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By Mike Aljancic, Financial Advisor
TRENDS YOU NEED TO KNOW: Gold becomes an investment topic every so often.
Some investors are eyeing gold because that's what the pundits are screaming about, but we agree you should think twice. Gold is back in the headlines, as prices have jumped to record highs. As of 1/12/24, the front-month futures contracts for gold closed at $2,071 a troy ounce. This move has gold enthusiasts clamoring over investment in precious metal, particularly at a time when fears over rising deficits and ballooning interest payments have many concerned about the U.S.’s fiscal situation. It’s also true that markets are starting to price in interest rate cuts sometime in 2024, with inflation-adjusted bond yields declining as a result. Since no-yield gold would arguably have less competition in a falling rate environment, many investors see this factor as giving gold a bit more ‘shine.'
When comparing to equities, gold has historically underperformed. Not only has gold been highly volatile over time, but U.S. stocks’ (S&P 500) outperformance of gold since the early 1970’s is nowhere near a close race. From 1973 to 2022, the geometric average historical return for gold was 6.91%, compared to the risk-free return of 6.12% for the 10-year U.S. Treasury bonds. For stocks, it was 10.24% (S&P 500, with dividend reinvestment).
Over time, gold’s performance simply has not held up relative to stocks, and some would argue that bonds offer far better risk-adjusted returns given gold’s historical volatility. This is not to say that gold cannot outperform going forward; it certainly could. But a few realities remain that might inhibit gold from becoming a better investment than stocks:
Gold doesn’t generate earnings.
It doesn’t pay dividends.
It doesn’t create new products or services that add value to the economy.
It hasn’t consistently, over time, delivered attractive long-term returns to investors.
A little gold in a portfolio assists with diversification and inflation, but ‘shine’ doesn’t equate historically with great long-term results. The old adage, “If it sounds too good to be true…”
Source: “Investors are Eyeing Gold, but Should Think Twice.” Mitch on the Markets. Zachs Investment Management. Mitch Zachs. 12.9.2023. https://zacksim.com/blog/investors-are-again-eyeing-gold-is-it-a-good-investment/
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Ascend Advisory Group is a separate entity from WFAFN.
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.