I’ve been getting a bunch of spam in my inbox recently telling me in panicked tones that the world as we know it is on the verge of ending and the only solution is to invest in gold. Touting its great returns, risk hedge capabilities and inflation protection for my portfolio, these missives implore me that if I want to preserve any semblance of wealth after the upcoming apocalypse, I must sell [enter the asset class of your choice here] and put that money to work in gold. Today. Now. Immediately.
Whenever the markets and world affairs are in turmoil—war, plague, political strife, social unrest—the gold-bugs emerge from their cocoons as predictably as cicadas do in the spring and making about as much noise. Maybe more.
It’s tempting. After all, who doesn’t seek some emotional stability and comfort during a crisis? For centuries, people have turned to gold to assuage those feelings. When uncertainty reigns, a certain calm comes from knowing you have something hard, tangible, and glistening in your possession.
For most investors, gold is like a plate of mashed potatoes, gravy and meatloaf. It is comfort food for the portfolio.
Gold as a metal has its merits. It has industrial uses, electronic conductivity and the unique quality of being both hard yet sufficiently malleable to be shaped into lovely objects of art or jewelry. We value gold as a reward for achievement or excellence. The Olympics bestows gold medals to winners, retirees get a gold watch, and we are given pep talks telling us to “go for the gold.”
Great stuff. But what about gold as an investment?
Based on the traditional one troy ounce (“t oz”, 31.1034768 grams) used by the Royal Mint (“owned by Her Majesty’s Treasury”), gold bugs quickly point to the fact that if you had bought that one troy ounce of gold in 1970 and held on to it until now, your total return would be a jaw dropping 5,333% gain! Now compare that to the performance of the S&P Composite*. Those stocks only managed a paltry 3,737% gain over that same period.
By not buying gold, you gave up 1,666% of gains. You fool.
If you break out gold prices over time, you quickly see that the biggest gains in gold came from January 1970 to January 1980, when gold topped out at $760 t oz. Investors in the 1970s were faced with the economic uncertainty of recessions, double digit inflation, and spiking oil prices. Hard assets were the place to be and no asset seemed harder than gold. With a nearly 2,075% total return over that period for an annual growth rate of 36%, gold outpaced a nearly moribund stock market. Over the same time, the S&P Composite eked out only a meager 22.79% return.
Gold Prices 1970 – 2020
FastMarkets/ICEBenchmark Admin, et alia
It was gold’s golden age. It took 27 years for gold to see that high again.
The price of gold began drifting down after that, hitting a low of around $257/t oz by September 1999. Values didn’t start appreciating in any meaningful way until 2005. (As an interesting aside, gold prices from 2005 to 2011 correlate pretty closely with the increasing use of the internet.) Gold has rallied and fallen since then, pretty much paralleling economic events. For example, from start of the Great Recession in 2007 to shortly thereafter, gold rose from around $810/t oz to a high of $1,794 in September 2011. But as the economy rebounded, gold sank in value, dropping back down to $1,088.90 in November 2015. Sometimes it seems gold values react no better than a Dutch tulip bulb in 1636.
Of course, these days, with the onset of Covid, a rancorous political climate, simmering social unrest, and economic uncertainty, gold again has rallied, hitting a new high of $1,931.90/t oz. in August 2020. Gold’s value seems to grow best when things are (or are perceived to be) at their worst. As an investment, it is the “pessimists play.”
But the gold bugs are quick to come to the defense of their favorite shiny metal. Cherry picking this period or that, they can show it works as an inflation hedge. As for its security, they are quick so tell you there is a reason the world’s central banks keep bars of the stuff in their vaults. (Fun fact brought to you by the U.S. Federal Reserve Bank of St. Louis: a 99.99% pure gold bar is 9.75 inches long, 1.5 inches tall and weighs some 28 lbs./408.3324 t oz.)
The piece de la resistance is that performance number. Yes, yes, gold prices have had their ups and downs, but over the long run, investors in gold were handsomely rewarded by that quadruple percentage return. Isn’t that proof enough gold should be in every long-term investor’s portfolio?
No. There is one fatal flaw in this investment thesis. Let’s revisit gold’s 5,333% return against the S&P Composite’s 3,737% return from 1970 to 2020. Sure, if you just bought the S&P Composite and let it ride for 50 years, the return would underperform against gold.
But that comparison is wrong. The comparison leaves out the eighth wonder of the world—compounding. Add in compounding and now make the comparison. That same investor buying the S&P Composite in 1970 and reinvesting the dividends quarterly would have seen a gain of 68,430% through September 2020.
S&P Composite 1970 to 2020, dividends reinvested
Barnet Sherman
And that is the problem with gold. Gold pays no dividends. It cannot compound. It does not have economic growth. It does not innovate. It does not generate cash flow. It’s just a piece of inert metal.
Investing in equities means owning a piece of a business. A business is an economic entity creating value and in doing so, grows in value over time. Put those businesses together in an index that reflects the U.S. economy and you have the S&P 500. The S&P composite represents the S&P 500 (the largest capitalized companies in the United States), and other major stock indices. Combined, these encompass every major sector of the U.S. economy.
An investment in the S&P Composite is an investment in the U.S. economy. While the economy may ebb and flow over the years, it tends to grow. In 1970, U.S. Gross Domestic Product (GDP is the market value of the goods and services produced by labor and property located in the United States) was $1,088 billion. By third quarter 2020, U.S. GDP was $21,157 billion.
I’m putting my money on the U.S. economy. I figure if I do well enough, I’ll be able to buy a nice piece of jewelry or a watch. Probably made of gold.
*(Note: We use the S&P Composite here since data on the S&P 500 was not available for the entire time period. While investors cannot invest in the composite directly, they can invest in a mutual fund or ETF that matches the S&P 500 and other components of the S&P Composite.)
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
