Gold has had a terrific run. Since 2005, its price has essentially doubled -- something few other assets can claim. But the surge in gold prices masks some underlying realities. Gold's long-term track record isn't great and the metal has a penchant for huge, long swings that can burn investors. That's a reason to be cautious about gold's current clarion call.
The question for investors: Will gold remain bright or not? More long term, what role should gold play in an investor's portfolio? The answer to both questions might disappoint the growing golden horde.
Peak in the Early 1980sDuring the late 1970s, not long after the U.S. went off any semblance of a gold standard to back its currency, gold skyrocketed, eventually reaching about $850 an ounce in 1980.
The thinking at the time seemed straightforward. An unrelenting and expensive Cold War, untameable inflation and soaring oil prices would place huge pressure on the dollar, stocks and bonds, making gold one of the few investments that would hold its value.
Gold skidded from $800 an ounce over the next few years and didn't see that level again for nearly three decades -- and on inflation-adjusted terms we remain well off that mark even today. Gold investing became a fool's game, a land of dead money. Instead of the world unfolding as gold bugs expected, the Federal Reserve tamed inflation, the Cold War petered out and oil prices dropped into the $10-a-barrel range.
But fundamentals don't support the soaring gold picture of late. As Carl Weinberg, chief economist at High Frequency Economics, a Valhalla, N.Y., research firm, notes: "Industrial demand for gold surely is depressed -- along with demand for other industrial materials -- and jewelry demand must be hard-hit by global recession."
Adding to the fundamental doubts about gold's surge is the performance of other commodities. Wheat, corn, nickel, copper and stainless-steel prices have all declined from highs reached ahead of the global financial crisis. Gold, however, has simply marched higher with barely a pause, smashing through $1,000 an ounce early in September before a recent retreat. That brings us to the fantasy half of the equation, which seems to be the main driver of gold today. Gold is the asset class of choice for those who fear grim tidings ahead. A collapse in the dollar. Runaway inflation. Civic upheaval. Some gold bugs talk of stockpiling seeds, bullets and canned goods. It can get a little Area 51.