finds in 2020 and 2022). But demand—comprised of relatively few things like jewelry, collectibles, central bank, government reserves, and investment demand—fluctuates wildly, making gold a volatile asset class. So unfortunately, gold isn’t a good “stable store of value” due to its volatile price nature, but it can provide peace of mind and speculation opportunities to try and increase your net worth.
Since US investors could legally own investment gold in the mid-1970s, it has posted a cumulative inflation-adjusted gain of 609% (01/01/1970-12/31/2022). That is an inflation-adjusted 3.76% average price increase over the last 52 years. The SP 500 total return inflation adjusted during the same period is up 2360.6%, creating an annualized inflation-adjusted return of 6.4%.
As for gold’s subpar returns, this stems from the fact it is a commodity, not a company. Firms can innovate, evolve, respond to market incentives and grow over time. As humans flourish, so, overall and on average, do publicly traded companies. Like other commodities, gold has no connection to economic growth and progress.
So, my stance on gold has always been that I have no idea what the future holds. Still, if history repeats itself, then when gold is at a deep inflation-adjusted discount to previous peaks, people might start betting on it going back up–this has previously taken up to a decade to happen.
Case in point, if you subscribe to the ideology that gold’s higher price over time is a reflection of the ongoing loss in purchasing power of the USD, gold cannot be expected to exceed previous price peaks on an inflation-adjusted basis. In inflation-adjusted terms, gold is cheaper today at $1913 oz. by more than 30% than at its high of around $850 oz. in January 1980. That 30% difference might be argued as the possible price appreciation gold could attain in the future.
No matter what, one ounce of gold today will purchase amounts of goods and services roughly equivalent to what it might be 50, 100, and 250 years from now. The value of gold does not change materially because gold, itself, is unchangeable, and so is its allure to us.