Gold was at about US$ 300 an ounce in the early nineties. At an exchange rate of about RM 2.50 to US$ 1, an ounce would have cost about RM 750 then. Today, the price of gold is at a record high of about US$ 1,100 per ounce. With a current exchange rate of RM 3.40 to one US$, an ounce of gold would cost RM 3,740. This is a 400 % increase or a four bagger.
Over a period of 18 years, the price has increased four folds. This represents an annual compounded rate of increase of 8 %. Not bad for an asset that does not generate any income. All the increase is a result of capital appreciation. This rate is also higher than the inflation figure. Hence, the metal is a good hedge against inflation.
So, why is the price of gold so high? The reason is gold is priced in US$ and the dollar is an overvalued currency. There is fear of a sudden currency depreciation. When that happens, the economy will experience mega-inflation. People are buying gold to hedge against this possibility.
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