Gold v Stocks, 1971 to Present

In an article on Monday, Bloomberg compared the returns on gold to CDs since gold hit its last peak.

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 coveted for at least 5,000 years during the last peak in January 1980.

Investors who paid $850 an ounce back then earned 44 percent 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 percent. On an inflation-adjusted basis, gold investors are still 79 percent away from getting their money back.

Generally, buying and holding assets at peak valuations is not a prudent investment strategy, as anyone who has continuously owned stocks this past decade knows.  Gold, of course, is no different.

Comparisons between asset class returns are very end-point sensitive but illustrative nonetheless.  So how has gold done relative to stocks?

One comparison is gold to equities since the United States abandoned the last vestiges of the gold standard.  On August 15, 1971, President Nixon suspended convertibility of dollars held by foreign central banks into gold, thus setting in motion the greatest orgy of credit creation the world has ever seen, arguably culminating in the credit crisis of 2008.

Using end of month levels, at the end of August 1971, the S&P 500 was 99.03 and gold was $42.73.  At the end of November 2009, the S&P 500 was 1095.63 while gold was $1173.52.  Over that time period, the S&P 500 price index returned 1006%, or 6.5% annually, whereas gold rose 2646%, or 9.0%.  On a price basis, gold has handily beaten stocks.

Of course, price appreciation is only a part of the return on equities.  Stocks pay dividends.  If one includes dividends reinvested, stocks returned 4192%, or 10.3%, besting gold, although not by as much as one might expect.

More interestingly, there have been long time periods when stocks and gold have outperformed relative to each other.  Upon suspending gold convertibility, gold began outperforming stocks almost immediately.  From September 1971 through September 1980, stocks returned 27% including dividends reinvested, or 2.6% per year.  Gold rose 1460%, or 35% per year.

Stocks started to outperform gold in October of 1980, and did so for two decades until August 2000, returning 2429% including dividends reinvested, or 17.6% per year.  Gold was a dog, declining 58%, or 4.3% per year.

Relative performance turned once again in September of 2000 and has continued ever since.  Total returns including dividends for equities up to the end of November of this year has been -18%, or -2.1% per year.  Gold has been a big winner, rising 323%, or 16.9% per year.

Everything has its time and place.  Wall Street will tell you that you should always be in stocks.  They are dead wrong.  Stocks have been horrible investments at various times throughout history.  Likewise, there have been great times to own gold and other times when you do not want to own an ounce of the stuff.

Gold may be topping.  I do not think it is, but we must be aware that it might be.  When it does top, you want to be as far, far away as possible, just like any other asset, including stocks.

UPDATE  Going back to September 1971, I constructed a portfolio of stocks and gold, investing half in stocks and half in gold at the beginning of each year.  If stocks outperformed gold in the previous year, at the beginning of the next year, stocks were sold and the corresponding amount was bought for gold such that the portfolio was rebalanced to an equal weight between the two.

This portfolio out-gained both stocks and gold, rising 5620%, or 11.2% per year.  Volatility was less at 15.4% for the portfolio whereas volatility for stocks was 18.3% and for gold 29.1%.

There were only seven years when the portfolio generated a loss, and only two a double-digit loss; -18.5% in 1981 and -16.7% in 2008.  The average loss for the seven negative years was -8.2%.

Stocks had nine losing years, with five years of double-digit losses, including -25.9% in 1974, -21.7% in 2002 and -38.5% in 2008.  The average decline was -15%.

There were more negative years for gold at 14 in total but the average decline was less than stocks at -11.8%.  There were six years of double-digit losses, including -23.7% in 1975, -32.6% in 1981, and -22.2% in 1997.

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