What's the right price for gold?

For the past 100 years, gold prices have been all over the map: from a low of $17/oz. in 1931, to a high of $850 in 1980, to a low of $255 in 2001, then up to its recent high of $1900 in 2011, and today down to just under $1100. Gold has lost over 40% of its value in the past four years, and along the way, it has paid zero in the way of interest. As an investment, gold is not for the faint of heart. You can make or lose a fortune, depending on your entry and exit points. So is now a good time to buy gold?

To help answer that question, I put together the chart above, which shows the real price of gold (using the CPI) over the past century. For the entire period, the average real price of gold was about $550/oz. For the period beginning 1965 (when the Fed began cheating on the gold standard by not raising interest rates to counter gold outflows) through today, the average real price of gold was about $725/oz. The inflation-adjusted, compound annual rate of return to holding gold over the past 100 years is about 0.9%. Yes, gold is a store of value, but just barely, and only over very long periods. 

As a partial answer to my question, I think gold still looks expensive right now, because relative to the prices of other things, gold today is still significantly above its long-term average. Buying gold today means paying a premium. If history is any guide, it could well drop to $700 or maybe even $500 before embarking on another long rally. And in the meantime, an investment in gold yields nothing. For gold to pay off, I think it would take another huge scare: another big recession, a big and unexpected rise in inflation, another crisis of confidence in the world's central banks, or something that would make people think that The End of the World As We Know It is just around the corner. Barring another major scare of some sort, gold prices are likely to drift lower, possibly for years to come.