Investing in Gold vs. Stocks

Today we have a guest post from Mathew Bojerski at RCW Financial. Enjoy!

Equities and precious metals, like gold, represent two of the more common portfolio allocations for individual investors in today’s world. And with so much uncertainty existing today both economically and politically, many investors have begun to expand their precious metals positions out of fear. Indeed, everywhere you turn right now a gold advertisement or commercial seems to be popping up.

So looking beyond what the advertisers and marketers are saying – how has gold really performed as an investment vehicle versus a more traditional equities portfolio? Let’s take a look at some of the real data.

According to data taken from the St. Louis Fed, the total return for gold from January 1976 through December 2015 was 664% for an annualized return of 5.2%. Once you adjust this for inflation using the CPI you are looking at an annualized return of 1.475%.

That being said, there have certainly been opportunities to make money and capitalize on cycles within the gold market. You know the old adage – buy low, sell high. This typically involves buying precious metals during a good economic environment when the dollar is strong, is strengthening against foreign currencies, inflation is low, people are positive on economic growth, and real interest rates are rising. You can see my analysis of gold and interest rates here on RCW Financial.

Selling high is the second part of the equation. Gold tends to rise quickly in environments where real interest rates are falling, there are lots of economic uncertainty, the dollar is weak, and we are seeing signs of inflation OR people are afraid of potential inflation. An example would be in 2011 gold climbed to over $1,900 an ounce as interest rates had been falling and people were terrified that quantitative easing would lead to massive amounts of inflation. This created a perfect environment for rising gold prices and many investors were able to capitalize on this opportunity to sell and generate very strong returns.

However, most of the gold investors I know tend to look at the gold market more conservatively by viewing it as a quasi “economic insurance policy.” And in that respect, the investment has successfully preserved value for investors assuming they did not purchase during the high periods of 1980 and 2010-2012. Those that have purchased purely for a return on investment have likely only had success by timing the market as mentioned above.

In contrast to precious metals, over that same 40 year time period the S&P 500 generated returns of roughly 1880%, 7.75% annualized (or 10.8% annualized with dividends reinvested). Once you account for inflation you are still looking at adjusted annualized returns of 3.9% (or 6.9% with dividends reinvested).

Equities have always been the go-to choice for long-term growth and this data shows you why. They have simply performed better over time. Granted, you can take data from a number of 5 or 10 year periods that would show gold being a stronger performer. But when you look at the bigger picture, equities have had stronger long-term performance. Gold does have advantages though and depending on your investment goals it may make more (or less) sense for you individually. And for that reason, I am never going to flat-out tell a client to buy one thing without knowing about their personal investment goals. Even reasons like “peace of mind” can impact portfolio construction.

All that being said, it’s doubtful gold will be your top performer over the long haul, though certainly there will be opportunities to profit as the economy goes through its cycles. As always, try to keep a balanced and diversified portfolio designed to meet your personal financial needs whatever they may be.

James Hendrickson

James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.