Do Gold Returns Hold Up to Stock Market Gains?

Gold has been one of mankind’s favorite ways to store wealth for thousands of years. Long before it became the backbone of coinage and exchange, kings, pharaohs, and emperors kept chambers full of golden jewelry, statues, and weapons. From the treasure hoards of ancient emperors to the gold-backed currencies of modern history, it has always attracted the confidence and trust of wealthy individuals (and states) who wanted to preserve their riches.

But does buying it make sense today? Since the global economy gave up gold-backed currency, it has become a commodity like any other, traded on open markets and available to anyone who can afford it. Does it make sense to buy gold in this day and age?

A History of Gold Returns

To find out, it can help to look at some of its best returns in contemporary history. The contemporary history of gold begins in 1971 when U.S. President Nixon ended the Bretton Woods system, with the price of an ounce valued at $40. Under the Bretton Woods system, all foreign currencies existed in relation to the U.S. dollar, and the U.S. dollar was backed by gold. But throughout the 1960s, a surplus of U.S. dollars in foreign aid and military spending, as well as foreign investment, the U.S. no longer had sufficient supplies to back every U.S. dollar.

Previously the value of gold had been regulated to provide economic stability and individual ownership was difficult – only South Africa’s Krugerrand was available for private investors. Suddenly it became deregulated and freely traded. The Royal Canadian Mint began selling Gold Maple Leafs (the world’s first 99.99% pure bullion coin) when apartheid-related economic embargoes cut off Krugerrands, and many national mints followed suit.

Gold Prices from Top to Bottom

By 1980, freely-traded gold reached $850 an ounce, a roughly 2000% return. Inflation fears sent investors reeling, and it turned out they still had confidence in gold. Over the next 20 years, strong economic growth left bullion to flounder, losing 70% of its value to 1999. The 1971-1999 growth rate can be figured at 6% annual returns, though most of that was in the first decade.

A New Gold Bull Market

In 1999, prices were $250 an ounce and it was the start of a long recovery. By late 2011, prices had increased to $1,900 an ounce – an increase of 650% annualized at 18%. From that peak, gold has climbed down toward $1,300 where it’s stabilized for the past few years. Keep an eye on the latest price of gold to see where the market is heading.

Gold vs. S&P

Numbers are fickle things. Search online and you can find a thousand different ways goldbugs and stock-partisans have manipulated the numbers to prove to you what you should buy. The most important thing you need to know is that gold is a tail risk hedge – after a crash or a crisis causes ongoing volatility, gold prices come in strong.

Rather than choosing gold vs. stocks, use them both to make your portfolio stronger and more crisis-resistant. Counterbalance stock risks by allocating a portion of your wealth into gold.