Gold Lags the Stock Market

As gold hits $1,500 an ounce, the buzz is ramping up and the gold bugs are going strong. Predictions of gold at $3,500 per ounce are once again common place. The University of Texas has turned into a gold bug taking possession of a billion dollars worth of the shiny metal. But how has gold performed versus the US stock market? The answer is that it has kept up with the stock market in the short-run but badly lagged in the long-run.

Gold over the last two years
Two years ago, gold was trading for the bargain price of $877.00 an ounce according to Kitco.com. At yesterday's closing price of $1,501 an ounce, that represents a 71 percent gain. While there's no denying this great gain, a broad US index fund like the Vanguard Total Stock Market Index ETF (VTI), clocked in an almost identical 71 percent gain. And because the long-term capital gains tax rate is not available on gold, the index fund actually outperformed gold on an after-tax basis.

Gold since 1980 - The long-run
It's somewhat arbitrary to pick a date to measure the long-run. I use the beginning of 1980 since that happens to be when I bought gold coins at $664 an ounce with the absolute certainty that it wou7ld hit $2,000 in a year or two. Despite the fact that gold has more than doubled, my return still amounts to a very unspectacular 2.6 percent annual return. It also lagged inflation, which means that I can buy less today than when I made my investment, even before Uncle Sam takes his cut of my nominal gain.

While my $3,320 college graduation money investing in gold in 1980 is worth $7,500 today, I probably would have been far better off if I had invested in American capitalism. Because with the US stock market racking up an 11.6% annual return, my $3,320 would have been worth $102,853. A $95 thousand greater return than my gold, how depressing is that?

My take on gold
While gold has not been a better investment than US stocks in the long or short-run, it's trounced the stock market in the mid-run. It's risen from $290 an ounce in the beginning of this century, clocking in a 15.7% annual return, and has far outpaced the 1.7% annual return of the US stock market.

My advice is not to bet the future on the recent past. If you believe that gold's 15.7% annual return will continue for another two decades, then you'd better believe in the possibility of gold at $27,700 an ounce. I'd be willing to bet that it's pretty unlikely. In fact, I'm willing to make a prediction and say "no way!"

I think that most people are buying gold right now for the same foolish reason I did in 1980 - the unwavering belief that they'll get rich. And that would be exactly the wrong reason to buy gold.

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Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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