If gold is such a good investment...
And this is because it is inherently a store of wealth...
And this is not part of the Greater Fool* idea...
Your second assumption is wrong. Gold is not
inherently a greater store of wealth than any other mineral, such as silver, aluminium, tin, chrome, etc.
Gold has a high value because people value gold highly.
But it's mostly used to store wealth and for decoration...
Wikipedia said:
The consumption of gold produced in the world is about 50% in jewelry, 40% in investments, and 10% in industry.
If people suddenly lost faith in gold's ability to store wealth, and started using aluminum bronze (which has an appealing gold color) instead of gold in jewelry, the price of gold would plummet to a tiny fraction of it's current value.
Gold is not an investment; gold is just one safe haven to maintain purchasing power during periods of inflation. For example, when gasoline* doubles in price solely due to political machinations, one does not have to suffer the consequences of the reduced purchasing power of the dollar/euro/yen ...
The rising cost of a single commodity alone wouldn't be reason to buy gold, since you'd have to convert it back into local currency before you can spend it. If the price of gold remained unaffected by the increase in the cost of the commodity, there would be no benefit in storing your wealth in the form of gold.
But inflation, yes. Assuming that the inflation-adjusted price of gold remains steady, it's like a tax-free investment that gives you a return exactly the same as the current level of inflation. (Which, most of the time, is only a few percent.)
Mostly people buy it in the expectation that the price of gold will rise (or that their currency will lose value, which often amounts to the same thing).
But the price of gold can be volatile. Checking
this site, I see that gold has fallen 5% in value in the last 20 days, and dropped more than 10% in September. (Although it's also risen a lot during other times)
Looking at the 10 and 15 year graphs, the price of gold appears to be growing on a (more or less) smooth curve.
But looking at the 30 year graph, it jumps up from 200 (USD/oz) to 800 in the late 70's, before falling back to 400 where it remained for 30 years, gradually declining to about 250 in the year 2001, before suddenly rising at an alarming rate to over 1800 in the space of a decade.
To my amateur eye, it almost looks like we're in some kind long-term bubble that could burst at any moment.
But a bit of web-searching suggests to me that the reason the price of gold started rising so fast may have something to do with the
Washington Agreement on Gold that began in 1999, where the central banks of many major nations agreed to limit the sale of gold. This agreement currently expires in 2014.
