Tuesday, July 14, 2009 15 comments ++[ CLICK TO COMMENT ]++

Reader question: Does gold ever beat stocks over long periods?

Any asset can beat another in the short-term but does gold perform well in the long run compared to stocks. I have a feeling that goldbugs will permanently delete this blog from their bookmarks after reading this post ;) Reader hpmst3 wondered about something he read about gold:

On another topic, I read that over the past 40 years, gold has returned 8.4% annualized versus the S&P 500's 9.1% annualized. This was in the wsj, and the author was quoting a money manager from Cincinnati. I was shocked. I thought that Gold's return was a lot lower like around 2 or 3% annualized. I don't know what they were using as a benchmark since ETF's were not around. I am guessing that they used the commodity itself. I have seen you write about gold before. Do you by any chance know if this is correct Sivaram?

The numbers are correct. I calculated the numbers and they are very close (any differences are likely due to slight differences in time period, annual vs daily price changes, and rounding error.)

Gold is indeed one of the worst investments during the long run. Its return is very close to cash/money-market-funds. However, the period that is picked (last 40 years, which is also roughly when USA went off the gold standard (in foreign dealings)) makes gold look better than it generally is. The chosen starting point matters very much.

Starting Point Matters

Fourty years would place the start close to when USA ended the gold standard (USA went off the gold standard in 1971). The fixed value of gold was severely undervalued by the late 60's, and gold rallied when the US$ went off the gold peg. Conversely, stocks had a terrible period starting in the early 70's. If you move the date further back (say to the 40's) or further towards the recent (say the late 70's), then gold would not post such a great return.

Furthermore, stocks are close to a trough in valuation right now. Although I think stocks are not cheap and can fall another 30% to 50%, I view stocks as being closer to the bottom than the top. Any comparison right now would look at a period when stocks had one of the worst bear markets while gold had one of the best bull markets. This is similar to the criticism I made a while back on notion thatbonds have outperformed stocks for the last 40 years: you are basically picking a trough for stocks and a peak for bonds. Strictly from a contrarian point of view, stocks are far more attractive now than gold. (None of this should be taken to suggest that stocks are a good investment right now per se. Rather, my view is that stocks will likely outperform for the long-term, going forward.)

In any case, let's look at what actually happened.

Gold vs Stocks: 1900 to Now

How does gold compare to stocks?

The charts below plots average annual gold prices against the average annual S&P 500 index (scaled) with dividends excluded since 1900. The data comes from the World Gold Council (if you ever need gold statistics, head over there—requires free registration) and Crestmont Research. These charts also plot the average annual price and index level so they may differ slightly from daily values (for example, gold hit a daily peak in the US$800's in 1980 but the annual peak, which is what I plot, is only $615.)

I wish I had the S&P 500 chart including dividends but, alas, I don't have access to any so I have to go with the price index. However, I do list the annualized return including dividends (I calculated these and there may be some rounding errors and some minor discrepancies.) The S&P 500 numbers are scaled to those of gold. That is, S&P 500 starts at the same value as gold in order to facilitate comparison, so the S&P 500 numbers do not represent the actual index numbers. As usual, click on the chart for a more legible picture.

As you can see, stocks had a spectacular rally recently, followed by two catastrophic collapses. Gold essentially catches up to the S&P 500 in the last 10 years. The charts are useful it getting a rough feel for how things worked out in the past. One should really use the annualized numbers, which are more precise, to compare against gold.

It's kind of hard to see the details from this chart, so I also plotted the same graph with a log scale:

This isn't much of a battle. Stocks leave gold in the dust. Since 1900, gold posted a 3.5% annual return whereas stocks posted 5% per year without dividends and 9% with dividends. Since only the stock prices are plotted, at least gold sort of keeps up, trailing badly. If one plotted a chart including dividends, the gap would be so large that it would be like a contest between a snail and a cheetah ;).

To get real returns, I typically subtract 3% for inflation. For stocks and bonds one may also want to subtract 1% for transaction costs (Crestmont Research, in their stock matrix, uses 2%). If you subtract 3% from gold, you get a real return close to 0%. This is consistent with what one should expect. Gold doesn't create any wealth*; it simply preserves it.

Gold vs Stocks: 1970 to Now

So far it seems gold doesn't do as well as the original quote indicates. But how about in the last 40 years (or thereabouts)? I have plotted the same chart as above, but for the period covering 1970 onwards. I chose this period instead of exactly 40 years simply because it was easier; the results wouldn't change if someone started in 1969.

The story is drastically different in this time period. As you can see from the chart, gold actually surpasses the price chart (which excludes dividends) that is plotted. If you include dividends, gold still underperforms stocks but it is close.

From 1970 onwards, gold posts an annual return of 8.3%, whereas stocks post 6% and 9%, without and with dividends, respectively.

So, what hpmst3 mentions is correct. My numbers are slightly off (possibly due to rounding errors, annual vs daily price change, S&P 500 estimate, etc) but they are consistent with what was quoted at the beginning. A gold investor performs almost as well as a stock market investor in the last 40 years. This, for an asset that doesn't even pay interest or a dividend!

So is gold a better investment right now? I would say no, unless you were in the high-inflation or hyperinflation camp. Gold looks good because it is near a peak while stocks are near a trough. In 10 years, I'll bet that stocks will have outperformed gold for the 1970 to 2019 period. In fact, if stock prices stay flat for the next 10 years, they will match gold simply because their dividend yield is 3% (assuming no cuts). Gold generally returns 3% per year, which is roughly the long run inflation rate, and a 3% dividend yield on stocks will match gold's performance. Of course, this is just a rough estimate and if you incorporate your macro outlook and valuation judgment, then stocks may outperform or underperform. For instance, someone who expects high inflation will be certain that gold will post way more than 3% per year going forward. In contrast, those leaning towards deflation will be shocked if gold even returns 3% (it should actually return 0% or even negative, assuming you start with gold at neutral/fair-value.)

Last Word

So, hopefully that answers the question. Thanks for asking the question because it is a good one. I had to spend some time on this post but it was a good learning for me as well.

The analysis here clearly goes to show that some assets can outperform during long periods even if they have lower very-long-term returns (this is one of the key thrusts for macro investors, who tend to invest in anything, even if the asset has poor long-term return.) One should never assume that stocks always outperform even though no other asset comes anywhere near stocks in the long run. It's possible for stocks to underperform for long stretches.

My opinion right now is that stocks are neither cheap nor expensive. I view gold as being overvalued and closer to any peak than a trough. But, unlike stocks or bonds, gold has no intrinsic value and is driven by sentiment and other non-quantitative factors.


* Gold doesn't create wealth. If it did, then a few hundread years ago, the Spanish, who had a lot of gold and silver, would have been more prosperous than the Dutch, who had very little gold. Yet, the Dutch are considered more successful and to have increased their wealth more than the Spanish. Investing in stocks versus gold is similar. If you invest in gold, you are flying the Spanish flag and if you invest in stocks, you choose to bet your money on the Dutch. The Spanish, in the time period I am referring to, retained a lot of their wealth but they never really increased it much. Similarly, if you put 50% of your portfolio in gold, I am certain that it will maintain its value in 100 years (unless gold becomes obsolete or loses its monetary nature). But you won't increase it either... If you are wealthy, you should probably hold 5% in gold bullion, just to preserve wealth even if the whole world falls apart. But if you are not rich, like me, then gold is a drag**. I will probably live my life without holding any gold as a long-term investment (but I can see myself making a medium-term macro bet on gold.)

** I am not a passive investor and most of what I write has nothing to do with it. But if you are a passive investor who uses a diversified portfolio model and believes in efficient markets (i.e. doesn't believe one can beat the market, or at least predict anything), you can actually increase your portfolio returns by adding gold. Historically (pre-2005 or thereabouts), gold has had a zero to very-low correlation with stocks. According to basic portfolio theory, adding such an asset, even if it has lower expected return, boosts your portfolio return. In addition, William Bernstein has suggested that you can significantly boost your returns by rebalancing gold stocks: "...rebalancing precious metals equity allows one to extract the arithmetic return out of the geometric return." I don't use a diversified portfolio or rely on passive investment strategies so I'm not going to comment further. If you are into it, you should read up on it (other historically lowly correlated assets include timber, frontier markets, and I also believe art & collectibles.)


15 Response to Reader question: Does gold ever beat stocks over long periods?

July 15, 2009 at 1:21 AM

I guess I'll skip the usual reference to bodily functions and get straight to the chase:  after I read your extremely long and tedious post on gold, I immediately went out and bought one share of the gold ETF.  I am 100% sure that one share will make me money!  I'll probably randomly pick a time to sell it next week, depending on my mood.

July 15, 2009 at 1:25 AM

Btw, for those who just can't stand holding cash earning 0.01% interest, and have this strange burning sensation in their pockets where there is money in them , I'd advise you to follow Sivaram's financial advice and insights -- they are golden!, just precious and golden, man!

The only caveat is you should randomly go long or short his ideas, and randomly exit your positions.  That should work out well.

Daniel M. Ryan
July 15, 2009 at 1:35 AM

There are always gold stocks, which do create value, but they require a similar analytical heave-ho to that which other stocks require. Gold-stock analysis is a somehat rarefied world, especially at the exploration end.

July 15, 2009 at 3:31 AM


Thanks for responding!  I have found this post to be very informative.


July 15, 2009 at 10:34 AM

What you write is more of a reflection of you than me. For someone who hates this blog, you do spend an awful lot of time reading what I write. Isn't it more productive for you to follow what you believe is more useful for you?

You seem very disgruntled. You should be the one that is happy. You were actually correct about the credit bust and you should be swimming in money if you followed through on your convictions. At one point, you had something to contribute, not that I believed in your strategies, but now you are nothing more than a troll. Feel free to keep posting if you wish but I doubt it helps anyone else...

July 15, 2009 at 10:47 AM

I looked at your site and I know you are a fan of gold stocks but I am not.

If one has the skill in analyzing gold mining firms, then they should pursue that. But my opinion is that it is awefully difficult for an average investor to be successful. The shareholder returns are very poor in general and profitability is totally dependent on gold prices--companies themselves have little control over profitability.

But some people are pretty good at picking off the good ones so if someone has the skills, they should be ok. Investing in exploration firms is like growth investing in start-up technology firms or biotech firms.

July 15, 2009 at 5:21 PM

It has been pointed out elsewhere that comparing gold during the pre 1973 period is not fair becuase it was locked to the dollar, at least in some fashion.  Thus, by definition it could not increase in dollar terms...

We are no longer in that world, and until we are the post 1973 numbers would seem more probable going forward.

July 15, 2009 at 7:25 PM

DaveG: "It has been pointed out elsewhere that comparing gold during the pre 1973 period is not fair becuase it was locked to the dollar, at least in some fashion.  Thus, by definition it could not increase in dollar terms..."

That shouldn't matter because we are looking at relative valuations of gold against stocks. If gold was floating before, rather than the US$ being fixed to gold, then stocks would likely have posted much higher nominal returns as well. I don't think it would make much difference in the comparison. For instance, you will notice that stocks did not rise much when USA was on the gold standard (in fact, stocks went through a lot of collapses i.e. deflation). But stocks started rising like crazy after the gold standard ended for locals in 1933. If we were still on the gold standard, stocks wouldn't have rose that much in nominal terms. You wouldn't see them skyrocketing like that.

I think it would be unfair to gold if we looked at the comparison before 1971. In that case, we would have the US off the gold standard for locals but not for foreigners and gold was in a bizarre, semi-hard-currency, state. Gold would have been undervalued in, say, 1969 or 1970. But as long as we look it after the gold standard was completely eliminated (1971), I don't see anything wrong. If you believe in free markets, the market would have set the correct price of gold by the 80's and certainly by now.

July 15, 2009 at 7:28 PM

DaveG: "We are no longer in that world, and until we are the post 1973 numbers would seem more probable going forward."

I agree that nominal returns for gold will resemble the post-1971 period than the prior period when it was fixed. However, I do not think it will be anywhere near as good. The reason is because gold was undervalued when USA went off the gold standard in 1971. If USA had stayed completely on the gold standard, gold would not have been undervalued but because USA was on a quasi-standard, it was undervalued. In other words, USA was printing money throughout the 40's and 50's but it artifically held the gold price. In contrast, in the early 1900's it was closer to a pure gold standard so even if gold was pegged, it was fine.

I think any adjustment upward in the price of gold, due to its undervaluation in 1971, won't be repeated. In other words, I don't think one can argue that gold is undervalued right now and will automatically go up like in the early 70's.

I think any future super-long-term return will probably resemble the period from, say, 1975 to now. But it wouldn't change the overall comparison between gold and stocks. STocks will still beat gold by a huge margin. And the seemingly strong performance of gold is because, I belive, it is near a peak, while stocks are near a trough.

July 16, 2009 at 1:36 AM


I just want to say again that I think this is an informative great article.  I have been reading the wsj/ft/barron's/forbes/fortune since 2001, and I have never seen a long term comparison of gold to the S&P 500.  I also read Rogers' book on commodities, and I don't remember him exactly looking at this.  I also liked your Crestmont link.  I am still digging into it, but I see that it mentions Shiller's book as the source of it's index data.  I think that I read that, but maybe I will look at it again.

When I first heard that gold did 8% annualizedversus 9% S&P I was shocked.  I had thought that it would be 1-2%.  When that was confirmed, I then assumed that 8% was the return over 100 years.  This article clears that all up in my mind.

It also started me thinking about benchmarks.  I have read some of your thoughts on benchmarks.  I personally bought one share of the Vanguard 750 ETF: VV, which is the largest 750 US companies by market cap.  I also bought one share of the Vanguard Total World ETF: VT which is including U. S.,  1134 largest companies ETF index.  VT contains companies from the developing world and the emerging markets.

The expense ratios for the ETF's are:
VV: .07%
VT: .25%


July 16, 2009 at 1:36 AM


I was going to use the S&P ETF but I figured that Vanguard was cheaper.  By owning one share of each VV and VT, I can have the actual return data plus dividend data from my brokerage account.  (Unfortunately, these ETF's do not go back very far.)  I figure that these ETF's would be the best alternative to me actively mangaing my account.  The other benchmarks that I considered were the 10 year US Govt bond, and Vanguard ETF's that covered 300 smaller US companies.  I figured that for myself, if I took a passive approach for the next 30 years, where I did not have to look at any finanial info, that I would like to own VV Vanguard US 750.  I would rather own these large US companies which have higher ROE, along with international subsidiaries, rahter than large non US or smaller US companies.  But I also wanted to follow the world index including the US,  just to see if it outperformed VV over the years.  (On a further technical note, if I was buying over 30 years, then I would own the Vanguard fund rather than the ETF.)

I also have considered Buffett's thoughts on hiring an investment manager.  He mentioned that he would use the S&P 500 as a benchmark, and the manager would get 10% of anything above that.  I found that to be interesting because I believe that most hedge fund managers use the 10 year US Govt as a benchmark/hurdle rate.  Einhorn in his book said that he manages for an absolute return rather than a relative return.  I am guessing that that means he uses the 10 year US Govt as a hurdle rate of around 4-5%.  I think that Buffet's approach is best, because one is investing over a long time period. Over a long time period, the S&P 500 has beaten the 10 year US Govt bond.  I also believe that it will continue to beat the 10 year Govt bond in the future.

Anyway, sorry for all this rambling, your blog just got me thinking about this stuff.  Thanks again for responding.


July 16, 2009 at 1:40 AM

Finally, I want to clarify my previous comments by stating that I use an active concentrated approach, where I own a handful of companies.  I just own one share of VV and one share of VT to use as a benchmark. 


July 16, 2009 at 12:52 PM

Hpmst3: "When I first heard that gold did 8% annualizedversus 9% S&P I was shocked.  I had thought that it would be 1-2%.  When that was confirmed, I then assumed that 8% was the return over 100 years.  This article clears that all up in my mind."

Yeah, it's actually amazing how well gold has done. This also illustrates why market timers and macro investors rotate in and out of assets. Of course, it's not easy to do and most people will get it wrong but the right asset class at the right time makes such as big difference. If someone told me 30 years ago that gold would beat stocks, I would have said, no way.

July 16, 2009 at 1:03 PM

I use the long bond as my minor benchmark and a Dow Jones World index (similar to FTSE all world index, or whatever it is called) for my main index. S&P 500 is also fine as a main index.

The minor index (bonds) is my general benchmark. It is sort of what I would earn if I wasn't investing in stocks and held safe bond-like instruments. Since I am trying to invest on my own, the real benchmark is S&P 500 or something like that (I use Dow Jones World but whatever). If someone doesn't beat S&P 500 (or similiar broad index) in the long run, they are not skilled and it probably isn't worthwhile to pursue investing on their own.

If professionals were using the long bond as their benchmark that's kind of lame. I don't see how even a poor investor can't beat the bonds if they overweighted stocks. My assumption (ignoring any macro outlook) is that long bonds will return 5% while stocks return 9%, and that's a huge gap. If I gave my money to someone to be managed, I would benchmark them against S&P 500 (or something similar).

(Technically, one should benchmark against what they are investing in. For instance, if you only invested in small-caps, then a small-cap index is the best benchmark. But a broad one like S&P 500 is fine as a rough measure).

BTW, I don't know if you have considered it already but one should also think a bit about currencies. Although I am not expecting it, one should think about what happens if the US$ collapses 50% over the next decade. Since I am Canadian, I worry a lot about this issue because a lot of my holdings are in US$-denominated assets and I wonder about negative currency scenarios.

July 16, 2009 at 1:07 PM

Oh forgot one thing... the best benchmark is to target absolute returns. You mentioned that David Einhorn does that, and Seth Klarman also does it. Negative returns are horrible (because returns are geometric e.g. 50% loss requries 100% gain to break-even). If I had my perfect outcome,  Iwould rather earn low positive returns than wildly swinging ones with losses thrown in there.

But absolute returns are extremely hard to achieve.

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