Once dismissed as a "barbarous relic," gold is having the kind of decade that would make Midas blush. In the past decade, gold has risen more than 500%, surging from a low of $265 per ounce to its recent record near $1625. The Dow is up less than 20% in the same time period and has suffered a lot more drama along the way.
As someone who was making the bullish case for gold 10 years ago — and literally being laughed at by my colleagues at the time — it's a bit stunning to me to see how far gold has come as an investment. (It's sort of like how Metallica went from underground menace 20 years ago to the Rock and Roll Hall of Fame, something I still have a tough time comprehending.)
In the accompanying video, WSJ reporter Greg Zuckerman and I discuss how gold has gone from the province of conspiracy theorists and shut-ins to an investment choice for investors of all stripes, including hedge fund stars like John Paulson, John Burbank, David Einhorn and, until recently, George Soros. (See: Why the 'Smart Money' Is Betting on Gold ... and Housing)
Like Metallica's rise to mainstream acceptance, gold's surge arguably says a lot about how society's tastes have changed and long-held beliefs in how our capitalist system works have been challenged.
Gold works "when you have extremes," Zuckerman says, noting a bullish case is being made by those worried about inflation or deflation, the demise of fiat currencies, global warming or general economic Armageddon.
But gold's allure is also a sign of investors' loss of faith in our institutions and policymakers. "Over the last few years, government officials and the Federal Reserve got it wrong and people are betting they'll get it wrong again," he says.
Whether it's Ben Bernanke and inflation or Congress and the debt ceiling, "some people are betting against Washington by buying gold."
By the same token, Europe's inability to quell the sovereign debt crisis in the eurozone has also driven investors to seek a haven in gold, which has historically been viewed as an alternative to paper money.
So while skeptics say gold is hard to value, expensive to store and "just a shiny rock," there's a logical case for owning precious metals in a world where the risk of "fat-tail" events seems to be rising. Furthermore, negative real interest rates — meaning inflation rates are higher than the fed funds rate — have historically been bullish for gold. Finally, the really bullish case for gold is that institutions are still under-invested in the metal relative to their exposure to paper assets. (See: Get Ready for $3000 Gold in 5 Years, Says Holmes)
Of course, if buying gold 10 years ago was "a lesson in being a contrarian investor," as Zuckerman says, there's a case to be made the bullish sentiment has become overdone. "If we muddle along with 2.5% growth, I think gold goes down from here," he says. "If you don't get rising inflation or bad things happening in terms in terms of the euro and U.S. dollar, I think don't gold can continue" to rally.
So has gold's run been overdone or is the metal's rally just getting started? Tell us what you think in the comments below or on our new Facebook page.
- John Paulson
- fiat currencies
- Ben Bernanke
- conspiracy theorists