Facts and Myths: Gold
Facts and Myths: Gold
It has been one of the more common questions I’ve received throughout my career. Should I invest in gold? Is now a good time to buy gold? How much gold should I own?
The strong interest investors seem to have in gold likely stems from its reputation as a hedge against inflation and as a diversifier. But is its reputation actually backed up by the facts? In this article I will explore whether the commonly held beliefs about gold actually hold up, or if they are myths.
Gold is safe and stable: Myth
Commercials may be responsible for this one. Whenever the stock market is volatile, the advertisements for investing in gold seem to come out of the woodwork. The implication is that one should fear the stock market and all of its price swings, and invest safely in gold instead.
The truth is, the price of gold can and has fluctuated greatly over short periods of time. Over the last 30 years, the annualized volatility of gold is actually slightly higher than the S&P 500. Just over ten years ago, in 2013, the price of gold dropped nearly 28%. Stable investment? Doesn’t sound like it to me.
This commonly held belief about gold likely comes from its tendency to perform well during periods of macroeconomic stress, often when stocks are tumbling. More on this later.
Gold is a hedge against inflation: Some myth, some fact
During the worst inflation the U.S. has seen in the last 100 years, gold proved to not just be a hedge against inflation, but quite an exceptional one. In the late 1970’s, with stagflation spreading across the country, the price of gold experienced four consecutive positive returns (the following are approximations): 23% in 1977, 35% in 1978, an extraordinary 133% in 1979, followed by 12% in 1980.
However, after its peak in 1980, the next two decades were a net loss in the price of gold, despite inflation continuing during this period (although it had dramatically dropped from its highs). In other words, it provided a profound hedge against the extreme inflation of the 1970’s, but no hedge at all during the moderate inflation of the following two decades.
For the most recent example, we can look to 2022, when inflation rose to its highest level in decades, peaking around 9%. Gold provided no hedge this time, ending that year with a slightly negative return.
The lesson here is that gold can provide a hedge against inflation, depending on other variables in the economy. But there simply isn’t enough data to support any expectation that gold will always produce a positive return simply because inflation is on the rise.
Gold is a diversifier: Fact
Gold has a very low correlation to both stocks and bonds, adding diversification to a portfolio that can help smooth out the ride of investing.
As an example, in 2008; when the U.S. stock market tumbled nearly -38%, gold had a positive return, albeit a small one. In 2002, at the peak of the dot.com crash, the U.S. stock market was down roughly -22%. Gold was up almost 24%.
Of course, this doesn’t happen every time. There are many examples where both gold and stocks are positive or negative in the same year. Nevertheless, the low to negative correlation has happened enough to prove gold has been a useful diversifier and may have a place in certain portfolios.
Where gold may and may not belong in a portfolio:
For aggressive investors with long time horizons, gold may not be as useful, considering stocks have outperformed gold over long periods of time.
For income investors, gold also may not be ideal, considering it produces no income/yield whatsoever.
For moderate investors who wish to add diversification and have a hedge against environments of economic stress, political turmoil or extreme inflation, gold has the potential to deliver.
Bottom Line:
Gold has lived up to some of its reputation, but not all. In reality, it is a volatile investment that produces no income, but one that has generated decent long term returns and added another layer of diversification for investors.
If you’re wondering if you have too much or not enough gold in your portfolio, feel free to reach out to me.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
