Gold returns are good, why the hate?

[spiritwarrior7]

I ran the numbers and it seems gold has done well (13.9% p.a.) over the last 20 years (see below for details). Why then do I often see people in the finance community poo-poo gold as a worthwhile investment? Granted, gold didn't do as well over the last 40 years (11.5% p.a.) since it was probably helped by recent recessions, but otherwise the only downsides I can see to owning physical gold are the risk of theft and the high buy-sell spread for krugerrands.

Let's consider the gold price over the last 20 years in comparison to some local and US stock market indices.

At month-end of August 2003:

• Gold price: (converted to ZAR on the day): R 2658.70
• JSE All Share Index: R 9226.20
• S&P 500 Index (converted to ZAR on the day): R 7449.19

The current price (month-end August 2023):

• Gold price (converted to ZAR): R 36080.83
• JSE All Share Index: R 74987.21
• S&P 500 Index (converted to ZAR): R 84027.76

Calculating the annualised rate of return (in ZAR) over that period:

• Gold: 13.9% p.a.
• JSE All Share Index: 11.0% p.a.
• S&P 500 Index: 12.9% p.a.

For reference, CPI increased by about 5.3% p.a. over the same period (I did not adjust for inflation).

That being said, over the last 40 years gold increased by 11.5% p.a., CPI by 7.9% p.a. and S&P 500 by 16.5% p.a.

EDIT: typos and clarity

 

[alfiano]

@spiritwarrior7 You can’t just look at the index level for returns, you’re missing out all dividends over the time period.

As for why NOT to invest in gold:

Past returns are not necessarily indicative of future performance, don’t forget. And returns don’t tell you the level of risk incurred.

 

[spiritwarrior7]

@alfiano Good point about the dividends, I forgot about that. Over the last 20 years the average yield was about 1.9%, which would bring S&P above gold. The point is still that they performed surprisingly similarly in recent decades.

Thanks for the video, it makes sense, especially regarding using it as a hedge in light of its volatility.

 

[alfiano]

@spiritwarrior7 Yeh, it’s also not just a simple addition calculation as you also need to account for the returns in reinvesting the dividends to get a completely accurate like-for-like comparison. But that is getting into the minutiae.

 

[vancouverguy]

@spiritwarrior7 You need to assume reinvestment and compound that yield to compare like for like.

 

[spiritwarrior7]

@vancouverguy Since it's small, merely adding it is a good approximation. Nevertheless, I accounted for the yield compounding and S&P 500 comes out to be 15.0% p.a. over the last 20 years (in rands, accounting for dividend yield).

 

[vancouverguy]

@spiritwarrior7 Yeah I got 14.8% pa with a quick calc.

 

[elly1]

@spiritwarrior7 I’ve also done some research at my job showing that gold is a) a pretty ineffective tail risk hedge, and b) a pretty ineffective inflation hedge. These are usually the arguments for including gold in a portfolio.

Personally, I just park my money in an ETF as belabored as this argument is.

 

[vancouverguy]

@spiritwarrior7 Good post, thanks for linking the references.

You are generally buying gold above spot - not at. And depending where you sell it can be below spot.

The S&P and JSE returns also include dividend yields which are not captured by looking at start and end date. Those dividends should be reinvested to compare the returns equally. Gold does not yield dividend - and while dividend is not something I chase it is a return from holding equity that is not accounted for above.

 

[silentjohn]

@spiritwarrior7 It’s priced in dollars but are your returns in dollars or rands? Because I’d bet most of those returns are coming from the depreciation of the Rand to the dollar over the last 20 years.

 

[spiritwarrior7]

@silentjohn Everything is priced in rands. Indeed, the returns for everything mentioned are affected by the exchange rate, but this is from a South African perspective and we're used to seeing the changing exchange rate factored into our investment returns anyway (e.g. if you bought an S&P 500 tracking ETF).

 

[savedbythelord317]

@spiritwarrior7 Have you tracked this against property as well? I think you are correct. If you ignore dividend reinvestment gold is actually a winner.

 

[spiritwarrior7]

@savedbythelord317 I haven't.

My takeaway from all this is that gold has actually done well since the past few recessions, mostly keeping up with stocks, but historically it lags. Anything about gold's future behaviour is speculation, I'm just surprised to see it doing so well. I'm no gold bull, but I'm starting to reconsider its place in my portfolio. I stumbled on a paper earlier which found that (in Europe) a 1-9% portfolio allocation to gold for diversification was optimal from historical data.

 

[deus_ex_machina]

@spiritwarrior7 I am trying to get my portfolio to 10% in precious metals (mainly silver). Sadly, the stock market keeps running away from me, so it's more like 5% now and I couldn't be arsed "rebalancing".

 

[vancouverguy]

@deus_ex_machina Why? Silvers historic return is worse than gold

 

[deus_ex_machina]

@vancouverguy Good question! As the old saying goes "Returns represent past performance, are not a guarantee of future performance"

1. So far I am up almost 40% for the year!
2. I firmly believe the upside in silver will be greater than gold.

 

[vancouverguy]

@deus_ex_machina The silver price in dollars has only ranged $20-$26 this year, are you actively trading for that 40% return?

 

[deus_ex_machina]

@vancouverguy No, not at all, I bought most of it when it was quite low, but recent silver movements coupled with USD appreciation turbocharged it.

If I was to annualize it over 3 years my return would be a lot lower.

I think its still a higher return than gold, but silver is coming from a very low base. If you think gold is unfashionable, you should see silver!

 

[arl127]

@spiritwarrior7 Now do 10 years

 

[deus_ex_machina]

@spiritwarrior7 Investing is about fashion as much as it is about numbers. Gold went out of fashion, even though the numbers are OK.

Sure there are "investments" that may potentially return more AND are more fashionable e.g. Bitcoin (and Tulip bulbs, once upon a time) however they come with greater risk.

What is surprising, is that gold has still held up against all these new fancier investments.

Edit: Typo