A:

Gold has been a stellar performer so far in this millennium, having racked up 11 straight years of gains since 2000 and appreciating more than six-fold in price over this period. But this great run came after a decade in which the precious metal did very little, as it traded in a tight range for most of the 1990s.

While gold is a controversial investment topic for some, the debate about its future price trajectory has increased after it reached a new record high of US$1,921.15 in September 2011. Supporters of the precious metal claim that it is headed to new highs eventually, propelled by the flood of economic stimulus around the world and a dismal prognosis for the US dollar. Detractors claim that gold is an investment fad and like all fads, is bound to fade.

In order to ascertain the investment merits of gold, let's check its performance against that of the S&P 500 for the past 20 years. Gold has trounced the S&P 500 in the 10-year period from November 2002 to October 2012, with a total price appreciation of 441.5%, or 18.4% annually. The S&P 500, on the other hand, has appreciated by 58% over this period.

In the preceding 10 years, however, gold was a huge underperformer even as the S&P 500 embarked on a massive bull run. In the 10-year period ending October 2002, the S&P 500 more than doubled in price and generated total returns of over 110%, while gold declined about 6.8% in price and had an annual return of -0.7%. The S&P 500 managed to substantially outperform gold over this period despite losing 50% of its value from March 2000 to October 2012.

The point here is that gold is not always a good investment. The best time to invest in almost any asset is when popular sentiment is against it and the asset is inexpensive, providing substantial upside potential when it returns to favor. As examples, consider the S&P 500 in October 2002, and again in March 2009. Conversely, the worst time to invest in any asset is when it is at or near an all-time high. Examples - U.S. housing in 2006, or the S&P 500 in March 2000 and October 2007.

The axiom that timing is everything when it comes to investments certainly holds true for gold as well. By extension of that logic, just as there are good times to invest in gold, there are bad times as well.

RELATED FAQS
  1. What are the primary factors that drive prices in the gold industry?

    Find out about the factors that drive gold prices, such as interest rates, the stock market, demand and supply, and the value ... Read Answer >>
  2. Has gold been a good investment over the long term?

    Examine the performance of gold as an investment, dating back to 1933, when President Roosevelt required all gold bullion, ... Read Answer >>
Related Articles
  1. Investing

    Does it Still Pay to Invest in Gold?

    This asset's appeal dates back thousands of years. Find out whether it can live up to the hype.
  2. Investing

    Why Gold Matters

    Gold is a very useful investment during periods of instability and high inflation.
  3. Investing

    The Midas Touch For Gold Investors

    Find some golden opportunities by investing in gold commodities or futures contracts.
  4. Investing

    8 Reasons To Own Gold

    This precious metal's rich history stems from its ability to maintain value over the long term.
  5. Investing

    Everything You Ever Wanted To Know About The Gold Standard

    Many feel that with the instability that occurred in the first decade of the 21st century, some form of the gold standard should be brought back.
  6. Investing

    Three Ways To Short Gold

    Investor enthusiasm for gold has been falling by the wayside. For portfolios, that could mean it's time to short the metal.
  7. Investing

    Gold: The Other Currency

    Throughout history, gold has held its value against paper currencies. Learn how it can help offset market risks.
  8. Financial Advisor

    4 Ways You Can Invest In Gold Without Holding It

    Owning gold can be a store of value and a hedge against unexpected inflation. Holding physical gold, however, can be cumbersome and costly. Fortunately, there are several ways to own gold without ...
  9. Investing

    Not All That Glitters Is Worth Owning, Especially Gold

    What's the better investment for the long term, gold or equities?
  10. Investing

    Why is Gold a Counter Cyclical Asset?

    Gold is widely considered a safe haven during market turbulence. History has proven gold performs counter cyclically to the state of the U.S. economy.
RELATED TERMS
  1. Short Gold ETF

    An exchange traded fund that seeks to profit from negative changes ...
  2. Gold Bull

    A slang term for a market or investor who is bullish on gold. ...
  3. Gold Fund

    A mutual fund or exchange-traded fund (ETF) that invests primarily ...
  4. Gold Reserve Act Of 1934

    An act that took away title to all gold and gold certificates ...
  5. Digital Gold Currency - DGC

    An electronic, private currency backed by gold bullion. Companies ...
  6. Reverse Gold ETF

    Exchange traded funds that are designed to trade in a direction ...
Hot Definitions
  1. Financial Statements

    Records that outline the financial activities of a business, an individual or any other entity. Financial statements are ...
  2. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  3. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  4. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  5. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  6. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
Trading Center