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Tuesday, March 10, 2009

Gold... Has It Really Stored Value?

In response to yesterday's inflation adjusted S&P 500, we were asked:

Could you present the same plot but with inflation-adjusted gold overlayed on the data? It would be interesting to see if stocks really do outperform over the long-term...
Over the past 34 years, the price of gold is only 25% higher in real terms.

Compare this to yesterday's chart to equities... (note this is back one more year than the chart for gold... I can't dig up that last year of gold data), which shows equities returned 400% in real terms over the past 35 years.

And the following chart combining the two 10-year rolling periods...


You shouldn't be... asset inflation (whether via gold, housing, or commodities) serves no long-term productive purposes... only increased productivity creates actual economic value. Thus, the movement of capital towards productive resources (i.e. what equities, fixed income, and bank loans are intended to do) is the only type of long-term investment that really creates broad economic value.

Using an extreme example: Imagine if all the wealth in the world simply went to buy assets (to be more extreme, lets pretend it all went to gold and was in turn stored in a vault). There literally would be no global economy.