Not So Golden

How do you know when gold isn’t doing well? Evidently, when no one is talking about it. Throughout April and early May, articles touting gold’s flirtation with new record highs popped up daily, hyping its alleged superpowers to hedge against any and all potential economic and societal ills, especially the then-front-of-mind bank worries. And then … nothing. The well dried up. Likely because, after coming within a hair’s breadth of a new record, gold slumped. Through September’s end, the shiny yellow metal is now down -8.7% from April 13’s year-to-date high.^[i] Just another reminder that gold is nothing special—just a boom-and-bust prone commodity that hinges mostly on sentiment.

Like all commodities, gold moves on supply and demand. But unlike most, the fundamental drivers are limited. On the supply side, changes tend to be glacial. New mines take a lot of up-front work and investment, which makes new output slow to ramp up. Once those mines are going, producers are loath to slash output even if prices fall since they have to make up those high exploration and extraction costs, not to mention expensive ongoing maintenance. So supply tends to respond slowly to price movement. Meanwhile, real-world demand is narrow. Gold has few industrial uses, leaving jewelry production as the swing factor for physical use. This generally doesn’t move the needle much in terms of price swings, which leaves investor sentiment as the primary force. Sentiment, that notoriously fickle and unpredictable beast.

As a result, while gold has gone on some amazing runs and amassed big returns in short periods, it has also had some real awful stretches. Gold may be up 1,566.4% since it started trading free of legal restraints in 1974, but these gains (which trail stocks by a country mile) came in short bursts.^[ii] One burst was the 721.3% ascent between August 25, 1976—when gold was net negative since it was freed—and January 21, 1980.^[iii] But by late May 1985 it had lost nearly two-thirds of its peak value, falling -63.4%.^[iv] A small two and a half-year run followed, but gold came nowhere close to 1980’s high … and mostly fell for the next 15 years. By early 2001, gold was net flat since mid-1979. Capturing the occasionally positive returns in the interim would have required extraordinary timing.

Most of gold’s reputation comes from its strong run in the 2000s, culminating in its then-record high of $1,895 per troy ounce on September 6, 2011.^[v] Less famous is its subsequent -44.6% decline through mid-December 2015.^[vi] Gold then stumbled sideways for two and a half years before mounting the climb to its record high on August 6, 2020. It has since flirted with this level twice but remains down on a cumulative basis.

And stocks? US and global markets are up 34.6% and 27.0%, respectively, since gold’s last record high.^[vii] They are also up modestly during gold’s latest swoon, even with the late-summer volatility, at 4.2% and 1.7%, respectively.^[viii] Indeed, as Exhibit 1 shows, stocks have delivered positive returns during the vast majority of gold’s long slumps, despite the corrections and bear markets along the way. Stocks’ cumulative return over this period? 4,296%.^[ix] Gold’s is 1,566.4%.^[x] Note, too, that these are price returns only, due to data availability. Add in reinvested dividends, which gold doesn’t generate, and the gap would widen further.

Exhibit 1: No Contest

Source: FactSet, as of 10/2/2023. Month-end gold price and S&P 500 price index level, 12/31/1973 – 9/29/2023. Indexed to 100 at 12/31/1973. Log scale plots similar-sized percentage moves equally to facilitate viewing the movement.

This discrepancy stems from stocks’ far tighter relationship with fundamental drivers, in our view. Yes, stocks are subject to sentiment-fueled swings in the short term. But over more meaningful stretches, they weigh the likelihood economic and political conditions will support corporate earnings. Forecasting this isn’t easy, but we think it is at least possible to assign probabilities. And when stocks do endure deeper and longer declines (i.e., bear markets), we think it is possible to identify logical, fundamental reasons why. Not so for gold and the fickle madness of crowds.

As always, we aren’t anti-gold. We simply don’t think it is a good fit for folks seeking long-term growth to support retirement needs. Its swings are too great and impossible to time. It doesn’t hedge very well against inflation or bear markets. It is more volatile than stocks with lower long-term returns. Better, in our view, to stick with assets more linked to fundamental real-world conditions, like stocks and bonds (and perhaps cash or other securities, as and when warranted).