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On Gold

On Gold

December 14, 2017
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We haven’t heard much about gold in the last few years, for good reason. After hitting an all-time high in September of 2011, it has declined relentlessly ever since. While we’re off the lows of 2015 (gold had lost 43% of its value), gold prices are still 32% below their levels from over six years ago! Over the same period, global stocks have gained 13% a year, and $100,000 invested in equities* has grown to over $200,000. So the cost of gold isn’t just its precipitous loss, but the opportunity loss of owning it instead of equities. And losses in gold take a long time to recover from. In the same amount of time since the peak for equities in October 2007, they had not just fully recovered their losses, but had a cumulative gain (through January of 2014) of about 27%!

You might think I’m cherry-picking time periods for gold, so let’s look at the longer data. Since 1975, when it became legal to own gold, its annualized return through October 2017 is 0.9% a year net of inflation. A global stock index over this same period? +11.7% a year. Gold returns have been bad, excluding a few random and unpredictable bursts, for as long as you could own it.

So maybe gold isn’t a great long-term investment, but what about as a hedge against market calamities? You certainly would have been better off owning gold than stocks in 2008, right? That depends on your perspective. An investor with $1,000,000 who retired in 2008 needing $50,000 a year in income increased by inflation who bought the Gold ETF (GLD) would have made money in 2008, but not much since. Net of withdrawals, their gold investment is now down to $963,163, or less than they started with. Global stocks, despite the dramatic decline in 2008, have long since recovered, and net of withdrawals a $1,000,000 investment has risen to $1,100,976. A 2008 hedge maybe, but one that cost you dearly in the long run compared to a more sensible investment in stocks.

Fans of gold would cry foul on my simple comparison between gold and stocks as stand-alone investments, claiming that a small allocation to gold along with stocks provides meaningful diversification. Maybe so, on paper. But in the real world, investors don’t buy gold in anticipation of market declines, nor are they willing to wait 10 or 15 years to be proven right. They buy gold after a market decline, believing prices can only go lower. And this isn’t just the case with retail investors. This article claims that billionaire George Soros, the giant mutual fund firm PIMCO, hedge fund legend John Paulson (who did profit from the real estate collapse in 2008), and the Texas Teachers Pension Fund all loaded up on gold in the first quarter of 2012. Since April of 2012, the Gold ETF is down 25%, while global equities are up about 92%. These guys are professionals, and they couldn’t have been more wrong. I doubt the average Main Street investor fares much better.

Sooner or later, we’ll see a stock market decline. Maybe even a panic. It’s happened before and it’s sure to happen again. Gold may rise in price and the talk will return to gold as an important component of a portfolio. But it’s not. It doesn’t earn anything, it doesn’t really help much even when bought at the “right time” (see 2008), and the chances of you getting in before it rises and out before it falls back down are approximately zero. Just stick with stocks, where disciplined and diversified investors have rarely been disappointed. If you need more short-term security, a few years of income tucked away in short-term bonds should suffice. Gold is a no-go.

*all references to (global) stocks in this article related to the Dimensional Equity Balanced Strategy or Dimensional Equity Balanced Strategy Index. Details available upon request.

Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.