The investment case for gold is mixed. Gold's tactical value over specific periods is significant.
The period from 1999 to 2001 is referred to the "Brown Bottom" of a 20-year bear market during which gold prices declined. The reference is to the ill-fated decision by Gordon Brown (seen here), then UK Chancellor of the Exchequer and subsequent Prime Minister, to sell half of the UK's gold reserves via auction over 1999 and 2002. At the time, the UK's gold reserves were worth US$ 6.5 billion, constituting around half of the UK's foreign currency reserves.
The decision to sell around 400 tonnes of gold at the low point in the price cycle cost the UK tax payer up to 10 billion euro or around 600 euro per UK family (depending on the gold price used). Commentators have compared to cost of 3.3 billion euro to UK taxpayers on Black Wednesday 1992 when the UK was forced to withdraw from the European Exchange Rate Mechanism after a failed attempt by the Treasury and Bank of England to defend the Pound.
Any investor who purchased the gold sold by the 'financially astute' UK Chancellor would have made a substantial profit.
But gold is not itself a great store of value, at least over long time periods.
Gold bugs excitedly speculate about gold prices reaching $2300. But even at that price gold would merely match its January 1980 peak price after adjusting for inflation; in other words, the holder had earned nothing on the investment over almost 30 years!
The gold price adjusted for inflation is the same as the price in the middle ages. Dylan Grice of Societe Generale summed up the case for gold as a store of value in the following terms: "A 15th century gold bug who had stored all his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90 per cent over the next 500 years."
The gold price can also be very volatile. In late 2011, after reaching record levels, the gold price fell nearly 20% very quickly.
Warren Buffet observed that if stock investors are driven by optimism about prospects then "what motivates most gold purchasers is their belief that the ranks of the fearful will grow." Harry "Rabbit" Angstrom, the central character in John Updike's 1970s novels about American suburban life, spends $11000 on the purchase of 30 gold Kruggerrands (a South African minted gold coin). Rabbit explains the purchase to his wife: "The beauty of gold is, it loves bad news."
In economic chaos, war or collapse, gold reappears, reasserting it grip on humanity.