Gold doesn’t often glitter

Many investors, encouraged by some very clever analysts, allocate a permanent position in their portfolios to gold.  Is there any evidence that this makes sense?  

On the grounds that I should put up or shut up on this issue, here I have sliced and diced the data since 1977 – you MUST read this if you have any interest in gold and gold funds.

We’ve said many times before (here, here and here, for example) that it doesn’t make sense to have gold as a permanent part of your portfolio.  A look at the data backs this up.

We analysed annual returns for a number of different US assets going back to 1977.   The results are shown in Table 1 (original data courtesy of BullionVault).  A few points are worth highlighting:

• US stocks had the best return, up 7,259%, almost 11x more than an investment in gold
• Gold had the second most negative years, just behind commodities.
• Equally, it had the second fewest positive years…
• …and the worst volatility (in terms of range of annual returns)

Clearly, holding gold for the long-term is not the best strategy, and its reputation as a safe-haven asset is daft.

You gotta believe

Of course, more often than not it’s what investors believe that matters.  And exploiting investors’ beliefs (or behavioural biases) can be a very profitable strategy.

Example?  In December 2015, simple sentiment analysis told us that an investment in gold mining shares might make sense:

“That investors tend to be most confident (bullish) about an investment just as it peaks, at precisely the wrong time, is well understood - though sadly most humans (wrongly) think this applies to other people and not them.  

The same applies in reverse - when most people are pessimistic (bearish) about an investment, you should not be selling - you should be buying.”

At that time, pessimism in gold was at a high.

What happened next?  From December 2015 to Summer 2016 Smith & Williamson Global Gold and Resources, our recommendation, rose about 150%. 

ACTION FOR INVESTORS

• On occasions, there are opportunities to invest in gold…
• …but arguments in favour of holding it for the long-term don’t stand up to scrutiny
• A fund investing in gold mining shares will move more than the gold price (more risk but more reward)

FURTHER READING

• Worth a punt in gold or commodities?
• Commodity fund attractions
• Fill yer boots with gold (again)

Table 1: Total return and positive & negative years (1977-2016)