Take a look at many investors’ portfolios and you’ll see two common traits: shares and precious metals. The rise of precious metals has coincided with political and instability in today’s modern world, which is why adverts for cash for gold companies have popped up everywhere.
It’s easy to get lost in all of the hype – so let’s look at the data. How has gold performed as an investment asset vs shares?
This data taken from the St. Louis Fed, the total return for gold from January 1976 through December 2015 was 664%, which works out to about a return of 5.2% per year.
In contrast, S&P 500, the ‘gold standard’, as it were, for equities, generated returns of roughly 1880%, 7.75% annualized.
So, just looking at the raw data, should we be ignoring the hype train on gold and focus solely on equities?
Not quite. Look, for instance, at the last 15 years of growth in gold. There have been unprecedented movements on the upside for gold, indicating that its merit as an investment asset has increased just as sharply. It also allows speculative investors, who time the market right, to make more dramatic gains. We can’t give expert advice on when the market is always “right” in this article, but gold tends to be ‘weak’ when the dollar is strong, inflation is low, and the dollar is strengthening against other currencies.
However, gold isn’t ‘just’ an investment asset. Many people view it as an ‘insurance policy’ against the market. Bar the peaks of 1980 and 2010-12, gold has consistently performed, while providing people with something tangible, something they can actually own (and in some cases, not even realize it – the gold selling industry has thrived on people selling their old gold items for good returns). During the peak of the global credit crunch, physical ownership of gold sky rocketed, as people took it out as an insurance policy against a flight of capital, or restrictions on moving their money.
Equities have outperformed gold over an extended period, when looking solely at returns. That can’t be denied. However, gold has held its own during that time, while providing some investors with ‘piece of mind’, and an alternative investment asset that can give them something tangible to hold onto.
The key to any successful portfolio is diversity and an assessment of risk. By opening up your portfolio to gold, you go a long way to ensuring that success.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.