We have had a number of pieces on the inflated price of gold, for instance here and here. Bloomberg today runs a great story on how the world’s most popular gold ETF (SPDR) has drawn ordinary investors to buy into the precious metal:

“Globally, the 10 biggest such funds now hold a combined 2,113 metric tons of gold, more than the official reserves accumulated by every country in the world save four: the U.S., Germany, Italy and France. Their popularity has helped drive unprecedented gains for the precious metal, and some people, including analysts at Goldman Sachs Group Inc., say gold can go higher.”

But from a long-term trend gold has underperformed alsmost all other asset classes (except cash). So, don’t bet on this bubble - because “this time is different” won’t apply - at least not in the long-run…

In its latest “Investor’s Guide” (only in print)  UBS  pushes heavily the case for gold. In an interview Dirk Faltin, head thematic research at UBS, says:

“Compared to stocks or oil gold is according to our calculations somewhat cheap, at least not extremely expensive… Gold has maintained its value for over 750 years. Naturally the gold price fluctuates, even substantially… But gold offers some protection against inflation.”

As opposed to UBS we have no particular opinion on the future price of gold. But what we know is that, in real terms, gold has had almost no positive return for investors.

Here are the data (from: The Buy and Hold Bible (in German), Prof. Jeremy Siegel comes to the same conclusion):

Average Annual Return of Gold (after inflation)

1889-1908: -0.4%
19909-1928: -3.2%
1929-1948: 1.9%
1949-1968: -1.4%
1969-1988: 6.9%
1989-2008: 0.8%

Compared to other asset classes the picture for gold is bleak (source: J. Siegel):

Even short-term government bonds would have returned more than gold. What sense does it make to recommend gold as its price hase been increasing so much over the last few years? This has probably more to do with all those gold etfs, gold certificates and other structured gold products UBS and many other wealth managers want to push down their clients’ throats than with a sensible investment strategy. Please read also the excellent interview with Rick Bookstaber on The Gold Bubble.

The German Financial Times (FTD) reports that Germans are ordering gold, especially gold coins, in unprecedented amounts. Frank Ziegler, head of precious metals at Bayern LB is quoted with the words “People buy Krugerrands like crazy”. But other coins are in high demand too: Münze Austria, which makes the “Wiener Philharmoniker” coins talks about “Panik-Käufe” (panic purchasing). The spread between coin gold and the gold market price has risen to 8% - usually it is 2%.

Most likely it is the German fear of inflation, reaching a fever pitch after the Greek bail-out, that drives gold sales. People still have the historic memory of the hyper-inflation 1923 and the currency reform 1949 which detroyed the paper savings of millions. Some market experts are fanning the flames: Quirin Bank’s (a private bank based in Berlin) chief strategist Claus Vogt said last week that “in 8-10 years our money [the Euro] will be worth only the half”. This statement implies an inflation rate of more than 5% starting in 2011.

However, we believe that this panic may be ill-informed. Gold is not a particular good inflation hedge and the price of gold may have already reached a near peak. Rick Bookstaber, well known risk expert and former hedge fund manager, who is presently an adviser to the SEC, has warned investors about the gold bubble on MyPrivateBanking.com. Germans should heed his advise - in the long-run, returns from gold have been near zero.