All that Glitters is Not Gold
The aphorism in the title of this article applies to many things in life and most definitely applies to investments.
The gold standard ended more than 50 years ago when President Richard Nixon removed the link between the dollar and gold. Money as we know it today is backed by the full faith of the government and this has led many gold bugs to say that gold is good investment. It helps that gold has had an excellent run in recent times.
Adjusting for inflation, gold has almost doubled its purchasing power since it was decoupled from the U.S. dollar. In comparison, gold has been no match for the inflation-adjusted growth of global equities over the same period. Global equities beat gold by 8x in real terms (inflation-adjusted), $1 would have grown to $16.66. While gold’s long term performance has not been ideal for wealth creation, it has done what its supposed to do, preserve the value of its purchasing power. Inflation-adjusted, $1 invested in gold since 1975 would have grown to $1.82 today, nicely beating inflation.
The popularity of gold as an investment usually shines during periods that coincide with a commodity super-cycle which do not happen very often.
A study done by SPDR shows that on average, gold performs best when real interest rates are low or negative as the opportunity costs of holding gold is lower. When real interest rates are above 2.5%, gold gives a negative return on average.
Many people quote returns on gold based on the spot prices which most investors would not be able to access. The easiest access for most investors would be through a listed investment such as an ETF. The largest gold backed investment in the world is the SPDR Gold Shares ETF — which has a 10 year return of 1.72% p.a. as of 31st March 2023. Unfortunately, this diverges from spot gold returns due to fees, expenses and execution related frictions. Going to a bank to buy physical bullion has the same problem — bid-ask spreads and storage costs apply, driving returns down.
The odds are that in the long run, equities will continue to beat gold in terms of returns as an asset class. If you still want to hold gold or other asset classes, it is still fine — as long as your properly diversify. Knowing each asset’s place and function in your portfolio would ensure that all these components are working together as intended. A broadly diversified global equity investment has shown to be the best instrument in growing your wealth.
In the same way that you would rely on a doctor to treat you or a professional mechanic to service your automobile, investors can benefit greatly by working with an adviser — giving you the peace of mind knowing that your plan is in the hands of a professional.
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