Gold is considered a safe investment. It is said to be a safe bet when markets go down, as the price of gold usually does not move in line with market prices. As a result, gold can also be considered a risky investment, as history has shown that the price of gold does not always rise, especially when markets are in strong growth.
Investors usually turn to gold when there is market turmoil and they expect stock prices to fall.
Moreover, gold is not an income-generating asset. Unlike stocks and bonds, the return on gold is based entirely on price appreciation. Moreover, investing in gold involves unique costs. Because it is a physical asset, it requires storage and insurance costs. And while gold is traditionally considered a safe asset, it can be very volatile and its price can fall.
This is why we at Tavex recommend that you include gold in your portfolio if you are aiming for long-term investments.
Taking these factors into account, gold works best as part of a diversified portfolio, especially when it acts as a hedge against a falling stock market. Let’s take a look at how gold has performed over the long term.
- Gold has long been considered a sustainable store of value and a hedge against inflation.
- However, over the long term, both stocks and bonds have, on average, outperformed the price increase of gold. Nevertheless, over certain shorter periods of time, gold can emerge as a winner.
- Gold tends to rise during periods of high inflation and geopolitical uncertainty.
Gold price compared to the stock market
When evaluating gold’s performance as an investment over the long term, it depends on the time period analysed. For example, over some 30-year periods, stocks have outperformed gold and bonds, but over some 15-year periods, gold has outperformed both stocks and bonds.
From 1990 to 2020, the price of gold increased by about 360%. Over the same period, the Dow Jones Industrial Average (DJIA) increased by 991%. If we look now at the 15-year period from 2005 to 2020, the price of gold increased by 330%, about the same as the 30 years mentioned earlier. In the same period, the DJIA only increased by 153%.
If we only look at the years 2021 and 2022, gold has outperformed stocks as geopolitical uncertainty and inflation increased worldwide.
So, over the longer term, stocks seem to outperform gold by about 3 to 1, but over shorter time periods, gold may be the winner. In fact, if we go back to the 1920s until today, the return on equities far outperforms gold.
Over long periods, gold has proven to retain its value and act as a hedge against inflation.
As for bonds, the average annual return on investment grade corporate bonds from the 1920s to 2020 is around 5%. This indicates that over the past 30 years, corporate bonds have provided a return of around 330%, which is similar to that of gold. Over a 15-year period, returns on bonds have been lower than both stocks and gold.
A historical perspective
To give a historical perspective on gold prices, from January 1934, with the introduction of the Gold Reserve Act, to August 1971, the price of gold was effectively set at 26 GBP per ounce.
Before the Gold Reserve Act, the then President had required citizens to turn in gold bars, coins and notes in exchange for US dollars. This effectively made investing in gold extremely difficult, if not impossible and pointless for those who managed to hoard or hide quantities of this precious metal.
Starting from the fixed gold price of 35 dollars and the price of 1,492 GBP per ounce at the first quarter of 2022, a price increase of about 5,700% can be calculated for gold. From 1971 to the first quarter of 2022, the DJIA has increased in value by about 4,500%.
Why is there less investment in gold when shares generate high returns?
In general, gold performs relatively poorly when the stock market is strong. One reason is that gold is not an income-generating asset, nor does it represent growth in a specific company or sector. Instead, it is valued for its relative scarcity and its socio-historical importance as something of value. Therefore, stocks tend to be more attractive to investors when the economy is growing and companies are performing well.
However, there are several factors that can affect investments in gold compared to stocks in terms of returns. Here are some possible reasons why investing in gold may decline when the stock market generates high returns:
- Risk appetite: When the stock market is performing well and generating high returns, investors may be more willing to take higher risks by investing in assets that have the potential to provide even higher returns.
- Equities are often considered riskier than gold, and when there is optimism in the market, investors may choose to invest more in equities instead of gold.
- Inflation protection: Gold is considered a traditional safe haven and a protective asset against inflation. When there are concerns about inflation or other economic risks, investors may be more inclined to invest in gold to protect their assets.
- If inflation is low or expected to remain stable, investors may feel less need to invest in gold as a hedge against inflation.
- Interest rates and alternative returns: Interest rates play an important role in investors’ decisions. When interest rates are low, investors are often less willing to invest in safer forms of savings such as bonds and savings accounts, which can lead them to seek out other assets that are riskier (such as shares).
- If the stock market offers higher returns in the form of capital gains or dividends, this may make equities more attractive than holding gold, which does not generate any direct returns.
- Sentiment and trends: Investments are also influenced by market sentiment and trends. If there is a strong belief that the stock market will continue to generate high returns, it may lead to more investors flocking to stocks and neglecting investments in gold. Social media, news reporting and other factors can influence investor attitudes and preferences.
It is important to note that investment decisions are complex and influenced by several factors, including individual goals, risk tolerance and market conditions. There is no universal rule that says investments in gold should decline when stocks generate high returns, as investors have different strategies and preferences based on their unique circumstances.
Sources: Simplywall.st, Kinesis
Do cryptocurrencies beat gold in returns?
Since Bitcoin (BTC) emerged in 2009, it has generally outperformed most other asset classes, including gold, rising from less than $1 to several thousand dollars. Because of its scarcity and fixed and declining rate of new supply growth, many have equated Bitcoin and other cryptocurrencies with a form of digital gold. Cryptocurrencies are significantly more volatile than gold and are therefore not considered as safe an investment option.
However, if we look at a shorter time period, such as the last two years, gold has outperformed cryptocurrencies. This is largely due to the market downturn that hit Bitcoin and other cryptocurrencies in 2022.
As with any investment, it is important to consider the timeframe of the investment and study market analysis to gain an understanding of expected market performance. Gold is not a risk-free investment; as with stocks and bonds, the price of gold fluctuates depending on a variety of factors in the global economy.
Diversification is important for any investment portfolio, and investing in gold can help diversify a portfolio. This is particularly important during market downturns, when the price of gold often increases. Including gold in an investment portfolio helps to diversify risks.
As the price of gold does not necessarily correlate with other asset classes such as shares and bonds, it can act as a counterweight in the portfolio during periods of market volatility.