The Golden Years: The Performance of the Precious Metal 🪙
The Golden Years: The Performance of the Precious Metal 🪙
Gold has proven to be a reliable and steady investment for thousands of years. But has it been a good investment relative to other assets such as stocks or bonds?
Gold has proven to be a reliable and steady investment for thousands of years. But has it been a good investment relative to other assets such as stocks or bonds?
Perhaps the biggest drawback of investing in the precious metal is that it doesn’t generate anything - no dividends, interest, or any form of passive income, it’s purely a store of value and a form of diversification in your portfolio.
But this hasn’t stopped demand for it from exploding. According to the United States Geological Survey, about 50% of all the gold ever produced has been mined since 1967.
As of February 2023, it’s estimated that there’s about $13.5 trillion (209,000 tonnes) of gold in circulation with $180 billion (2,750 tonnes) being mined each year.
Its performance recently has been impressive, it reached nearly $2,100 per ounce on 4th December but that means it’s still only up 115% in the last 10 years, relative to a 351% increase for the Nasdaq and 150% for the S&P 500.
How has it performed over a longer timeframe?
Historic Performance
Since the Nixon Shock (when the US left the gold standard in 1971), gold has averaged a return of 7.8% per year, relatively poor compared to the 10.64% achieved by the S&P 500.
And despite the popular belief that gold performs well during a recession, we can see from the chart below that this isn’t really true.
In the 11 recessions between 1950 and 2023 (about one every six years), gold fell in 6 of them, and in the others, didn’t really go up by a lot.
If you’d bought $1,000 of gold in 1950 and waited till today, adjusted for inflation, it’d be worth about $4,400. If you’d invested $1,000 in the S&P 500 and reinvested the dividends, it’d be worth roughly $205,000 adjusted for inflation.
And the longer the time period, the larger the difference in relative performance.
So gold might have performed well against bonds and real estate over the very long term, however, compared to US stocks it’s way behind.
But are there certain scenarios where it might still have a role?
Gold As A Hedge Against Inflation
The role of gold as a hedge against inflation has been of interest to investors and economists for decades.
The most cited example is the 1970s, a decade marked by significant inflation, largely due to oil price shocks and loose monetary policy.
During this period, gold prices soared. In 1971, when the US dollar was taken off the gold standard, the metal was around $35 per ounce.
By 1980, it had peaked at over $800, corresponding to an annual compound growth rate of over 30%, far outpacing the average annual inflation rate of approximately 7.4% during this decade.
This gave it a reputation for performing well during times of high inflation.
However from 1980 to 1984, annual inflation averaged 6.5%, but gold prices fell 10% on average each year.
1988 to 1991 saw a similar effect, inflation averaged 4.6% each year but gold prices fell an average of 7.6% annually.
Government bonds are also more generally secure and pay higher rates when inflation rises and Treasury Inflation-Protected Securities (TIPS) provide built-in inflation protection.
Gold might be a more exciting investment, but bonds provide slow and steady long-term income and TIPS guarantee a minimum level of income during times of high inflation.
Gold As A Safe Haven
All figures below are adjusted for inflation with November 2023 as the base and available at Macrotrends.
After the highs of the 1970s, prices fell in the early 1980s but gold remained a portfolio diversifier for many.
During the 1987 stock market crash (aka “Black Monday”), where the Dow Jones dropped 22.6% in one day, gold prices fell from $491.50 on Monday to $463.2 the next day, a fall of 5.8%. People wanted to sell gold to raise cash.
During the Gulf War (August 1990 – February 1991), the gold price fell from $924 to $830 per ounce, not a great performance from an asset that’s widely believed to be a haven in times of trouble.
It didn’t perform particularly well during the dot-com bubble in 2000 either, going from $514 in March of 2000, the peak of the bubble, to $480 by the end of 2021.
Ironically, gold performed quite well from 2002 - 2008, a period of relative stability in the global economy.
It went from $489 to $1,300. It continued to perform well for most of the global financial crisis (although it did go from $1395 in March 2008 to $1,038 by October 2008), and by August 2011 it had reached $2,478.
During the pandemic in 2020, gold went from $1,886 in January to $2,340 in July, it then fell to reach a bottom of $1,684 in October of 2022.
So, despite it being widely believed that gold is a good asset to hold in times of crisis, it seems to be largely a myth.
Perhaps more recently an argument could be made that it has been but over the last century, it’s a difficult argument to make.
Although positive, its performance relative to stocks has been poor. So what is its role, if any, in a modern portfolio?
So Does Gold Have A Role in a Modern Portfolio?
I don’t feel there is much of a role for gold in a portfolio today other than for diversification (which isn’t a good enough reason for me to hold it).
Perhaps if you can hold physical gold it might be worth having, just in case there is some sort of global catastrophe.
With political tensions rising across the West, the threat of a China-Taiwan war, and countless possible black swan events, this might not be a bad idea for some.
It’s also just hit a record-high of nearly $2,100 per ounce after remarks from the Federal Reserve increased confidence that the US will start cutting rates in March 2024.
However, for me personally, its lack of passive income and inability to grow through retained earnings and investment, unlike stocks, means that I probably won’t be adding it to my portfolio anytime soon.