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The golden years: Why gold has outperformed the S&P500 for the last 50 years

November 20, 2019

November 20, 2019

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The golden years: Why gold has outperformed the S&P500 for the last 50 years

Gold is one of the oldest currencies in the world. First used in 643BC in modern-day Turkey,  it’s since been prized by almost every culture on Earth. 

Gold is one of the oldest currencies in the world. First used in 643BC in modern-day Turkey,  it’s since been prized by almost every culture on Earth. 

For some, such as Ancient Egypt, gold was a symbol of divinity. For others, it meant wealth and power. The Spanish colonised half of the Americas in search of El Dorado and collected enough gold along the way to firmly establish Spain’s status as a superpower of the time. 

Until the 20th century, the value of most currencies was a direct representation of how much gold that country had in its reserves. While that’s no longer the case, gold has retained its value in society and is still a commodity widely bought and sold.  

It is interesting that in the modern days of digital money we still, in part, utilise physical commodities. The reason for this is that rare metals such as gold are predictable. Gold holds its value better than something with an assigned value such as paper money, especially in an unstable environment.

Gold is also scarce and a finite resource. 190,040 tonnes of gold is known to have been mined to date and just 54,000 tonnes remain underground. According to Metals Focus, a precious metals consultancy, the average grade of gold pulled from mines has fallen from 10 grams per ton in the 1970s to 1.4 grams today. 

Beyond its status and beauty, gold is a prized jewellery metal because it’s easy to work with and keeps its lustre forever. Gold is also a very good electrical conductor 

that doesn’t tarnish or corrode, so it’s a key necessity in modern technology and one of the best metals to use in devices that transmit high-speed signals at low voltages

 

Why gold has outperformed the stock market for 50 years 

The S&P 500 is an index that reports the risks and returns of the biggest public companies in the US. Investors use the S&P 500 index as the benchmark to compare all other investments. 

For the past 50 years, gold has regularly outperformed the S&P 500.

Why? Well, the last half-century has been economically and politically turbulent. Just as we recovered from WWII, we had another spate of wars and political upheavals. We’ve also had a smattering of economic meltdowns, and the cherry on top was the Global Financial Crisis (GFC).

The macro climate has created stock market instability. Meanwhile, gold always retains its long term value. 

 

The S&P 500 is now outperforming gold: What does this mean? 

In the year to date, the S&P 500 has outperformed gold with a record 23.26% growth compared to gold’s value which has increased by 13.99%. However, gold has historically had a low correlation with stocks and other financial instruments and can be used by some as a hedge, so it makes sense if more people are looking to it as a safe haven in times of market uncertainty. 

 

 

Why banks are buying gold 

While currencies are no longer gold-backed, central banks still hold a significant amount of their reserves in bullion because it hedges against inflation and erosion of currency. Central banks are known to have a total of US$1.5 trillion (33,000 tonnes) of gold bullion in their collective vaults, which is close to 17% of gold reserves.

The market is a rollercoaster at the moment. The US-China Trade Wars are pushing up the US dollar to the detriment of other currencies. While the US stock market is experiencing the benefits now, the mere phrase ‘trade war’ adds volatility. Geopolitical issues like Brexit and the brouhaha in the South China Sea don’t help. 

Despite the slower growth, banks are buying gold to prop themselves up against the volatile climate. They’ve been buying gold at unprecedented levels since the GFC. Why? In response to the economic uncertainty of the past decade, banks have moved away from the unpredictable greenback. Instead, they’ve diversified into the stability of gold. This year alone, China bought 105.8 tonnes.

 

Diversification is worth its weight in gold

The global economy is walking on glass right now. But that doesn’t mean you should cash in your stocks, drain your bank account, and flee to the hills with your ingots and baked beans. 

Instead, it’s time to mix up the medicine. Portfolio diversity hedges your investments against market foibles. Healthy investment portfolios have a blend of good stocks and some gold. Right now, the central banks’ actions tell us that gold is a good space to move into.  

Ray Dalio, founder of one of the world’s largest hedge funds, agrees that gold is a valuable addition to any investor’s portfolio. 

“I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio,” Dalio said in a 6000-word essay on LinkedIn. 

If 50 years of history are anything to go by, investing in gold assets could be just the thing your portfolio needs to get through these tumultuous times. 

 

Past performance is not a reliable indicator of future performance.

 

Sources:

 


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