WC Varones

Don't lend your hand to raise no flag atop no ship of fools

Gold for the Long Run

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 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 let the Federal Reserve 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 2.86 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.


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