Three Truths, And a Lie About Gold

Investors sometimes hesitate when contemplating a gold purchase. They are unsure of about taking the next step because they find commodities confusing. This uncertainty is understandable. Gold is nebulous. It doesn’t trace back to a product, service, or a board of directors.

In contrast, stocks and bonds are less opaque. They are the life blood of one of the most American of institutions: the corporation. People understand the basic idea of these two asset classes. With stocks you are becoming an owner of a company. With bonds you are becoming a lender to a company.

For too long, people have complicated gold investing by making false, or needlessly complex statements about the precious metal. Here, with the help of research from The World Gold Council, we dispel some of those myths by discussing the three key truths of gold, and one major misconception.

Truth: Gold is Less Volatile Than Other Commodities

Gold is more stable than a host of other commodities. The metal’s annual volatility is well below that of silver, platinum, and several commodity indexes like the Bloomberg Oil Index, the Bloomberg Energy Index, the Bloomberg Industrial Index, and even the S&P GS Commodity Index. Over the past 10 years, gold has been more stable than all of theses other commodities and indices.

Truth: Gold Delivers in High Inflation Environments

Between 1971 and 2018 gold has delivered an average annual nominal return of approximately 15% during periods of high inflation (>3%). What makes this performance so impressive is the fact that it outpaces the nominal average annual return of the Bloomberg Commodity Index over the same period. Even more impressive is the fact that in low inflation environments (<3%) gold still generates a positive return of approximately 5% while the commodities dip into negative territory.

Truth: Gold Behaves Differently Than Other Commodities

Gold is often discussed in investment literature as a commodity. While it is true that gold is a commodity, it is also misleading to discuss the precious metal as if it behaves like all commodities. Consider that gold tends to generate positive performance when volatility increases. For example, during the Great Recession, the Bloomberg Commodity Index lost more than a quarter of its value whereas gold delivered a return just shy of 50%. This same relationship occurred during the second Sovereign Debt Crisis in 2011 when the Commodity Index fell into negative return territory while gold delivered more than 25%.

Lie: Stocks Outperform Gold Over the Long Run

Of all the untrue statements about gold, this one is perhaps the most pervasive and harmful to investors. Over the past 20 years, gold has outperformed many different equity configurations including US stocks and EAFE stocks. In fact, gold has also outperformed the US Bond Aggregate, US cash, and the Bloomberg Commodity Index over the same period. Moreover, even when we extend this time line to the last 48 years we see that US stocks and EAFE stocks only narrowly outperform gold. It is also worth mentioning that this out-performance comes at the cost of increased volatility compared to gold.

Getting it right as an investor means getting the facts and nothing speaks louder, or truer, than data. Take these three truths (and this one lie) as a starting point to explore how gold really helps a portfolio over the long run.