Over the past twelve months, we have watched the stock market move up and down due to various events. In the beginning of 2016 the market sold off on fears of China, but recovered over the next couple of months. By summer, the market was trading higher, but dipped overnight on fears of the outcome of the Brexit vote.
Within a few days, the market recovered. Finally, the stock market began to shake in late October and November of last year when the U.S. election results began trickling in. But this time, the markets found momentum and instead of cratering to new lows, it raced towards all-time highs. One of the most interesting things about each trough and crest in the market over the past year has been the renewed interest in gold as an investment.
What really is gold? Gold is a commodity, just like corn, oil, coffee beans or lumber. A commodity is a type of good that “should” have a set price across all sellers. This is because each ounce of gold mined or pound of coffee farmed is essentially the same, no matter who produces it. For example, when you fill your gas tank, the price of gas is relatively the same at each gas station. Commodities by definition should hold their price well, but as we have seen with oil before, it doesn’t always happen and prices do fluctuate.
Along with being a commodity, gold has some interesting other attributes. Historically, gold has been a hedge against inflation. That means that unlike paper currencies, such as the U.S. dollar or the Euro, gold holds its buying power as prices rise. This is due to several factors, but mainly the limited supply of gold globally and its view as a safe haven for money. Normally, when markets turn volatile, dip or when various currencies weaken, investors will purchase gold, driving its price up.
But what about gold’s role in a portfolio? Your initial thought is probably that you need gold. After all, it’s a hedge against inflation, right? And it’s a safe haven, right? Well, the answer is way more complicated. Studies have been done on the long-term performance of gold in real returns versus various other asset classes and the results are surprising. $1.00 invested in gold in 1926 through 2014 yielded $4.43! Leaving your $1.00 un-invested, under your mattress, would yield about $0.08 due to eighty-nine years of inflation. So when compared to doing nothing and holding dollars, gold did hold its value and resist inflation.
But what about U.S. stocks or government bonds? T-Bills, government bonds with less than one year maturities, yielded $1.56. Long term government bonds yielded $10.32. Investing $1.00 in U.S. stocks at the end of 1925 would have yielded over $406.
Isn’t that incredible? Through all the volatile moments in the past ninety-years, including the Great Depression, World War II, Korea and Vietnam, the Cold War, the Tech Bubble, and the Great Recession of 2008-2009, U.S. stocks outperformed gold and other asset classes listed here. Within those years, there were periods of gains and losses for each asset class, which makes a diversified portfolio imperative. When considering your need for gold as an investment, consult with a trusted financial planner to see if it makes sense for you. Gold often sees a lot of interest in the short term, but investing is a marathon, not a sprint.
Sources: Time. com, “Stocks, Bonds, Bills, and Inflation” by Morningstar, Ibbotson 2015
Past Performance is not a guarantee of future results.