During times of heightened uncertainty our wealth management firm receives many questions surrounding gold as an investment. Many of our clients believe that gold is a safe investment that will at least keep pace with inflation. This belief seems to stem from the numerous commercials and talk shows that tout the perceived positive attributes surrounding gold as an investment.
To help determine if gold is a safe investment that does a good job of keeping pace with inflation over various time horizons, I believe it is important to be provided with empirical proof of gold’s risk and return over multiple decades. The analysis below uses data from Dimensional Fund Advisors to illustrate the historical performance of gold, stocks, and bonds from January 1, 1975, to September 30, 2020, comparing the gold spot price, S&P 500, and Bloomberg Barclays U.S. Government Bond Index Intermediate. This starting point was selected because it is the effective date of the bill signed by President Gerald Ford allowing “United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad.”
During that time frame, gold had an average annual return of 5.21%, so an initial $10,000 investment in gold would have grown to $102,103. Bonds grew by an average of 6.65%, turning a $10,000 investment into $190,449, while stocks had an average annual return of 12.06%, increasing that initial investment to $1,828,530.
As you can see, the average annual return for gold lagged the performance of both bonds and stocks from January 1, 1975, through September 30, 2020. A $10,000 investment in gold would have been worth $88,346 less than bonds and $1,726,427 less than stocks over this time horizon.
This data highlights the lack of performance in gold relative to other popular asset classes over the time horizon analyzed. Despite the lack of performance in gold, investors may argue that the safety of gold as an investment is more important than performance. To address whether gold is safe, it is worth observing gold’s risk.
Risk can be defined in many ways. One way to quantify risk is by measuring volatility. Standard deviation is one method used to measure volatility. The higher the standard deviation an investment has, the higher the volatility of the investment.
Over the same period noted above, gold had a standard deviation of 5.38, compared to 1.15 for bonds and 4.34 for stocks. As those figures show, gold has a higher standard deviation than both bonds and stocks. Gold’s standard deviation is 367.82% higher than bonds and 23.96% higher than the standard deviation of stocks.
In addition to the higher standard deviation and thus volatility, it is also worth analyzing how gold has performed in worst-case scenarios relative to stocks and bonds over the same time horizon. To help understand the risk extremes of gold versus stocks and bonds, it’s worth looking at the returns for each respective category’s worst 5-year, 10-year, and 20-year time periods since 1975, which are as follows:
- Gold: -14.69%, -5.99%, -4.34%
- Bonds: +0.54%, +1.83%, +3.66%
- Stocks: -6.63, -3.43, +4.79
Gold lost more money than stocks and bonds during the worst 5-, 10- and 20-year periods.
There are many compelling arguments regarding the benefits of investing in gold. Unfortunately, I find these arguments to be rooted in theory. Without the foresight of knowing the appropriate entry and exit points, gold has struggled to measure up in both performance and risk relative to other popular investments. I hope this brief analysis helps answer questions you may have regarding owning gold for a portion of your portfolio.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Great Valley Advisory Group, a registered investment advisor and separate entity from LPL Financial.