Market Moment: 2006, Gold Crosses $700 for the First Time Since 1980

Today in market history 2006, the price of gold breaks $700 for the first time since 1980. On an inflation adjusted basis, however, gold’s price was still well below its $2,022 peak. Gold prices went on to rally to $1,895 per ounce by September 2011. Buyers of gold in May 2006 were up 170% in five years. Since then, gold prices are down approximately 32%.

Humans have been fascinated with gold for centuries. A soft, malleable metal, gold is technically an element. It is listed on the periodic table under the symbol, Au. But gold has no investable properties. It does not pay a dividend or coupon payment, and it has no expected cash flows. Like other commodities, the price of gold is determined by the price the next person is willing to pay for it.

Some call gold a flight to safety, others an inflation hedge. For hundreds of years, gold was quite simply currency, a means of exchange. The United States went off the gold standard in 1933, although remnants of the gold standard remained until 1971. My favorite description of gold comes from none other than Warren Buffett:


Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.



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