On a Long-Term Horizon, Gold Prices Beat Stock Prices…Significantly
Stocks are all the rage at the moment. They have been for several years now, and investors still can’t get enough. But if we expand our time horizon a touch, it’s gold prices that have shone brightest. Some investors might be shocked by that attestation. But it’s true, even if recency bias makes this assertion almost unbelievable.
If we were to ask 100 investors which asset has performed better since 2000—stocks or gold—we estimate 80 would say the former. It’s not just the fact that stocks have exploded in recent years; it’s the constant implication that gold is a “barbarous relic” no longer relevant in modern finance. Constantly shunned and left for dead, gold is like the Rodney Dangerfield of investable assets—it just doesn’t get any respect.
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But according to the World Gold Council (WGC), this most definitely should not be the case. Especially for investors with longer-term investment objectives.
In its current September 2017 Gold Investor Report, WGC articulates that gold has outperformed the S&P 500 so far this century, returning 86% more than the S&P if both asset classes were indexed at 100 on December 31, 1999. (Source: “Gold has beaten the market so far this century,” World Gold Council, September 2017.)
Obviously, this over-performance is much more significant than a rounding error. It’s a total annihilation of equities on an absolute basis over a prolonged period of time. Excluding dividends, investors would have $8,600 for every $10,000 invested simply by investing in gold over that stretch.
Can History Repeat Itself?
You probably won’t find many equity investors buying into this rationale. Gold prices have gone nowhere over the past four years, roughly trading at the midpoint of a fairly narrow range between $1,200-$1,360/oz.
Meanwhile, we’ve all witnessed the unabashed march forward in stocks. If weekly all-time highs aren’t occurring on some major North American index, it almost seems abnormal. The insatiable appetite for stocks exhibits a shocking lack of risk perspective. Not just from valuations, but the way inflows are concentrating too readily at the top of the food chain.
The WGC points out what Lombardi Letter was extolling months ago. That is, that stocks have been disproportionately levitated by a minute handful of tech stocks, such as Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), and Alphabet Inc (NASDAQ:GOOG). As of August 1, the S&P 500 was up 10.5% year-to-date, but only 7.5% if information technology stocks are removed. Quite a big difference considering how many sectors the S&P 500 carries. (Source: Ibid.)
This “herding” or corralling of investors into top names distorts markets because it makes them less diversified. When investors purchase a popular tech ETF, a disproportionate amount of capital flows to the top end, as ETFs are generally market-cap-weighted. Some very smart people are comparing this situation to a tanker of gasoline just waiting for the match.
So while valuations for stock (especially high-end names) keep rising, gold is getting cheaper. Currently, the gold-to-S&P 500 ratio is at its lowest levels in 10 years, as investors have gone all-in on stocks. The ratio is forming a double-top high with values last seen in November 2015.
This “rubber band” effect is likely to keep playing out until something disrupts the low inflation, moderate growth paradigm. While any number of things could disrupt it, it’s important to note that gold prices hedge well against both stagflationary and deflationary business cycle outcomes. This is clearly evident in the numbers.
According to quarterly data over a 50-year period (1967-2017), gold real returns have outperformed stocks 12.3% to -11.1% in “high inflationary” periods defined as quarters with one percent or greater positive changes in the consumer price index (CPI). Likewise, gold real returns have outperformed stocks 4.6% to -7.6% in periods with very low or negative CPI. (Source: Ibid.)
Given that nobody really knows whether America faces a high inflationary environment post next recession or deflationary, these numbers are comforting. Stocks clearly outperformed gold in “healthy growth” environments, but not so in most other environments.
Risk Events on the Horizon
I won’t delve into the obvious geopolitical risk factors. They are too well-publicized and telegraphed to lastingly drive gold prices. Besides, there’s increasing evidence that gold isn’t really much of a hedge against geopolitical risk anymore. At least, not in recent times.
No, the real risk is our own central bank. It’s more about what the Fed will do during the next crisis.
That is, the likelihood that they’ll expand their balance sheet during the next recession. How do we know this? One of the Fed’s primary dealers tells us so. There’s nobody more plugged into what the Fed is thinking than these people.
Early in 2017, a Deutsche Bank AG (NYSE:DB) report stated that should America encounter a recession in the next several years (a near guarantee), the likely reaction by the Fed would be another $1.0 trillion in quantitative easing. Perhaps more importantly, it could delay any expectations for a return to a normal balance sheet. (Source: “The Fed Is Preparing $1 Trillion In QE For The Next Recession: Deutsche,” Zero Hedge, March 3, 2017.)
In other words, the next recession will bring about another round of extreme money printing and lack of balance sheet control.
While Deutsche Bank says $1.0 trillion, I believe that amount could be significantly higher owing to the immense size of the credit bubble. It’s too early to speculate completely, but the baseline outcome is bullish for gold prices.
In the end, the undeniable fact is that gold prices have outperformed stock prices in the 21st century. This, despite the non-stop march forward in equities in recent years. Many investors have lost touch with this perspective, but this fact shouldn’t be ignored.
When the tide turns, it just may be a lifesaver. More than that, your portfolio could continue to grow.
