WC Varones

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

Stocks catch up to gold




This is a chart of the price of gold and the S&P 500 since 1994.   Until 2008, the price of the S&P was consistently higher than gold.  In 2008-09, stocks crashed below the price of gold, and the two prices rose together from there until 2010-11 when they decoupled as gold outpaced stocks.  Since late 2011, gold has declined and stocks have continued rising.  Last week, stocks caught up to gold in the high 1500s, though at Friday's close, gold had regained a slight lead.

The point here is that the two asset classes have similar long-term returns, though wildly different short-term returns.  That makes them excellent diversifiers for each other.  Gold's price return over the period is 302%, or 7.6% annualized.  The S&P's price return is 247%, or 6.8% annualized.  Add in the S&P's dividend yield which has averaged around 2%, and stocks have outperformed gold.  But gold has equity-like returns with significant risk diversification.  And the real winner is anyone who dollar-cost averaged into both asset classes, buying more gold when gold was low and stocks were high and more stocks when stocks were low and gold was high.

Gold and stocks are both essential components of any rational long-term portfolio strategy.



4 comments:

Doo Doo Econ said...

I might put my money on another stock market drop. It hard to believe that our economy is suddenly golden with so many people out of the job market.

W.C. Varones said...

I'm tempted to agree and even have a little bit of money on short-term stock market puts, but then I think if the market drops, Zimbabwe Ben will just print more.

I think the only regulator on Zimbabwe Ben is oil prices. As long as gasoline stays cheap, he keeps printing.

K T Cat said...

I'm thinking that the coming Japanese implosion will drive money to the US markets as a safe haven. Well, safer than elsewhere, that is.

Negocios Loucos said...

WC at any point will the printing do nothing? Do you think Mr. Market will ever win or is that all in the past this being a new paradigm?

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