Gold's best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought the most malleable of metals during the last peak in January, 1980.

Investors who paid $850 an ounce back then earned 44% as gold reached a record $1,226.56 on Dec. 3 in London. The Standard & Poor's 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average U.S. checking account rose at least 92%. On an inflation-adjusted basis, gold investors are still 79% away from getting their money back.

"You give up a lot of return for the privilege of sleeping well at night," said James Paulsen, who oversees about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. "If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. From my experience, the world has not ended yet."

While gold's nine-year bull market is attracting hedge-fund managers John Paulson, Paul Tudor Jones and David Einhorn, strategists and fund managers at Barclays, HSBC Holdings (HBCYF), SCM Advisors, and Brinker Capital say buy-and-hold investors shouldn't always own bullion. The accumulation of gold is part of a record $60 billion Barclays estimates will flow into commodities this year.

Hoarding Bullion

The SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has amassed more metal than Switzerland's central bank, spurred by a plunging dollar and concern that the at least $12 trillion of government spending to lift economies out of the worst global recession since World War II will spur inflation. The collapse of U.S. real estate in 2007 froze credit markets and left the world's biggest financial companies with $1.72 trillion of losses and writedowns, data compiled by Bloomberg show.

The U.S. Mint suspended production last month of some American Eagle coins made from precious metals because of depleted inventories. The U.K.'s Royal Mint more than quadrupled production of gold coins in the third quarter. Harrods Ltd., the London department store, began selling gold bars and coins for the first time in October.

Those sales contributed to a 30% rally in gold this year, beating the 25% gain in the S&P 500, with dividends reinvested, and a 2.4% drop in Treasuries. Investors bought gold as the U.S. economy, the world's biggest, shrank 3.8% in the 12 months ended in June, the worst performance in seven decades. Gross domestic product expanded at a 2.8% annual rate in the third quarter.

Longest Winning Streak

A weakening dollar also contributed to bullion's longest winning streak since at least 1948. The U.S. Dollar Index, a measure against six counterparts, dropped in six of the last eight years, including a 6.6% decline in 2009, bolstering demand for a hedge. Gold fell 1.6% to $1,143 an ounce by 11:08 a.m. in London. Before today, the metal had risen 32% this year, the most since 1979.

Buy-and-hold investors may not have done so well. One dollar put into a U.S. checking account in 1983 would be worth at least $1.92 today, based on annual average interest rates from The Federal Reserve target rate from 1980 to 1982 was 8.5% to 20%. Banks were paying 5% on the accounts in January 1981, according to a report in the New York Times.

Dividends Reinvested

The S&P 500 returned 2,182% from the beginning of 1980 through the end of the third quarter this year, according to data compiled by Bloomberg. The calculation assumes dividends reinvested on a gross basis. Treasuries returned 1,089% through the beginning of this month, according to Merrill Lynch's Treasury Master Index.

"Gold is a useless asset to hold long term," said Charles Morris, who manages more than $2 billion at HSBC Global Asset Management's Absolute Return fund in London. "I'm not a gold bug who believes that you want to own this thing in your portfolio at all times. We should own it when the going is good, and the going right now is great."

Those who bought gold when it reached a two-decade low of $251.95 in August 1999 have seen a 387% return, more than four times the 82% gain in Treasuries. An investment in the S&P 500 lost 0.4% through the end of last month. Interest on checking accounts shrank to 0.14% this year from 0.89% in 1999.

Since the S&P 500 peaked in October 2007, investors in the index lost 25%, holders of Treasuries made 16% and gold buyers are up 64%.

'Very Conservative Investments'

"There are people that just stayed in very conservative investments in cash and government bonds," said Larry Hatheway, global head of asset allocation at UBS (UBS) in London, who recommends investors hold about 1% of their assets in bullion. "Surely they would have been a lot better off being in gold."

Buying bullion at $35 when U.S. President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.

Gold will average $1,070 next year, according to the median in a Bloomberg survey of 19 analysts. The metal may jump to $2,000 in the next five years, said HSBC's Morris. Ian Henderson, manager of $5 billion at JPMorgan Chase & Co. (JPM), said he's adding to his gold-related holdings because of "the momentum behind it." Jim Rogers, the investor who predicted the start of the commodities rally in 1999, has said bullion will surge to at least $2,000 over the next decade.

Touradji Capital

"Our sense is that this bubble is more at the beginning stages than on the brink of collapse," said Thomas Wilson, head of the institutional and private client group at Brinker Capital in Berwyn, Pennsylvania, which manages about $8.5 billion.

Touradji Capital Management the New York hedge fund founded by Paul Touradji, bought 2.23 million shares of Barrick Gold Corp., the world's biggest producer, during the third quarter, according to a Nov. 13 filing with regulators. The stake, Touradji's biggest equity holding, is worth $95 million.

Paulson & Co., the hedge-fund firm run by billionaire Paulson, will start a gold fund on Jan. 1 investing in mining companies and bullion-related derivatives, according to a person familiar with the plan. Einhorn, who runs New York-based Greenlight Capital Inc., told a presentation in New York in October that he's buying gold to bet against the dollar.

Paul Tudor Jones, in an Oct. 15 letter to clients of his Tudor Investment Corp., said gold is "just an asset that, like everything else in life, has its time and place. And now is that time."

Net Gold Buyers

Central banks will become net buyers of gold this year for the first time since 1988, according to New York-based researcher CPM Group. India, China, Russia, Sri Lanka and Mauritius have all added to their reserves.

Gold should be held when governments cease to function and currencies are worthless, or when inflation is surging, said Brian Nick, a New York-based investment strategist at Barclays Wealth, which manages $221 billion. He doesn't recommend increasing gold holdings, which are a "very small" part of commodity allocations.

Inflation has yet to accelerate. U.S. consumer prices will rise 2% next year, the smallest expansion since 2002, according to the median estimate of 63 economists surveyed by Bloomberg. Prices will shrink 0.4% this year.

'Knee-Jerk Reaction'

"People have this knee-jerk reaction and say that you want gold as a hedge against inflation," said Maxwell Bublitz, who helps oversee $3.5 billion as the chief strategist at San Francisco-based SCM Advisors and recommends investors hold no more than 5% of their assets in the metal. "But the history of gold in regard to inflation shows that it's not a great hedge."

Investors seeking to protect themselves against inflation should buy commodities, which are cheaper than gold, said Wells Capital's Paulsen. Copper, after more than doubling this year, is still 28% away from the record $8,940 a metric ton reached in July 2008.

"Theoretically, it does have a spot in portfolios, a small one," Bublitz said. "You're probably going to get entry points that are a lot better than where gold is now."

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