Gold doesn’t often glitter

Fri 25 Aug 2017

By Brian Dennehy

Access Level | public

Sector analysis

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GOLDWe’ve said many times before (here, here and here, for example) that it doesn’t make sense to have gold as a permanent part of your portfolio.  A look at the data backs this up.

We analysed annual returns for a number of different US assets going back to 1977.   The results are shown in Table 1 (original data courtesy of BullionVault).  A few points are worth highlighting:

  • US stocks had the best return, up 7,259%, almost 11x more than an investment in gold
  • Gold had the second most negative years, just behind commodities.
  • Equally, it had the second fewest positive years
  • …and the worst volatility (in terms of range of annual returns)

Clearly, holding gold for the long-term is not the best strategy, and its reputation as a safe-haven asset is daft.

You gotta believe

Of course, more often than not it’s what investors believe that matters.  And exploiting investors’ beliefs (or behavioural biases) can be a very profitable strategy.

Example?  In December 2015, simple sentiment analysis told us that an investment in gold mining shares might make sense:

“That investors tend to be most confident (bullish) about an investment just as it peaks, at precisely the wrong time, is well understood - though sadly most humans (wrongly) think this applies to other people and not them.  

The same applies in reverse - when most people are pessimistic (bearish) about an investment, you should not be selling - you should be buying.”

At that time, pessimism in gold was at a high.

What happened next?  From December 2015 to Summer 2016 Smith & Williamson Global Gold and Resources, our recommendation, rose about 150%. 

ACTION FOR INVESTORS

  • On occasions, there are opportunities to invest in gold…
  • …but arguments in favour of holding it for the long-term don’t stand up to scrutiny
  • A fund investing in gold mining shares will move more than the gold price (more risk but more reward)

FURTHER READING

 

 

Table 1: Total return and positive & negative years (1977-2016)

Asset

Total Return

Positive years

Negative years

US Stocks

7259.00%

34

6

Real estate

5615.66%

32

8

Non-US Stocks

2832.13%

30

10

Corp bonds

1876.15%

34

6

Bonds

1435.92%

32

8

Gold

647.60%

25

15

Cash

477.28%

40

0

US Housing

474.08%

34

6

Commodities

-0.02%

19

21

       

Inflation

281.82%

39

1

 

Data sourced from BullionVault.  Inflation: US CPI index, year end value; Cash: 3-month T-bill rate, daily average; Bonds: 10-year Treasuries, yield + capital value; US stocks: S&P500 index, capital + divs; Non-US stocks: MSCI EAFE, capital + divs; Corp Bonds: BofAML US Corp Master TR index; Real estate: FTSE NAREIT All REITs TR; Commodities: Reuters-CRB Continuous Commodity Index (CCI); US housing: S&P/Case-Shiller Home Price Series; Gold: Last London gold fix of the year USD

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