Gold is considered a safe investment. It is supposed to act as a safety net when markets are in decline since the price of gold doesn't typically move with market prices. Because of this, it can be considered a risky investment as well, as history has shown that the price of gold does not always go up, particularly when markets are soaring. Investors typically turn to gold when there is fear in the market and they expect prices of stocks to go down.

Furthermore, gold is not an income-generating asset. Unlike stocks and bonds, the return on gold is based entirely on price appreciation. Moreover, an investment in gold carries unique costs. As it is a physical asset, it requires storage and insurance costs. Taking into consideration these factors, gold works best as part of a diversified portfolio, particularly when it is acting as a hedge against a falling stock market. Let's take a look at how gold has held up over the long-term.

Key Takeaways

  • Gold has long been considered a durable store of value and a hedge against inflation.
  • Over the long run, however, both stocks and bonds have outperformed the price increase in gold, on average.
  • Nevertheless, over certain shorter time spans, gold may come out ahead.

Gold vs. Stocks and Bonds

When evaluating the performance of gold as an investment over the long term, it really depends on the time period being analyzed. For example, over a 30-year period, stocks have outperformed gold and bonds have been similar to one another, but over a 15-year period, gold has outperformed stocks and bonds. 

From 1990 to 2020, the price of gold increased by around 360%. Over the same period, the Dow Jones Industrial Average (DJIA) gained 991%.

If we look instead over the 15 years from 2005 to 2020, the price of gold has increased by 330%, roughly the same as the 30 year. Over the same period, the DJIA increased by only 153%.

So, over the longer term, stocks seem to outperform gold by about 3-to-1, but over shorter time horizons, gold may win out. Indeed, if we go way back to the 1920s through today, stocks blow gold away.

Turning to bonds, the average annual rate of return on investment-grade corporate bonds going back to the 1920s until 2020 is around 5%. That indicates that over the past 30 years, corporate bonds have returned around 330% - slightly below that of gold. Over a 15-year period the return on bonds has been lower than both stocks and gold.

A Historical Perspective

To gain a historical perspective on gold prices, between January 1934, with the introduction of the Gold Reserve Act, and August 1971, when President Richard Nixon closed the U.S. gold purchase window, the price of gold was effectively set at $35 per ounce. 

Prior to the Gold Reserve Act, President Roosevelt had required citizens to surrender gold bullion, coins, and notes in exchange for U.S. dollars, and effectively made investing in gold extremely difficult, if not impossible and futile, for those who did manage to hoard or conceal quantities of the precious metal.

Using the set gold price of $35 and the price of $1,650 per ounce as of April 2020, a price appreciation of approximately 4,500% can be deduced for gold. From February 1971 to 2020, the DJIA has appreciated in value by 3,221%.

In July 2020, the price of gold had surpassed its previous all-time price high of nearly $2,000 an ounce the highest since September of 2011.

The Bottom Line

As with any investment, it's important to consider the time frame of investing, as well as to study market research to gauge an understanding of how markets are expected to perform. Gold is not a foolproof investment, as with stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy. With all investment portfolios, diversification is important, and investing in gold can help diversify a portfolio, typically in market declines, when the price of gold tends to increase.