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Gold is one of the few investments that have done well in the past decade. While stocks, real estate, and many commodities have experienced volatile booms and busts, the gold price has increased by more than 300 percent since 2001. It reached $1,200 an ounce in December, a record high in nominal terms.
Investor interest in gold is higher than at any time since the 1970s. Some are simply chasing the latest hot investment. Some are disillusioned with stocks or trying to diversify their portfolios. Others are buying gold because its unique properties and history resonate strongly now, in the wake of the past year’s financial and economic turmoil and the immense scale of the federal policy response.
Simply put, gold is no ordinary commodity. Gold is money, and throughout history it has served as a store of value and as a safe haven during uncertain economic times. It is both imperishable and liquid. It is produced not just for consumption (as are most commodities) but also for accumulation. Its primary function is as a liquid store of wealth, not as an industrial input or item of consumption.
Consider that the annual production of consumed commodities (such as oil) roughly matches annual demand, and relatively little is left to add to above-ground supplies. Gold is different. Virtually all the gold that has ever been mined throughout history still exists today in above-ground stocks. Because of its high value, very little is ever lost. According to GFMS, a leading industry research firm, the known world gold stock today is about 163,000 metric tons, or 5.2 billion troy ounces, an amount that could fit into a 66-foot high cube.
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This article is from the December issue of the Economic Bulletin.
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