Yikes! Gold's $2,400 price tag is even higher than you think.

By Brett Arends

This year, gold has proven a better investment than stocks, bonds or real estate

"All that glisters is not gold," warned William Shakespeare. Try telling that to the financial markets.

Gold (GC00) recently topped $2,400 per ounce, its highest dollar figure ever recorded.

So far this year, the precious metal has proven a better investment than stocks, bonds or real estate. Gold has earned you a 14% return since Jan. 1, compared to 12% for the S&P 500 SPX index of large U.S. stocks, 2% for the S&P 600 SML index of small U.S. stocks, and 8% for the EAFE index (see, for example, EFA) of international stocks.

Meanwhile, the iShares Core U.S. Aggregate Bond index fund AGG is down 1%, even when you include interest payments, while real-estate investment trusts, or REITs (as tracked by VNQ), have lost nearly 5%. (Average sales prices for homes, meanwhile, were 6.5% higher in April than in December, according to Realtor.com - which, like MarketWatch, is owned by News Corp.)

But if you think gold is expensive, think again.

It's now very expensive.

Our chart shows you what today's gold price looks like when you adjust for inflation. The real, inflation-adjusted price is almost twice the average since gold began floating freely in 1975. It is very near the peak seen during the last mania, in 2011. It is, astonishingly, not even that far below the levels seen during most of the infamous gold bubble of 1979-1980.

(It should be added, though, that for a few days in January 1980, gold went parabolic and spiked as high as $850 an ounce - worth about $3,400 an ounce in today's money.)

These numbers don't account for the fact that the dollar DXY is also booming, so the picture from here in the U.S. is unusual. In other developed countries, the real purchasing power of an ounce of gold today is far above even the levels seen in early 1980. In both Japanese yen (USDJPY) and British pounds (GBPUSD), for example, today's gold price is about 45% higher than the peaks seen back then, even when adjusted for inflation.

The danger here is that when gold has reached these lofty levels in the past, it has then fallen back down. Which makes sense when you remember that a major selling point of gold is that it is simply a "store of value" that will "keep up with inflation" over time. Investors buying into gold at these levels are taking a hefty gamble.

"High real gold prices presage future unattractive real gold returns," warn analysts Claude Erb and Campbell Harvey in a new research paper. "Historically, a high real gold price has been associated with low inflation-adjusted gold returns over the subsequent 10 years." Erb is a former managing director at fund manager TCW Group; Harvey is a professor of finance at Duke University's Fuqua School of Business.

Interestingly, U.S. investors have missed the latest gold boom. The World Gold Council reports that U.S. investors have been net sellers of exchange-traded bullion funds so far this year, to the sum of $4 billion.

There are several obvious reasons for this. The U.S. economy has been booming, U.S. stocks have been booming, and presumably Republicans are hopeful that Donald Trump will win the White House in November.

The reason that matters is because Republican gold fans outnumber Democrat gold fans by a factor of four to one, according to Gallup, and gold is something many retail investors buy when they are worried the country is going to hell in a handcart. Past gold manias took place when conservatives were panicking about presidents Carter and Obama.

Gold is an investment asset that is much maligned by mainstream investment advice. This is true even though gold has now proven a better investment than 10-year U.S. Treasury bonds BX:TMUBMUSD10Y, let alone 3-month Treasury bills BX:TMUBMUSD03M, for more than 30 years. Part of the reason gold is shunned is because it seems to make no logical sense as an investment: It serves no major functional purpose and it generates no cash flow. The best that can be said is that it's a currency, and one that no country controls.

The major buyers these days are emerging-market central banks. They want an alternative global currency to the U.S. dollar.

Will gold produce good returns from current levels? That would depend on the future looking different from the past. Maybe it will. Maybe "this time is different." But remember what the late, great investing legend Sir John Templeton once said: Those are the four most dangerous words in investing.

-Brett Arends

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05-24-24 0742ET

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