Gold Is Not a Good Investment—At Least for 500 Years

GoldMatthew O’Brien brought my attention to the graph below which shows the inflation adjusted value of gold over the last 8 centuries. What it shows is that gold is a really terrible investment. Gold does not hold its value. Since about 1500, it has been going down in value steadily. And there are only two times recently where its value went up. The first was in the 1970s when the United States went fully off the gold standard and people could buy it. And the second time was after the financial crisis when Tea Party types became convinced that we were devaluing our currency. In other words, gold only goes up in value in a major way due to bubbles.

What boggles my mind is why people think that currency based upon gold eliminates the possibility of inflation. Gold just isn’t that valuable a commodity. Much better is to base the value of our currency on the productive capacity of our economy. And regardless, gold could be inflationary if their theories about money were correct. Imagine that huge gold reserves were discovered. Gold bugs are deluding themselves. I wish they would study this graph:

Long Term Gold Prices

I remember reading a libertarian book many years ago (I can’t remember its title). It was a good overview of libertarian thought, but the chapter on the gold standard was remarkable. The author pointed out that we didn’t need to worry about the money supply. If the economy grew too fast and more money was needed, the value of cash would just go up. Problem solved! Now, that sounds like a good idea. But like much libertarian thought, the theory is okay but it is a disaster on a practical level. If the value of money is increasing, then people have an incentive to hoard it. That means there will be less investment in the economy. If that weren’t bad enough, the hoarding of money would only make the money supply smaller and thus increase the value of it and cause more hoarding.

I still find the science of money supply confusing. And so I sympathize with the gold bugs who want to simplify the whole thing. But this really is a case where we have clear experimental data. The gold standard is not a solution to our money supply problems. And why people would think so after decades of low inflation, I can’t say.

3 replies on “Gold Is Not a Good Investment—At Least for 500 Years”

  1. […] truth is that gold prices are not at all stable. A couple of years ago, I wrote, Gold Is Not a Good Investment — at Least for 500 Years. It includes a graph that shows the overall volatility of gold’s value, and also that […]

  2. […] couple of years ago, I wrote, Gold Is Not a Good Investment — at Least for 500 Years. The truth is that the value of gold has only gone down over time. What’s more, its value is […]

  3. […] tracks what's going on in the economy. Starting in the mid-15th century, gold has done little but go down in value. (Other than spikes because gold bugs were freaking […]

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