Many investors will allocate a permanent position in their portfolios for gold. Is there evidence that this is a good approach for the long term? We investigate.
We’ve said many times before (
here,
here and
here, and most recently
here) 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.
Human drivers
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 towards gold was extreme.
What happened next? From December 2015 to Summer 2016 our recommendation, rose about 150%.
Now we are again seeing an extreme in pessimism. We explore the opportunity
here.
ACTION FOR INVESTORS
- Arguments in favour of holding gold for the long-term don’t stand up to scrutiny…
- …but on occasions, there are opportunities to invest in gold…
- A fund investing in gold mining shares will typically move more than the gold price (more risk but more reward)
FURTHER READING
Table 1: Total return and positive & negative years (1977-2016)
|
Asset
|
Total Return
|
Positive years
|
Negative years
|
|
US Stocks
|
7259.00%
|
34
|
6
|
|
Real estate
|
5615.66%
|
32
|
8
|
|
Non-US Stocks
|
2832.13%
|
30
|
10
|
|
Corp bonds
|
1876.15%
|
34
|
6
|
|
Bonds
|
1435.92%
|
32
|
8
|
|
Gold
|
647.60%
|
25
|
15
|
|
Cash
|
477.28%
|
40
|
0
|
|
US Housing
|
474.08%
|
34
|
6
|
|
Commodities
|
-0.02%
|
19
|
21
|
|
|
|
|
|
|
Inflation
|
281.82%
|
39
|
1
|
Data sourced from BullionVault. Inflation: US CPI index, year end value; Cash: 3-month T-bill rate, daily average; Bonds: 10-year Treasuries, yield + capital value; US stocks: S&P500 index, capital + divs; Non-US stocks: MSCI EAFE, capital + divs; Corp Bonds: BofAML US Corp Master TR index; Real estate: FTSE NAREIT All REITs TR; Commodities: Reuters-CRB Continuous Commodity Index (CCI); US housing: S&P/Case-Shiller Home Price Series; Gold: Last London gold fix of the year USD