November 27, 2022

Some People Are Celebrating The Gold Collapse – Taking A Long Term View On The Future

American-Gold-EagleMany financial bloggers who never bought into the “yes, it’s important to own some gold” theory have been almost hysterically gloating over the recent divergence between gold and stocks.  An example of this is a recent blog post comparing the performance of the SPDR Gold Trust (GLD) to the Standard & Poor’s 500 (SPY).

Reality cannot be ignored – owning stocks over the past two years has been a black hole for investors compared to stocks

Here’s the ugly chart proving that investors who thought that precious metals had a golden future are wrong.

Courtesy: thereformedbroker.com

Courtesy: thereformedbroker.com

Short term views can be misleading and the biggest gains are made by making the right investment and holding for the long term. The picture of the GLD vs. the SPY looks quite different if we go back to 2005.

courtesy: yahoo finance

courtesy: yahoo finance

In addition, let’s not forget that the stock market as measured by the S&P 500 is just about where it was over a decade ago in 2001.

courtesy: yahoo finance

courtesy: yahoo finance

Considering the perilous state of world economic affairs and notwithstanding the recent significant drop in the price of precious metals, maintaining a position in gold and silver seems like a prudent long term option.

Gold Has Outperformed Stocks By 300% Over The Past Decade

By Axel Merk

Superior Performance of Gold

Over recent years, gold has performed remarkably well relative to other asset classes, in terms of both absolute performance and risk-adjusted performance. Over the preceding 10 years, an investment in gold would have significantly outperformed a corresponding investment in the S&P 500 Index or U.S. bonds, not to mention international and emerging market equities. Over the past 10 years, gold outperformed U.S. equities by over three times:

Courtesy: merkinvestments.com

Gold Shines even when Under-performing

Note that even during time periods when gold underperforms other asset classes, as it did during the 20-year time period analyzed above, the addition of a gold component improves the overall risk-adjusted return profile of a risky portfolio. We consider this to be largely driven by the low levels of correlation between the two assets and thus the positive impact it has on the volatility profile of the hypothetical portfolio above. For example, we find that a portfolio comprised 50% gold and 50% the S&P 500 would have exhibited an annualized standard deviation of returns of 12.7% over the 20-year period ended September 30, 2012.  This is a significant reduction to the annualized standard deviation of returns exhibited by a portfolio comprised 100% the S&P 500, which was 19.2% over the same time frame.

Read the full article here.