Recent returns from conventional asset classes such as stocks and bonds have been, to put it mildly, disappointing. But, there is one asset class that has posted red-hot returns: gold. Since 2000, the price of gold has more than doubled in Canadian dollar terms but the price trend has been accelerating in recent years. In the past five years, gold has appreciated (in CAD) at an average annual rate of close to 20%.

[5 year Gold Price in CAD 2004-2009]

Like moths to a flame, investors are attracted to recent returns. The prospectus for the SPDR Gold Trust (GLD) provides a fascinating insight into the gold market. Jewellery, the primary source of demand for gold has been dropping at the same time that investment demand has been exploding. In the past five years, demand for retail investment products such as coins and bars and gold ETFs has tripled and investment demand alone now accounts for a quarter of total gold demand, up from 10% in the early 2000s.

[Investment Demand for Gold]

It must be recalled that, unlike conventional asset classes, gold pays neither interest nor dividends. Therefore, gold investors, as tulip bulb and dot com investors before them, must rely on the “greater fool” theory of investing for their profits. It is possible, of course, that competing asset classes would continue to languish, gold prices continue to increase, driving more investment demand for the yellow metal. Then again, the feedback loop could easily go negative due to any number of reasons ranging from increased mine supply to scrap supply and once again burn investors who chased returns.

This article has 44 comments

  1. What do you think about all of the factors related to gold acting as an inflation hedge as well as insurance (basic store of value)? There’s certainly a lot of factors at play in gold’s price rise recently. A few of those factors are bubblish (like the new proliferation of ETFs), but it seems to me many aren’t. I think it’s just that almost all of the reasons it can be good to hold gold are really coming together all at once this year. We will see how it pans out next year, but I think those calling for $1500/oz aren’t going to be far off. Just my two cents.

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  3. You have to consider the supply/demand issue as well. If investors are the only group (or the majority) supporting the price of gold with no or little underlying demand from the jewellery industry then investors are solely responsible for maintaining the price of gold.

    If inflation doesn’t occur at the rates many are anticipating then there’s likely a floor well below the current price.

  4. Aaahhh…. but I can’t mail my Nortel stock certificates in “We Take Gold” and have them pay me 36% of it’s actual value in CASH, now can I?

    Truly we live in the new Gold Rush, but the funny thing is that Gold Mining keeps pumping it out of the ground, but under a controlled flow? (is Gold like Diamonds, not quite, but still).

    Gold looks nice on my wife, is all I know (she’d look like hell wearing Nortel Stock Certificates)!

  5. Leading Edge Boomer

    (she’d look like hell wearing Nortel Stock Certificates)!

    That depends on how they are arranged.

  6. Hmmm…maybe it’s time to short GLD or buy an inverse gold ETF. Even during the tulip bulb craze, I’m sure even some dairy farmer got lucky and purchased sacks of suddenly cheap feed. Someone always gets lucky, now only if I could time it correctly… 🙂


  7. It would be interesting to see what would happen if some breakthrough method of improved gold mining lead to flooding the gold market. I think this would undermine the price of gold more than it would some other metal, such as copper. Copper is actually useful for various purposes. Presumably copper use would expand in the face of additional supply, and this increased demand would stabilize prices somewhat. In the case of gold, it seems doubtful that increased demand for jewelry made of gold would be enough to prop up gold prices much.

  8. Some investors seem to think that Gold is like an alternative currency. While it may fulfill this role to an extent at the international level, at the individual level, it is incredibly inconvenient. We’re not going back to the Gold standard. That system had its own problems, not the least of which was long term persistent deflation caused by money demand continually outstripping the Gold supply.

    • Canadian Capitalist

      @Robillard: Agree. The GLD prospectus mentions that the total above ground gold supply amounts to 160,000 tonnes worth about 6T at current prices. It is hardly enough to support a gold standard. That total market is also dwarfed by global stock and bond markets worth more than 100T USD.

      Then again, gold is up another $24 today, so who knows how high these prices will go.

  9. Canadian Capitalist

    @MoneyEnergy: Bond markets don’t seem to be pricing in inflation. 10-year bonds are yielding 3.5% and seem to pricing in modest inflation. I find it intriguing that investment demand for gold is exploding. Of course, there is no telling how long investors will chase gold and you could well be right that the price will cross $1,500 this year.

    @Gaby: I wouldn’t be confident shorting gold. I mean who knows how crazy things can get.

    @Michael: In fact, scrap supply could increase due to higher gold prices. All those gold parties, cash for gold companies etc. could significantly impact supply and push down prices. That in turn, could result in a negative loop — gold prices down, investors fleeing gold, which further pushes down prices and so on.

  10. CC: yeah, unfortunately I agree. The most I’d do is buy a single inverse ETF (no HGD, inverse x2, for me) if I had cash sitting on the sidelines, but otherwise, save my commodity allotment for something I know will go up in the long term like natural gas or oil, and be patient with it.

  11. Uhmm… did anybody forgot what the government did in 2008?

    They printed money!

    Smart investors are getting rid of their cash and converting it to anything be it prescious metals, real estate, oil, and etc..

    Personally, I didn’t go with this gold rush. Only 5% of my portfolio holds it.

    There’s one gold company that now pays dividend. I don’t know which one.

  12. I remember seeing gold at $500/ounce. That was back when I was still thinking the world was going to end and reading way too many peak oil sites. I’m glad I’m out of that phase. Back then arm chair survivalists were saying that come the end of the world as we know it, junk gold and silver will be the new currency. I wish I had bought some then, it would have paid off nicely now. This is a bubble in my opinion. Question is how long will it last before the big guys get out? Nice article.



  13. It seems to me that this blog is mostly about cheerleading for your investment philosophy, and that when other investment philosophies are mentioned, it is only in a disparaging way. I don’t own gold right now, but I would prefer to read balanced perspectives that might actually teach me something. Dissmissing gold as only for investors looking for greater fools is not really helpful. Many reasonable investment philosophies call for gold to occupy a small percentage of a prudently balanced portfolio, especially in uncertain economic times, or when governments appear poised to start printing money to deal with deficits. I suspect that these last 2 features of our macro-economic millieu can explain gold’s recent run-up, at least in part. Let’s talk about that, ans/or whether gold would be a prudent purchase the next time we have a financial or economic crisis.

  14. I agree @Dale. When there’s a lot of “Photocopied” piece of paper called US dollars and Government mismanagement of Funds, historically, people run to gold.

    Why did China and India bought billion worth of Gold? Because they are holding a lot of US dollars. They haven’t dump the market yet but if they did watch how US dollars collapse!

    Where else can you put your money? So don’t hold cash.

  15. Wow. Where to start? It would appear that the author and most of the people commenting do not either understand or believe that gold is money. Gold and silver have a 5000-odd year history of behaving as money. Fiat debt money such as we currently have, has a much shorter and more inglorious history. To undertand whether gold is in a bubble you have to look at what gold will buy. In 1980 at the peak price of gold, one ounce would buy the Dow. In 2000, it took around 40 ounces to buy the Dow. Now it is back down to around 8 1/2 ounces.

    Gold is the ultimate hedge against inflation in that over large periods of time its value remains relatively constant. I.e you can still buy a nice suit of clothes or 300 loaves of bread with an ounce of gold. Gold has no couterparty risk. It is no one elses liability. Regardless of whether inflation is overtly obvious now, inflation has eroded 95% of the purchasing power of the dollar since the gold window was closed by Nixon in 1971.

    Ask yourself whether you would rather hold an ounce of gold or $1160 US for the next 10 years. If your answer is dollars, you will have found the greater fool.

    The relative value of many assets can get out of whack in the market for long periods of time, but I would argue that right now, with what is going on with global fiat money creation, there has never been a better time to own gold.

  16. Digging all that gold out of the ground is one of the biggest wastes of time in the history of humanity.

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  18. Gold is not an investment; it is an alternative currency, a store of value. Your portfolio should be 5% to 15% gold, even at today’s prices.

    For gold to be a bubble, the following must be true:

    With production costs around $500/ounce and climbing, there is a definite floor to the price of gold. There is no floor to the value of the dollar….

  19. Canadian Capitalist

    @Dale: I have breaking news for you. This post, like most others on this blog is an *opinion* piece. I don’t do financial reporting here; you can get that on any number of places on the web. Readers are always welcome to differ and they do so as you can see from the comments.

    As to whether calling gold investing is “greater fool” theory of investing, it is hardly disparaging. It’s a fact. If I buy gold today, I make a profit only when I can sell it to someone at a higher price in the future.

    @Brian: Actually, depending on the time period, storing money in your mattress would have worked out better than buying gold. You could have bought gold for $500 in 1987 and waited until 2005 to break even. In other words, the $500 in your mattress would have been worth more for 18 long years.

  20. CC – You better check your numbers or review your understanding of fundamental economics. If you stored your $500 in your mattress from 1987 to 2005, inflation would have taken that $500 in 1987 purchasing power down to $290.83 (all data sets used in this post sourced from

    Furthermore, all trading or investing is based on the greater fool principle. Stocks require a greater fool to pay you more as well (ignoring for the moment dividends or short selling). Your general point, that at times gold is a bad investment, is valid, but then stocks have been a bad investment for the past decade too.

    The Dow opened the decade at 11,357.51 on Jan 1, 2000. Yesterday’s close was 10,450.95. Ignoring the cost of inflation, an investment of $11,357.51 on Jan 1, 2000 would have yielded -7.98% over the last almost 10 years.

    The same $11,357.51 invested in gold on Jan 1, 2000 would have purchased 40.55 ounces of gold, which would today be worth $47, 201.99 for a total return of 315.6%. Now if you deflate the purchasing power of that $11,357.51 to account for inflation it would be worth $9083.77, meaning that although the Dow lost money in nominal terms during the period, it did manage to slightly outpace inflation.

    Rather than ask whether there is a bubble in gold, ask whether there has been a bubble in fiat currency creation over this period? If you understand that gold is real money, then you can evaluate the relative value of different assets, not in the false paradigm of fiat debt money, but against hard commodities like gold, silver, oil etc. Then you can make more educated decisions about where to invest your hard earned money.

    I always believe that a well balanced portfolio requires an investment of around 10% in precious metals. Right now, I would argue that 20-25% makes more sense as the flood of paper currency world-wide shows no sign of abatement.

  21. Here is a great quote from John Maynard Keynes that speaks to the point I was making above.

    “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. ”

    This describes quite accurately the point at which we have arrived with respect to the US dollar. As a follower of the Austrian School of economics, I agree with Von Mises, Hayek, Rothbard et al that inflation is always and ever a monetary phenomenon. Gold simply stands as a personal defence against the profligate actions of the Fed and the US Treasury.

  22. Canadian Capitalist

    @Brian: “If you stored your $500 in your mattress from 1987 to 2005, inflation would have taken that $500 in 1987 purchasing power down to $290.83″…

    I’m comparing *nominal* dollars to the *nominal* price of gold in USD. Why would I want to compare inflation-adjusted dollars to the nominal value of gold?

    “ignoring for the moment dividends”…

    Why ignore dividends? It is a vital component of stock market returns.

    The point your making simply confirms the thesis of this post. Investors are loading up on gold *because* it has gone up and the returns from other asset classes haven’t been as attractive. Much as they wish, investors don’t earn past returns — it is future returns that count.

  23. CC: “Investors are loading up on gold *because* it has gone up ”

    Uh, no. Some might be doing this. Most are going to gold as a refuge. When investors do start going into gold simply because it has gone up, it will be time to sell gold.

  24. CC – The only reason I ignored dividends is because not all Dow constituents pay dividends and I do not have a ready source to enable me to include them. Of course they are an important component of total return.

    When you write, “I’m comparing *nominal* dollars to the *nominal* price of gold in USD. Why would I want to compare inflation-adjusted dollars to the nominal value of gold?”, you really reveal your ignorance of what money is. If you are going to look only at nominal returns, you might as well stick your money in a GIC and say that your wealth is increasing and it is safe. Never mind the fact that your real return is causing your wealth to shrink. Why not ignore FX as well, or for that matter management fees. Surely they don’t impact the amount of purchasing power that you have.

    I’m afraid I can’t help you if you don’t fundamentally understand what makes money, money. Hint – it’s not legal tender laws that force pretty pieces of paper on people by dint of government sanctioned violence.

    Even your logical premise doesn’t stand up to reason. You state, “Much as they wish, investors don’t earn past returns — it is future returns that count.”, yet you ignore the obverse, which is also true. Just because something wasn’t a good investment for a period in the past doesn’t mean it isn’t now.

    Saying that something will stop going up in value simply because it has already risen substantially is as facile as suggesting that something will always go up because it is currently. Gold is rising for very sound macro reasons at the moment. You will know when it is time to sell gold when your hairdresser or pizza delivery guy are talking about their gold investments. We are still in a very nascent bull market in commodities generally and gold specifically and it is all about the destruction of the USD.

    I hope that people are not actually making investment decisions based on your very shallow understanding of money and markets.

  25. CC The title of your blog site is “Helping you invest and prosper.” Your opinion piece did generate “helpful” responses, but your posts would themselves be more “helpful” if they were less opinionated and more balanced. You obviously hold a religuous fervour about your sleepy investing style, with which all of your readers are probably very familiar. You may believe that the sleepy portfolio is the only “help” Canadians need, but why not be open to other philosophies? I challenge you to fully and meaningfully live up to your billing by becoming more open to other views.

    To argue that equity investing is not “greater fool” investing is silly. Most investors don’t buy stocks becasuse of dividends. The better argument is that gold investors are farther along the “greater fool” continuum than equity investors. That far I will go.

  26. You will know when gold will start it’s move down,when the bond market rolls over…….we are about 300 days away…..until then set your stops

  27. Canadian Capitalist

    @Brian: You are preaching to the choir when it comes to real returns. My response is to your comment #21, which compares real returns for one asset class (dollar bills) to the nominal price of gold. I’m simply saying that you should compare nominal returns for both asset classes or real returns for both. Of course, the latter is preferable.

    I find it funny that I don’t find a single comment questioning the central premise of this post: evidence suggests that investors are chasing returns in gold. The crowd that is piling on now can just as quickly head to the exits and put downward pressure on gold prices (just ask stock investors what happened when investors dumped stocks en masse). I haven’t seen a single comment arguing why this shouldn’t be so. Instead what I hear is “currency debasement” (as if any inflation we see in the future will be a new phenomenon), “central banks are buying it” (if central banks were so smart, why were they dumping gold in the late nineties?).

  28. CC: “I don’t find a single comment questioning the central premise of this post: ”

    Uh, look again at my comment (#24). Also, where is this “evidence” you speak of? It’s not just because prices go up that investors are chasing momentum. Prices do sometimes (often) go up due to fundamentals.

    Finally: Yes, the inflation we will see in the future will indeed be a “new” phenomenon. For a full generation people have been used to very low inflation. Even 10% inflation will be a rude shock to most, and will qualify as “new”. To say nothing of what 25% or more inflation would feel like.

  29. @Brian. You said “You will know when it is time to sell gold when your hairdresser or pizza delivery guy are talking about their gold investments”

    Is it time to sell gold when multiple trolls talk about investing in gold over and over and over again? 😉

    @Dale or Brian or …. Investing is not a “greater fool” game. If it was a zero sum game, I wouldn’t be participating or should I say gambling. With gold, you are betting against your currency and nothing more. There is no intrinsic growth in gold that you can count on to make a profit.

  30. Actually I completely disagree with your central premise. I do not believe that the majority of investors are chasing returns in gold. Quite the contrary, I think those investing in gold right now are ones with a deep understanding of monetary policy who see the impact of currency debasement and are seeking to shelter their wealth in hard assets (I would more broadly include many commodities in the group as well). We are not even close to the mania phase where the average investor will be buying up gold and talking all about the great returns they are getting.

    From your post and your responses thus far, I conclude that you do not understand the implications of FRS fiat debt money systems such as we have. Central banks have sold and leased gold and silver as part of very complex price suppression schemes precisely to keep the masses away from gold and hooked on their debt-created paper money. The evidence for this has been meticulously gathered by the folks at the Gold Anti-trust Action Committee and is beyond doubt.

    Former Bank of Canada governor Graham Towers in testimony before a Commons banking committee stated that “Every bank loan is a new creation of money and when it is paid back it ceases to exist”. If you follow this logically then you conclude that every bank loan causes a net decrease in the money supply. The loan is created but the interest owing never is, therefore the total money paid back and therefore taken out of existence, is greater than the amount created. This means that the only way liquidity can be maintained is a constant supply of new loans being taken out. Thus the need for constant growth and the Central bankers stark terror at the prospect of deflation. Fractional reserve, fiat, debt money is by definition then a ponzi scheme and as we all no, all ponzi schemes eventually collapse. Gold simply stands in opposition to the fiscal madness being perpetrated all over the world right now and that is why astute investors are buying gold.

    There is a very good discussion of the Paradox of Compound Interest here,

    It does not matter to me whether you believe any of this or not. I am simply trying to educate people on the grevious structural problems that exist in our system so that they can hopefully take steps to protect themselves and their families from the inevitable crash of this paper money ponzi monster.

    Good luck.

  31. CC you seem to rigidly cling to “hard” definitions and back & white concepts such as “investing in equities is not a type of greater fool investing” (but gold is). We had a similiar debate about what does, and does not constitute “market timing” a few months back. (Nobody really buys and holds forever, and that makes everyone a market-timer to some small extent, in the better view, which is not shared by you). Most market experts would say that investing concepts and strategies are better viewed as on a continuum; there are: few hard and fast rules and definitions; very little black/white; and lots of murky grey.

    Being the Don Cherry of the Canadian Investing blogosphere may be good for generating hits, but it is not really meaningful “help” for investors.

    You have done good work over the past 5 years. I challenge you to improve upon the help that you proffer, by being less rigid, and more open to investment philosophies that differ from your own. By challenging your belief system, you might become even more fortified in your beliefs, or you might recognize that other reasonable and sane investors have, and will prosper with strategies that differ from your own, and you might convert in whole or in part. Either result will be positive.

  32. Canadian Capitalist

    @Dale: Sure there are black and white rules when it comes to investing. One example is costs. The more you pay in investing costs, the less you have in returns. Another is law of averages. Investors as a group earn average returns (less investing costs). Yet another is trading. The more you trade, the less your odds of even earning market averages. Perhaps, you think concepts and strategies that violate these rules are “murky grey”. But it is pretty black and white to me.

    “Don Cherry of the Canadian Investing blogosphere”.

    I’ll take that as a compliment and order some garish suits for my wardrobe.

    “I challenge you to improve upon the help that you proffer, by being less rigid, and more open to investment philosophies that differ from your own”.

    Well that depends on what “philosophies” are under examination. The onus is always on those claiming outperformance to (a) show actual outperformance in long term data (b) explain why there should be outperformance and (c) explain why they expect the outperformance in the future. Is it too much to question any investment philosophy that fails on either of these counts? Skepticism has served me well in investing — I see no reason to abandon it. You are welcome to characterize it as “rigid”. I simply view it as healthy.

  33. Dale Rathgeber’s vague criticisms of CC are the last refuge of those who cannot defend their arguments. Instead of wishy-washy attacks on CC’s personality, try making a concrete counterargument to his specific ideas. That way the two of you may actually learn something new and useful. I don’t always agree with CC, but I try to limit my criticisms to his ideas and to to him personally.

  34. Haha, I love gold bugs! It’s not long before someone rolls out the big bad government line — “legal tender laws that force pretty pieces of paper on people by dint of government sanctioned violence.”

    I hate to break it to you guys, but gold has no more inherent value than anything else we arbitrarily choose to use as currency. Gold is simply something that doesn’t corrode and is relatively rare. What do you think would happen if a large amount of easy to mine gold was found? Or if (/when) scientists are able to convert large amounts of metal into gold using nuclear physics?

    Equivalently, if the US government actually failed and its currency became worthless, do you really think gold would hold its value? I would rather own equipment or food, personally.

    Having a portion of your portfolio in gold isn’t a bad idea and isn’t necessarily at odds with the sleepy portfolio idea — you could hold something like 10% precious metals and rebalance along with everything else.

    Buying physical gold and keeping it in your safe at home to protect you from inflation or the government is a little crazy though. You could buy TIPS (or the equivalent inflation protected bonds in Canada) and sleep easy.

    Great blog, by the way, CC.

  35. Michael and CC: CC’s recent examples of black and white rules may be valid. But there are many other concepts in investing that are not. Even CC’s Rule #1 is illustrative of his flawed perspective, and rigidity. If investor A pays costs twice as high as investor B, but investor A’s retuns are 10 times higher, whose returns are higher? True wisdom comes from differentiating the true rules from: the guidelines, the tendancies, the probabilities and the random.

    Ther is nothing personal here. I like this blog, and challenging CC to do even better, by questioning both his own system and others.

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  38. Your comments on trading are scary do you actually believe this “The more you trade, the less your odds of even earning market averages”
    I trade one stock all year long my 5 year average is double what the stock has done. If i can do it imagine what the pros are doing.
    As for gold, my gold stock is up over %2000 in 5 years . Just because you missed the boat so far doesn’t mean it’s too late for you. The big liftoff is yet to come and thats when i sell %80 of it to the late comers.
    I am keeping %20 in case it gets worse.

  39. if gold has more than doubled in 4 years, why hasn’t the value of the dollar halved in 4 years? arent they inversely proportional? thanks in advance.

  40. @Chris,

    It’s called market manipulation.. =) j/k

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  43. Ultimately, the question is not how high gold can go, its how low fiat currency can go. While the debate about whether gold is in a bubble or whether we are in a deflationary or inflation environment continues, the monetary authorities in the developed world have embarked on a well-publicized campaign of currency devaluation via low interest rates. Central banks can control interest rates or exchange rates – not both – and they are opting for record low interest rates with little concern for the debasing consequences. There should be no debate on this matter – central banks have a perfect track record in one area and that alarmingly is in currency devaluation. The US and Canadian currencies have suffered a greater than 95% loss in purchasing power since the inception of their respective central banks. Enquirica Research has published a report – “Guide to Inflation Hedging 101″ go to and signup for access.