October 7, 2008

Historical prices of gold

With all the economic problems we've had lately some people are turning to gold as an investment or potential safe harbor for their money. Gold has increased significantly in the past few years. Gold has doubled in value since 2005 and had an annual growth rate of about 26% from 2005 to 2008. That really is a good return especially compared to the stock market and real estate which have both dropped in the same time. Its not uncommon to see people arguing that gold is where you should put your money. But how has gold performed as an investment long term in the past?

To get historical gold prices lets look at the Kitco website. They have historical prices for gold dating back to 1833.

If you look at the yearly charts and data for 1833 to 1999 you can see that gold moved very little in price for the period 1833 to 1971. Gold was $20.65 an ounce in 1833 and it was $40.80 an ounce in 1971. From 1930 to 1971 gold grew in value at an annual rate of 1.7%. Before the 1970's gold saw little increase in value.

For the 1970's and later gold started to increase. From 1970 to 2008 gold grew at an average annual compound growth rate of 8.8%.

Here is a chart showing gold prices from 1970 to 2008:

The price was quite volatile over the years and saw increases in 66% of years and decreases in 33% of years. Here is a chart showing the annual percentage change in gold prices:

Right now gold prices are in a boom. Doubling value in 3 years is a very high growth rate. Its hard to time the market, but we know busts inevitably follow booms. Historic trends for gold are not quite as positive. Gold peaked in 1980 at $612. It then dropped to the $300-400 level for several years and dropped down below $300 in the early nineties. If you had put money into gold in 1980 at $612 and held onto it until today your average annual return would be just 1.1%.

Gold prices are volatile and returns on gold investments have not been attractive over the years. In my opinion gold is not a solid investment. It has high risk and does not have consistent high return.

For more data on gold historic prices see the Kitco website

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  1. The reason gold didn't rise much from 1870-1970 is because there was a gold standard! With the USD was defined in terms of gold, how could it possibly rise? Now, after 1971, when Nixon took us off the gold standard, gold DID rise by about 8.8% per year. This shows us that the inflation of the USD over that period was about 8.8% per year. It is true that purchasing gold is not a good way to increase purchasing power, but it is an excellent way to PRESERVE purchasing power.

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