Recently I caught the end of a Dorfman report (ugh!), and he was quoting somebody who was bullish on gold. It's supposed to go up to $450/ounce in a couple of days, or months, or something. It made me wonder, is gold a good investment?

First, I did a little research. Actually, more than a little---I went to the library and did some reading, and now I know enough about gold to bore anybody. Like the fact that for many years, the value of our currency was tied to gold. A U.S. dollar in 1837 was defined exactly as 23.22 grains of the stuff. Then, in the middle of the 19th century, we began to move away from the gold standard, and in 1864 the U.S. government issued zero interest bonds that could be used as legal tender. These were printed with green ink, and called "greenbacks." They only had the faith of the U.S. Government to back them, not gold, but these notes eventually became today's currency.

In the 1930's, the U.S. moved further from the gold standard. Owning gold as an investment became illegal, and its value was pegged at $35 an ounce. Technically we were off the gold standard, but with the gold price set at an official rate our currency was still linked to it. In 1975, after a number of crises, the U.S. government stopped setting a price on gold and allowed the average citizen to own it. By the early 80's an ounce of gold had soared to $850, though in recent years it has oscillated between $350 and $450. Since most of the world's currencies no longer tie their values to precious metals, much of the allure has faded.

Now, since gold doesn't add to its own value, and since it's worth is no longer linked to currency (unless you think society is going to collapse, and the major currencies will become worthless), you probably think you can't make money with it. That's not true. According to the December 18, 1995 Hulbert Financial Digest, if you use the right market-timing strategies, you CAN get a return (buy and hold doesn't work, they say). The winning timing method for an eight-year period is the Elliot Wave. In that time you would have made 44.9%, which gives you an annualized return of 4.7%. Am I missing something, or is that almost as good as a CD? Okay, I'll be fair. A five-year period using the Market Logic (Gold Model) gets you an annualized return of 6.7%. Not quite as high as the Lehman Bond Index, but maybe I expect too much.

There IS a value to gold, as I alluded to earlier. If society is collapsing around you, you can run off with a fair portion of your assets in your pockets. Of course if that happens you'd probably have more important things to worry about than your wealth. Also, some of those bullish on gold point to its popularity among the newly prosperous in Asia. I personally question how much the newly prosperous will put into $400 an-ounce gold as opposed to, say, buying VCR's, TV's, cars, and other things. Unlike gold, a VCR does something.

Now, compare gold to stocks. Stock in a company usually grows in value, because of increasing earnings, new products, dividends, stock buybacks, and so on. Gold sits there, looking yellow. You can, for the most part, pick a winning stock based on a company's business prospects and the quality of its management. With gold, you try to guess a trend using some obscure formula, or (ugh!) a Dorfman report. Finally, look at the return. The five year return for the S&P 500 is about 12%. Gold has been about one-half that. Maybe this time is different, I don't know. But personally, I'll stick with good old Fool's Gold---stocks. Let's see, for an ounce of the yellow stuff I can own five shares of Texaco. . .