Gold has enjoyed a heavily hyped bull market in recent years. Over the past several months, though, this bull market has quietly faded, to the extent that even the meager yields on savings accounts, CDs and money market accounts have looked strong by comparison.
Gold prices plateau
As of late April, gold prices were hovering in the mid-$1600 range, about 4 percent below where they had been six months earlier. This lengthening period of dead money is a far cry from gold's history over the past several years.
Beginning in 2001, the price of gold rose for 11 straight years. Over that period, gold posted a cumulative increase of 461.5 percent. As this rally grew, the market for gold generated a great deal of excitement. Especially when contrasted with a volatile stock market and sharply declining interest rates, these returns made gold seem like the ideal investment.
What's next for gold?
Now that the rally in gold prices has stalled, it remains to be seen how long investors who were attracted to its spectacular returns will stay with gold. History provides an interesting example of what can happen in this situation.
From the end of 1970 through the end of 1980, gold staged a rally even more spectacular than the one in this century. Over that period, the price of gold rose by a staggering 1429.30 percent. However, once the momentum stalled, it was hard to get it back. Gold then posted negative returns in 12 of the next 20 years, losing over half its value in the process. People who bought gold at the end of 1980 would have had to wait until 2006 to show a profit -- not accounting for the effects of inflation over that time.
The importance of income
Gold is often marketed as a conservative investment, but that is because it is often associated with worst-case scenarios. It has an appeal as a precious metal that would hold its value against a collapse in the U.S. dollar or the financial system. This is true to a limited extent -- those who don't physically hold gold, but hold title to gold in safekeeping elsewhere (or futures contracts) might ponder whether this is really any safer than any other financial market investment.
Barring a disaster scenario, the characteristics of gold differ greatly from those of truly conservative vehicles such as savings accounts, money market accounts and CDs. For one thing, the price of gold fluctuates too wildly to provide the stability conservative investors seek. For another thing, gold does not pay dividends or interest, so it does not produce a steady income stream.
To be sure, the income stream from deposit accounts has not been as steady as depositors would like. Still, conservative investors in those vehicles, especially those who have shopped for the best savings account rates, will find that their returns in recent months have easily outshone those of gold.