Gold is on fire.
The yellow metal is up more than 60% this year. In the last three months alone, it is up almost 30%.
It’s difficult to get a nuanced opinion about gold as a holding. There are many extreme opinions. Some people hate gold and think it is useless. Some people like gold and think it is the best protection against government spending, the dollar and the Fed.
I’m not in favor of going to extremes. I prefer to live in the gray area, not in black or white.
I personally don’t own gold, but I understand why some investors have an allocation. Gold is one of the most unique assets out there. It really marches to its own drummer.
Let’s do a little history lesson on gold’s returns versus the S&P 500 per decade and then I’ll talk about why I don’t own any.
Gold went crazy in the 1970s:
One of the biggest reasons why gold rose almost 30% per year in the 1970s was that Nixon ended the Bretton Woods system that pegged gold to the dollar. Add to that skyrocketing inflation, oil price shocks, a weak dollar and government spending, and it was like throwing a match at a Jake’s Fireworks store.
The other side of that crazy run-up was a major reversal in the 1980s, when stocks went crazy and gold got crushed:
This continued into the 1990s:
Gold had a maximum drawdown of almost 70% and a negative return for 20 years. On an inflation-adjusted basis, gold only surpassed its early 1980s high last year.
It was a long, difficult period.
Just when everyone had given up on gold as an asset class, the 2000s marked a lost decade for the S&P 500, while gold made a major recovery:
Gold shone and once again proved to be a good hedge against financial crises. The arrival of GLD as an ETF in 2004 certainly played a role here. For the first time ever, investors had an easy way to buy gold without having to store it anywhere themselves.
In the summer of 2011, GLD briefly surpassed SPY in terms of assets under management. It wouldn’t last. That was the high point for quite some time, while gold was going through a tough decade:
Gold rose just over 3% per year, compared to an annual return of almost 14% for US stocks in the 2010s.
In the 2020s, gold and the S&P 500 are both booming, with gold taking off like a rocket in recent months:
Gold is a pretty good diversifier, especially during tough decades for stocks. It has also been used as a form of currency or asset for thousands of years. That history must be worth something.
Then why don’t I own gold?
Part of that is the fact that it’s not a productive asset. It does nothing – no revenue or cash flow.
Part of that is that I’m big on innovation and gold seems like a relic to me. If I had to choose, I think Bitcoin, which I own, makes more sense going forward.
But I think it comes down to the historical return profile. I know stocks go through peaks, troughs and lost decades, but gold has had such a terrible 40-year run that it makes me nervous to hold it for the long term.
Look at the run in the 1980s and 1990s:
Then you had a good decade in the 2000s that was more or less followed by more another lost decade in the 2010s.
From 1980 to the end of 2019, these were the total returns for gold and the S&P 500:
- Gold +197%
- S&P 500 +8.242%
So you’re looking at an annual return of 2.8% versus 11.7% respectively. The worst part is that annual inflation was 3.1%, meaning gold lost money to inflation over a period of four decades.
Using the same calendar year-end returns going back to 1928, the worst 40-year return for the S&P 500 was 8.5% per year.
Now you could say I’m cherry-picking here. If you include the 1970s, long-term returns for gold look much better. Since 1970, gold has risen more than 8.5% per year.
I just don’t feel like doing something that could experience three out of four lost decades.
It would be nice to own some gold when it goes through a boom time like 2025, but you have to get used to the fact that you won’t always own the hottest asset every year.
I like to be diversified, but that doesn’t mean you have to own everything.
I understand why many investors own gold. It acts as a form of insurance. It has little correlation with other assets. It is volatile, making it a good candidate for rebalancing purposes. I completely understand the call.
I even understand why some investors think gold matters more now, because governments around the world are spending and borrowing so much money, with no signs of slowing down.
Reasonable.
You should always feel comfortable with what you own and why you own it. The same applies to investments that you do not own.
Sometimes you have to watch other people own assets that have gone up 60% in a year and be okay with the fact that you don’t own any.
Avoiding FOMO isn’t always easy, but sometimes that’s part of your job as an investor.
To each his own.
Further reading:
What is the investment argument for gold?
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