Before we begin, take a moment to imagine something immensely valuable.
Treasure, wealth, riches beyond belief.
What was it that came to mind first?
For most people, the answer is usually gold. For thousands of years, cultures around the world have used gold as a store of value. Today, gold maintains that role, and also acts as a reliable safe haven from economic volatility and uncertainty.
Those trying to time the markets will often switch between gold and stocks in an effort to maximize returns, a strategy that’s easier said than done. Yet, there is a final use case for gold. Gold is an asset class all of its own, and many investors will dedicate a portion of their portfolios to gold and leave it untouched for years.
Are these people simply “gold bugs,” with a zealous view of gold as an object to be treasured? Or does investment in gold as an asset class pay off over time? How have precious metals vs stocks performed over time?
Gold as a Long-Term Investment
The historical success of gold as a store of value lends it credibility in the markets. Unlike fiat currencies, whose values depend on supply rates and policies made by central banks in response to economic conditions, the value of gold remains relatively stable.
Gold prices from 1970 – 2020 (non-adjusted). Data source: Macro Trends
Gold has seen price fluctuations since the gold standard was removed in the 1970s. After periods of consolidation, however, the price has consistently moved higher. This price increase is likely due to the effects inflation has on the value of the dollar coupled with gold’s wide recognition as an asset. If you’re wondering how gold compares to silver, our gold vs silver IRA article covers the pros and cons of both options.
How Does Gold Perform During a Recession?
Investors often flock to gold during times of economic uncertainty or disaster because it’s considered a stable store of value. While the stock markets bleed during times of economic uncertainty, gold usually increases in value.
The Great Inflation of the 1970s
Data source: Macro Trends
The chart above shows the crossover between gold prices and the Dow Jones Industrial Average (DJIA) in the early 70s. In August 1971, the Nixon administration removed the U.S. dollar from the gold standard, turning the dollar into a fiat currency. Historically, the gold standard has helped regulate the value of national currencies.
Since the 1930s, spot gold prices were stable at around $35, and it was illegal for an individual to own more than $100 of gold. But this steady period was not to last. Along with other ill-advised monetary policies, breaking away from the gold standard contributed to the devaluation of the dollar.
From 1972 to 1975, the inflation rate doubled to 8.09% from the preceding four-year period. Interest rates rose 20% in an effort to combat the economic downturn and the stock market tanked. By January 1, 1976, gold was worth $176.52 per ounce, nearly four times its value of $37.88 on January 1, 1975 — just one year earlier.
Let’s compare gold’s long-term performance against different stock market indices before calculating the returns investors would have made by allocating some of their savings to gold. Below, we have three hypothetical portfolios that will show the performance of the DJIA, NASDAQ, and gold in various combinations in the stated time period.
January 1, 1971 – January 1, 1975
- Portfolio A: $100,000 with 100% allocated to the DJIA sees 18.69% losses to $81,310.
- Portfolio B: $100,000 with 90% allocation to the DJIA and 10% to gold sees 19.78% growth to $119,778.
- Portfolio C: $100,000 with 45% allocated to the DJIA, 45% to the NASDAQ, and 10% to gold sees growth of 14.17% to $114,175.
By the beginning of the 80s, the Federal Reserve raised the interest rate to 20% in an attempt to crush out-of-control inflation. This unprecedented rate of interest finally reined in gold’s bull run and tamed inflation. The immediate economic crisis was over, but this drastic monetary policy of interference went on to have severe consequences for the housing market and other aspects of the U.S. economy.
Boom/Bust of the Dot Com Bubble
The Dot-Com bubble of 1995 to 2000 was another slow period for gold, as investors flocked to the stock markets in droves to make quick profits on web companies. Gold fell 24.87% from $378.44 to $284.44 between January 1st of 1995 to January 1st of 2000. The NASDAQ, where most of these new startup companies were listed, rose 421% during this period.
January 1, 1995 – January 1, 2000
- Portfolio A: $100,000 with 100% NASDAQ allocation sees 421% growth to $421,000.
- Portfolio B: $100,000 with 90% NASDAQ allocation and 10% gold sees 376.41% growth from $100,000 to 476,413
- Portfolio C: $100,000 with 45% DJIA allocation, 45% NASDAQ, and 10% gold sees 270.38% growth to $370,384.
However, the stocks were historically overvalued, with insane valuations driven by overexcitement, herd mentality and the fear of missing out on huge gains. The bubble burst at the turn of the century leading to a crash in the stock market with significant societal effects. The Federal Reserve cut interest rates to compensate, which once again proved gold shines during times of inflation.
In 2005, gold began to outperform the DJIA which saw a significant drop towards the end of the decade. Between January of 2001 and January of 2003, gold prices rose 13.44% from $265.44 to $356.86.
January 1, 2001 – January 1, 2003
- Portfolio A: $100,000 with 100% allocation to the NASDAQ sees 52.36% losses to $47,640.
- Portfolio B: $100,000 with 90% allocation to the NASDAQ and 10% to gold sees 43.68% losses to $56,317.
- Portfolio C: $100,000 with 45% allocation to the NASDAQ, 45% to DJIA, and 10% to gold sees 37.90% losses to $68,170.
Gold During The Great Recession Onwards
Gold (yellow) vs. the DJIA (blue). Source: Macro Trends
2006 onwards saw the collapse of the U.S. housing market due to unsound practices from Wall Street banks and mainstream financial institutions, triggering a major financial crisis and worldwide recession. As a result, investors shunned the stock market and sought refuge in gold.
Between January 1, 2007 and January 1, 2011, gold prices rose 110.24%, from $631 to $1,327, while the DJIA fell 44% as of early 2009, entering 2011 with losses of 20.23%.
January 1, 2007 – January 1, 2010
- Portfolio A: $100,000 with 100% allocated to the DJIA sees 20.23% losses to $79,770.
- Portfolio B: $100,0000 with 90% allocated to the DJIA and 10% to gold sees 7.18% losses to $92,817.
- Portfolio C: $100,000 with 45% allocated to the DJIA, 45% to the NASDAQ, and 10% to gold sees 3.86% losses to $96,133.
While it’s too early to measure the impact of the ongoing financial crisis caused by the COVID-19 pandemic, the monetary easing measures rolled out by the U.S. federal reserve has inflated the money supply by an unprecedented 20%. These measures create favorable conditions for bullish momentum in gold, with investors seeking to avoid impending cash inflation.
Microstrategy CEO Michael Saylor pointed out in a recent interview that while the nominal rate of inflation is zero, investors are getting less value for assets like stocks due to central bank policies. Saylor cites the fact that Apple stock doubled in 2020 despite flat revenues and a dim outlook for future consumer spending, a sign that cash is losing its real-world value.
How Does Gold Perform in a Growing Economy?
In healthier economies, gold often lags behind stocks, but still tends to hold its value. Below, we’ll examine the performance of gold versus the stock markets, along with the returns from various mixed portfolios, during these growth periods.
Growth in the 1980s
Gold (yellow) vs. the DJIA (blue). Source: Macro Trends
After a brief recession in 1982, gold lagged behind the stock market throughout the 1980s. The DJIA gained 197.38% from January 1, 1982, to January 1, 1990, while gold prices saw more modest gains of 6.91%, rising from $383.95 to $410.49.
January 1, 1982 – January 1, 1990
- Portfolio A: $100,000 with 100% allocation to the DJIA sees 197.38% gains to $297,380.
- Portfolio B: $100,000 with 90% allocation to the DJIA and 10% to gold sees 178.33% gains to $278,333.
- Portfolio C: $100,000 with 45% allocation to the DJIA, 45% to the NASDAQ, and 10% to gold sees 143.95% gains to $243,588.5.
Gold saw significant peaks and troughs throughout the mid-80s, and this volatility correlated with a reduction in interest rates, weakening the use case for gold.
Source: St. Louis Federal Reserve
Despite the upswing in the stock market, U.S. GDP growth dropped steadily from 1984 onwards, falling from 7.24% to just 1.89% in 1990. A brief recession ensued, but by 1991 the economy was gearing up for another boom fuelled by the dot-com bubble. However, as we saw in our earlier section, gold’s prices moved sideways rather than down in the 90s despite major growth in the NASDAQ.
Economic Recovery After 2010
Data: St Louis Federal Reserve
After the Great Recession, low inflation and high stock growth contributed to an economic recovery in the United States. Gold remained flat during this time before going on a run in September of 2018, gaining 59% since then and reaching new all-time highs after the 2020 pandemic hit the economy.
Stocks went on a rally in March of 2020, with the DJIA gaining 36.34% from March to December compared to 60.45% gains in the NASDAQ and 14.06% gains in gold. Again, while its price gains were modest, gold held its value and then some during this rally.
Gold as an Investment Going Forward
As we can see in our various portfolio examples, gold can often reduce or even completely offset losses during downturns.
This data points to gold as being a relatively low-risk investment that more than pulls its weight in a mixed portfolio. Gold has moved significantly higher in price over the past few decades, typically rising, consolidating, and rising higher at a gradual pace.
What Factors Could Influence Gold Prices Going Forward?
Gold has been rising for a reason. Here are some of the factors driving the gold price that remain ongoing.
- Changes in gold production.
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- Gold discoveries have declined steadily over the last 30 years, with experts asserting that all the world’s major deposits have likely been found. The supply of new gold is drastically decreasing.
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- Demand rising on deficit spending.
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- Bank policies have increased deficit spending significantly since the onset of the pandemic, and this kind of behavior has historically increased demand for gold. Central bank gold purchases hit a 50-year high in 2018, accounting for 15% of all global gold sales, and that level was surpassed the following year.
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- Increased accessibility to gold.
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- Gold is seeing a growing number of investment vehicles emerge, offering new and diverse options for investors. These include “paper gold” investments into products like gold ETFs and mining stocks as well as the safer and more reliable option of buying physical gold, which has the advantages of physical ownership, intrinsic value, and baked-in scarcity.
With a diminishing supply, inflationary cash policies, and more sophisticated ways to gain gold exposure, the market’s appetite may well increase. If you’re interested in using your retirement account to purchase gold, visit this page for more information, or read about some of the other options for investing in precious metals here.
