Pathfinder: Gold’s glitter – going, going, gone, or has it?

Gold surged from US$255 in April 2001 to a high of US$1,913 in September 2011 (that’s over 20% p.a. compounded for a decade!).  It has since lost its shine and retreated about 35%. The market sell-off included a monumental 13% free fall over 2 days in April – you have to go back 30 years to see this rate of wealth destruction in gold markets.  This article is an overview of gold investing – most of which is widely known – but note in particular the application of capital gains tax rules (in paragraph 5 below). 

1. Gold – from a “gold bug” perspective

Gold has long been recognised as a “store of value” and a “medium of exchange”, i.e. as a currency.  The Kingdom of Lydia (located in modern day Turkey) is thought to have been the first to mint gold coins around 650 BC. 

Supporters of gold hold it out as an inflation hedge – this was particularly true until the “gold window” (ability to freely convert the US dollar into a fixed amount of gold) was closed by President Nixon in 1971. Since the 1970s the investment return from gold has exceeded inflation (see graph below) but it can hardly be called an “inflation tracker”.  It is clearly volatile and can trend (up or down) for a decade or more.