Gold for the Long Run

November 9, 2009
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With an ounce of gold and the S&P 500 coincidentally about equal at 1100 now, I thought it would be instructive to look at where they’ve come from. Jeremy Siegel wrote a book called Stocks for the Long Run in 1994 whose premise was that since U.S. stocks had outperformed all other asset classes in the 20th century, they would always outperform all other asset classes given enough time to ride out the volatility.

How has that advice worked out? Gold averaged about $390 per ounce in 1994, while the S&P 500 averaged about 460 in 1994. In other words, the S&P 500 was worth 1.18 ounces of gold. Fifteen years later, the S&P has fallen to 1 ounce of gold, meaning it’s lost 15% of its value over that time. Stocks for the long run, indeed.

But maybe 15 years is not “long run” enough. Surely, stocks will do better if we give them more time. Let’s go all the way back to August 1971 when Nixon closed the gold window and allowed the Federal Reserve to have its filthy way with the dollar. The S&P 500 was at 100 then, and gold was at $35, meaning the S&P was worth 2.85 ounces of gold. Thirty-eight years later, the S&P 500 has lost 65% of its value in gold. If that’s not the long run, only Methuselah should own stocks.

But gold yields nothing, you object. Stocks pay dividends. Yes, and the dividends are included in those S&P 500 returns.* And if you held the S&P 500 you had to pay tax on all those dividends, meaning your after-tax return is even less! But your gold returns are what you see is what you get.

Maybe I’m cherry-picking the last hot thing, as Siegel was in 1994. But in a fiat currency regime, gold is one asset class that Zimbabwe Ben Bernanke and Trillion-Dolla Obama can’t debase. It seems to me it merits a much larger weight in a portfolio than the 0% most individuals and pension funds hold.

*This was incorrect. The index series I used was price-only, not total return, so it does not include dividends. Standard & Poors apparently does not have a total return series available on its web site. It appears, however, that even including dividends, stocks still underperform gold, but to a lesser degree. Thanks to Mike and Jeremy for catching this.

12 Responses to Gold for the Long Run

  1. rightwingyahoo on November 9, 2009 at 7:54 pm

    You unbelievable hater and partisan leech.

    I’ll bet you have some ammo bricks too.

    Enjoy your cat food retirement, you dollar-cost refusnik.

    You are probably even one of those who refuse to see the wisdom of nationalizing the banks yesterday, today, and tomorrow. And you probably don’t love your socialized medicine.

    No “hallelujah, hallelujah” for you. Damn partisan, blind hater…

    Embrace the epiphany, or embrace your own destruction!

  2. SGT BAZZ on November 10, 2009 at 4:24 am

    I agree. I’ve never had a lot of money and kept what money I did have in a savings account. That used to be how we did things. But, after watching about $2K lose buying power over 10 years, nearly 40%, I knew I had to get out of the dollar market.
    One of my clients, a son of a car dealer, sat me down and we talked about how the dollar was in danger. He told me, buy gold and silver, and do it quickly. Gold was nearly $930/oz, and it seemed very expensive. But something told me to do it. So, I did. About 1.5 ounces of gold, and the rest in silver.
    So, when I see the dollar declining further, I feel more assured that I can keep the small wealth I’ve accumulated over my life and not let it devalue due to incompetence at the highest levels of government.

  3. wilderness on November 10, 2009 at 6:47 am

    good post varones. hard to predict where any of these markets will go, but the point that conventional wisdom is probably way off target is one a lot more people need to know and hear.

  4. Mike Bergsma on November 10, 2009 at 12:49 pm

    You need to include dividends for stocks and storage costs for gold in your evaluation. I do agree that every portfolio should have some gold in it.

  5. W.C. Varones on November 10, 2009 at 1:32 pm

    Mike,

    That does include dividends for stocks — the S&P is calculated on a dividend-reinvestment basis.

    Safe deposit boxes for gold can be had for free or near free at most banks.

  6. Jeremy on November 10, 2009 at 4:47 pm

    how do you figure that dividends are included in the s&p “returns” you mention? you’re comparing the spx value then to the value now, which does not at all include dividends.

    yes, you’d have to pay taxes on those dividends, but with div yield around 5% annually historically, if you pay 20% tax (and for most people it should be less than that), you still get 4% extra, COMPOUNDING, over all those years.

    I agree with the idea you should hold greater than 0% gold in your portfolio, but using the 4% number, compounded since 1971, gives you roughly an s&p 500 that’s 350 points higher than it is now, or 35%. Also, as someone else mentioned, there are storage costs for gold, unless you buy the GLD etf, which has management fees (about 1% per year).

    This is not as simple as you make it sound.

  7. W.C. Varones on November 10, 2009 at 6:17 pm

    My bad- Mike & Jeremy are right. I thought the S&P was a total return index. It looks like it’s a price-only index.

    The total return index is at 1795, meaning if you consider dividends, stocks still underperform gold, but not by as much. I haven’t found 1971 and 1994 total return index values yet, but they’d be higher than the figures I cited in the post.

  8. Anthony on December 4, 2009 at 7:26 am

    It is getting a little scary out there. Are we about to see the second ‘shoe’ drop in financial markets? We certainly do not appear to have worked our way through the massive global debt crisis we created quite yet. Where will gold go from here?

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