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 >>
  3. For investors, what are the alternatives to owning physical gold?

    Learn some of the primary alternate ways that someone can invest in the gold market besides simply purchasing physical gold ... Read Answer >>
  4. How can I track gold prices?

    Learn how to track gold prices. Gold is a commodity traded as a physical asset and a futures contract. The one you track ... Read Answer >>
  5. How can I invest in gold?

    Investing directly in commodities, such as gold or oil, tends to be more difficult for investors than investing in stocks ... Read Answer >>
  6. What is the gold standard?

    The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With ... Read Answer >>
Related Articles
  1. Options & Futures

    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. Options & Futures

    Why Gold Matters

    Gold is a very useful investment during periods of instability and high inflation.
  3. Mutual Funds & ETFs

    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 ...
  4. 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.
  5. ETF Center

    The Gold Showdown: ETFs Vs. Futures

    ETFs and gold futures are two ways to diversify into the metals asset class, but there are advantages and disadvantages to both instruments.
  6. Markets

    How Gold Prices Are Determined

    Gold has always fascinated humanity, and its demand has not wavered. It remains a precious metal and maintains strong investor and manufacturer appeal. Several factors drive its price.
  7. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  8. Mutual Funds & ETFs

    Investing in Gold: Direct Vs. Professional Management (ABX, GG)

    Find out how you can access the gold market through common stock, futures contracts, and actively managed or passively managed ETFs and mutual funds.
  9. Options & Futures

    Getting Into The Gold Market

    Add some sparkle to your portfolio by getting in on this classic commodity.
  10. Options & Futures

    Why Gold's Price is More than 'Supply and Demand'

    The price of gold is moved by a combination of factors. But the way they work together is sometimes counterintuitive.
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 Bug

    An individual who is bullish on gold. Gold bugs believe that ...
  4. Reverse Gold ETF

    Exchange traded funds that are designed to trade in a direction ...
  5. Gold Fund

    A mutual fund or exchange-traded fund (ETF) that invests primarily ...
  6. Digital Gold Currency - DGC

    An electronic, private currency backed by gold bullion. Companies ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center