Gold is often hailed as a secure investment, providing a haven during market downturns due to its tendency to resist fluctuations in market prices.
However, it’s essential to recognize that gold can also be regarded as a risky investment, as historical data reveals that its price doesn’t consistently rise, especially during market prosperity. Investors typically turn to gold when they sense fear in the market and anticipate a decline in stock prices.
Additionally, it’s crucial to note that gold does not generate income like stocks and bonds. Its returns are solely dependent on price appreciation. Furthermore, investing in gold entails unique expenses. Since it is a physical asset, storage, and insurance costs come into play. Despite its reputation as a safe asset, gold can exhibit high volatility and experience price drops.
Considering these factors, incorporating gold into a diversified portfolio is most effective, mainly when it is a hedge against a declining stock market. Now, let’s examine how gold has performed over the long term.
The recent returns on gold have been less than stellar in 2022. Over the past six months, gold has experienced a decline of 15.7%, which may disappoint investors at first glance.
For this reason, I’ve urged readers to start a gold IRA.
This process is very simple when done with reputable gold companies.
However, it is essential to consider the overall economic climate and the struggles faced by various assets, including precious metals and stocks, due to recession fears. In comparison to the broader market, gold has outperformed.
For instance, the primary U.S. index S&P 500, has fallen by over twenty-four percent this year. As of now, gold is priced at $1,643.83.
It will help if investors closely analyze gold’s price performance and average annual returns to make smart trading or investment decisions.
Gold returns have witnessed periods of solid performance and underperformance relative to other asset classes. The onset of the COVID-19 pandemic led to concerns among investors about its impact on the global economy and financial system.
During this period, the U.S. economy experienced a brief recession characterized by a consecutive two-quarter drop in gross domestic product. Consequently, many investors sought the safety of gold as a haven and added it to their portfolios.
Taking a broader perspective on gold’s past performance, it delivered a 28% return over the past five years.
Additionally, gold futures contracts reached an all-time high price during this period. Furthermore, over a 20-year timeframe, gold’s price witnessed a remarkable increase of 426.22%. These figures indicate a strong potential for gold’s future performance over the long run.
However, several factors should be considered when evaluating the recent lack of price growth in gold. These factors might involve the following:
the war in Ukraine
the energy crisis in Europe
the overall economic uncertainty surrounding a potential recession in America
Understanding these influences can help explain why gold’s performance has not shown significant upward movement recently.
Which Investment Has Generated the Best Returns Since 1980?
When generating impressive returns since 1980, large-cap stocks traded in the U.S. have surpassed other asset classes like gold and U.S. bonds. The S&P 500, with dividends reinvested, has reached an annualized return of 11.4% before inflation. That makes it the top performer. The annualized total return of the gold market stands at an impressive 8.0% over the same period, even after adjusting for inflation.
On the other hand, bonds have provided more modest returns. The benchmark 10-year Treasury note yielded an annualized total return of 5.6% from January 1980 through January 2023. Adjusted for inflation, the 10-year note’s annualized total return comes to 2.4%.
As for gold, its returns have been less remarkable compared to stocks and bonds. Over the same period, gold generated an annualized return of 3.1% before inflation. However, after adjusting for inflation, gold’s annualized return turns slightly negative at -0.01%.
Comparing Investment Performances Since 1990: U.S. Stocks, Bonds, and Gold
When analyzing investment performance between 1990 and 2023, U.S. stocks consistently outperformed U.S. bonds and gold.
The S&P 500 index achieved an annualized total return of 7.7% throughout this period before accounting for inflation. Taking inflation into consideration, the recovery remained impressive at 7.1%.
Meanwhile, the 10-year Treasury note yielded an annualized return of 4.2 percent throughout the same timeframe. Nonetheless, it’s also worth mentioning that the real annualized return dwindled to a modest 1.5% after adjusting for inflation.
While performing better than bonds, gold generated an annualized return of 4.9% before inflation. Once inflation is factored in, the real annualized return of gold comes to 2.3%. Despite this, gold’s performance significantly trailed behind stocks.
It is worth noting that the price of gold experienced a decline of approximately 27% between 1989 and 1999. This decline was influenced by the fact that gold tends to lose value during prosperous periods, which characterized the 1990s.
Performance Comparison Since 2000: Gold, Stocks, and Treasury Notes
When analyzing investment performance in the 21st century, gold has emerged as a standout performer. Between January 2000 and January 2021, gold showcased impressive results, generating an annualized return of 9.6%. Accounting for inflation, this translates to a solid 7.3% annualized return.
While gold took the lead, stocks claimed the second spot during this period. Despite facing significant challenges, such as the bursting of two major bubbles—the tech bubble in the early 2000s and the real estate and credit beads from around 2007—stocks still managed to deliver noteworthy returns. After adjusting for inflation, stores generated an annualized return of 6.5% or 4.0%.
Bringing up the rear in this comparison were benchmark Treasury notes. These notes struggled to keep pace with the performance of gold and stocks. Over the same period, Treasury notes recorded a modest annualized return of 2.7%. However, their adjusted return dwindles to a meager 0.2% when considering inflation.
Gold’s Reputation as a Reliable Hedge against Inflation Is Not Entirely Justified Based on Historical Data
Generally, the price of gold does not closely align with inflation trends. For instance, from 1987 to 2001, a period marked by inflation fluctuating around 3% annually, the price of gold decreased.
However, it is essential to acknowledge that during periods of exceptionally high inflation, gold prices can indeed skyrocket. A prime example is the mid-1970s through the early eighties, when inflation climbed from 4.8% in 1976 to 13.3% in 1979 and 12.4% in 1980 before it declined eventually. During this period, gold and other precious metals surged from under $150 per ounce to over $800, only to experience a subsequent collapse to $400 by 1981.
In contrast, despite experiencing a global spike in inflation, 2022 did not witness a similar surge in gold prices. Even in the United States, where inflation reached levels unseen in four decades, gold prices displayed a different trajectory. Although gold prices initially rose by approximately 13% year-to-date in the first few months of 2022, they also experienced a decline of up to 10% by November of the same year.
Gold: A Reliable Hedge in Crisis Situations
Gold has proven to be a reliable investment option during times of crisis, serving as a haven for investors seeking security and stability. This was particularly evident during the outbreak of COVID-19 in 2020 when gold and stocks took diverging paths.
Amidst the pandemic-induced stock market decline, the S&P 500 experienced a significant year-to-date loss of over 30% by March 23. In contrast, gold price has remained resilient, showcasing a 1% increase for the year up to that point.
Following this period, physical gold embarked on an impressive rally that lasted over four months, with a remarkable 36% surge until August 6, reaching an unprecedented peak of $2,067.20 per ounce.
Throughout the 21st century, gold has demonstrated its potential to shine during tumultuous times. Instances such as the aftermath of the September 11, 2001, terrorist attacks and the 2008-09 economic meltdown were marked by a bullish trend for gold investors.
Notably, gold tends to correlate positively with adverse events, such as global pandemics or sovereign debt crises, causing its gold price to rise. Conversely, it often experiences a decline in value when positive news surfaces, such as stronger-than-expected economic growth.
Is Cryptocurrency a Better Investment Than Gold?
Cryptocurrencies, led by Bitcoin (BTC), have demonstrated remarkable growth since their inception in 2009, surpassing the performance of numerous asset classes, including gold. The value of Bitcoin has skyrocketed from less than one dollar to several thousand dollars. Amazing, right?
This surge can be attributed to its inherent scarcity and the fixed, diminishing rate at which new Bitcoins are produced. Consequently, many have drawn parallels between Bitcoin and digital gold.
Suggested Reading: Gold investing vs. Bitcoin Investing.
However, if we shift our focus to a more recent timeframe, such as the past two years, gold has outperformed cryptocurrencies. This shift in performance can largely be attributed to the bear market that affected Bitcoin and other cryptocurrencies throughout 2022.
Factors Impacting Gold’s Performance
Rising Interest Rates
One significant factor affecting gold’s performance is the upward movement of interest rates. Central banks, including the U.S. Federal Reserve, have been raising interest rates to combat inflation, influencing economic activity.
This has created downward pressure on gold prices, as historically, gold prices tend to decrease when interest rates rise. Conversely, when interest rates are low, gold prices often increase.
Strength of the U.S. Dollar
Another influential factor is the strength of the U.S. dollar. Since gold is priced in U.S. dollars, its value can move in the opposite direction of the currency.
The U.S. dollar has been experiencing significant strength, reaching 40-year highs. This trend has contributed to the lower performance of gold.
However, gold is commonly seen as a hedge against a weak U.S. dollar, increasing gold prices when the greenback’s value declines.
High Bond Yields
Many investors seek safe-haven gold investments like bonds in market uncertainty, which offer relatively lower risks and modest returns.
However, short-term U.S. Treasury yields have recently been providing higher returns, with the 2-year Treasury note yielding an impressive 4.5%, marking a sharp rise of 372% year-to-date.
This increased attractiveness of bond yields may pressure gold prices as investors strive to combat inflation while minimizing risks amid market uncertainty.
Focus on Stock Investing
Although the stock market experienced a lackluster performance in 2022, individual stocks still present growth opportunities within investment portfolios.
Investors must maintain their exposure to stocks, as the equity market has historically shown periods of volatility and bear markets. Still, it tends to grow in value over time, benefiting investors’ portfolios.
It is worth noting that not all market sectors are performing poorly. For instance, the energy sector, with stocks like Chevron (CVX) and Exxon Mobil (XOM), has seen substantial year-to-date gains of 37.5% and 64.4%, respectively.
Some investors may excel at stock picking and outperform the broader market, which works against the favor of gold as an investment option.
Assessing Future Prospects for Gold and Key Factors to Consider
When considering the future returns of gold, it is essential to consider several important factors. Global gold demand has historically correlated with economic cycles, although precise predictions remain elusive. Nevertheless, in light of concerns surrounding a recession, gold holds the potential for good performance.
Gold holds a distinct position as a safe-haven asset, attracting investors during periods of economic turbulence. This characteristic was exemplified during the previous crisis, where the precious metal experienced a significant surge. Specifically, between September 2010 and September 2011, gold prices skyrocketed by 50.6%. This notable increase occurred as the economy was still recovering, and the capital markets remained highly volatile.
Furthermore, gold exhibits an inverse relationship with the value of the U.S. dollar and the overall money supply. As the purchasing power of the USD diminishes, gold tends to appreciate. Conversely, when benchmark interest rates rise, gold typically experiences negative returns. Due to its physical nature, gold displays low correlations with other financial instruments, making it a crucial component of a diversified portfolio. This principle holds significant importance in the realm of wealth management.
When investing, it is crucial to consider the investment time frame and conduct thorough market research to gain insights into the projected performance of various markets. Gold, like stocks and bonds, is not immune to fluctuations as its price is influenced by numerous factors within the global economy.
Diversification is a fundamental principle in building investment portfolios, and including gold in your portfolio can contribute to diversifying your holdings. This becomes particularly significant during market downturns, as gold often experiences price appreciation in such periods.