Gold has traditionally been a good hedge against inflation and offered comfort to nervous investors during the cold war. The trouble, says Alistair Blair, is that the threat of both has subsided.
In the late 1970s, gold and other precious commodities were investments without equal. People at dinner parties discussed the prices of Krugerrands, silver dollars and platinum. Silver, briefly assisted by an attempt to corner the market, outperformed even gold. For a few weeks at the height of the fever, the middle classes queued to sell silver heirlooms to be melted down. Diamonds also took off, although the lack of a standard price and De Beers' grip on supply meant they were never a mainstream investment.
The golden bubble popped. Gold made a low of $281 in 1985 and has never been past $500 again. At $320 and falling fast at the time of writing, it seems possible that 1985's low could be smashed by the time you read this piece. All the other precious commodities have been fellow travellers of gold. So is it conceivable that precious metals, favoured by investors since civilisation began, are taking a long final bow as an investment medium? Not everybody thinks so. In March last year, Craig Corcoran, a well-regarded US investment analyst pointed out that the ratio of the US stock index, the S&P 500, to the price of gold was at its highest level for 20 years. He thought the message was clear: stocks were overvalued and gold undervalued.
To put it mildly, he hasn't been proved right yet. With Wall Street another 10 blocks ahead since then and gold down by a quarter, Corcoran's ratio may well now have reached a 100-year high. And yet we find that the Australian central bank has just sold 167 tonnes of gold, around three quarters of its stock. Its Dutch opposite number has cashed up 300 tonnes over the last few years. Heaven help gold investors if ever the US, France, Germany or Italy - who each have shedfuls - should join the trend.
Gold spent a lot of the post-war period changing hands at $35 an ounce.
But, following the collapse of the international monetary system in the early 1970s, its price had soared to $850 by 1980. Or perhaps we should say that the price of paper money collapsed. Gold was supreme because currencies were being inflated. But the main argument against precious commodities as a bet is the improvement in East-West politics. As long as the cold war held the possibility of global nuclear chaos, gold offered nervous investors the prospect of some value if the world was blitzed next week. But even the worst recent flares have not threatened anything remotely similar. Only when Saddam Hussein invaded Kuwait did the gold price spike briefly - up by 30%.
A second argument against is the improving capabilities of the investment industry. Since 1980, decreased financial deregulation and increased financial sophistication mean investors can get much the investment characteristics offered by gold more readily and less expensively. There was a time when investors couldn't easily get their money out of their own countries and into desirable foreign stock markets and currencies. But in 1997, few governments even try to keep their citizens' money locked inside their borders and, in or out, there is a vast range of advanced investment choices to hedge any risk investors can name. Throw in the apparent death of inflation, and you've got a comprehensive case against gold. It could conceivably get back to $35. After all, if everyone decides they don't need it for financial security, hoarded gold hasn't got a lot of alternative uses.
Hang on a minute, say the gold bugs. In the first place, gold is very attractive to the three billion in emerging countries led by China and India who, as soon as they've got houses and cars, start adorning every limb and lobe with the stuff ... see how India is already the world's largest gold importer. Second, these soaring stock markets will not last forever.
As soon as they falter, investors will be out and into gold. This seems likely to prove less true. Certainly, the world's stock markets are heading for a fall, but gold may not be where the money goes. The 1987 crash barely rippled the gold price.
Third, say gold's defenders, many gold mines will have to close if gold gets under $300 an ounce; then, as supply tightened, the price would be sure to respond. Well, maybe it would for a while. But the weight of the argument seems to be with the bears. Gold isn't going back to $35 without a fight. It will win a few rounds. But without either nuclear fright or serious inflation, the investment demand for gold looks weak and getting weaker. If investors start to disgorge it, Asia's Goldfingers could be kitting themselves out sooner than expected.