Friday, November 5, 2010

Warning! Gold Could Drop Below $500 (ABX, AU, CEF, GFI, GLD, IAU, PHYS)

Warning! Gold Could Drop Below $500 (ABX, AU, CEF, GFI, GLD, IAU, PHYS): "Gold has performed very strongly over the past decade, trouncing equities and bonds in the process and handing investors who own the SPDR Gold Shares (NYSE: GLD) or the iShares Gold Trust (NYSE: IAU) handsome gains. Amid a heated debate about whether gold is in a bubble, it's worth taking a historical view to examine the risk investors are taking by paying more than $1,300 for an ounce of gold.

Gold's real return: zero
In fact, gold appears to have eked out a small positive real return over time. Using data from the World Gold Council and precious metal dealer Kitco, I was able to construct a series of inflation-adjusted gold prices going back to 1851, according to which gold generated a historical average return of 0.7% per annum. However, even that small positive real return is a bit of a mirage resulting from the powerful gold rally we've witnessed. Indeed, as recently as 2005, gold's average real return over 154 years was zero, period."

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