Has Gold Been a Good Investment Over the Long Term?

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. And, while gold is traditionally thought of as a "safe" asset, it can be highly volatile and drop in price. 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 tends to rise during periods of high inflation and geopolitical uncertainty.
  • Gold reached an all-time high of nearly $2,075 in 2020 as the COVID-19 pandemic spread, and it spiked again above $2,000 per ounce during the Russia-Ukraine conflict.

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 certain 30-year periods, stocks have outperformed gold and bonds have been similar to one another, but over some 15-year periods, 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 now at the 15 year period from 2005 to 2020, the price of gold increased by 330%, roughly the same as the 30 years considered above. Over the same period, the DJIA increased by only 153%. Then, if we only consider the years 2021 and 2022, gold has outperformed stocks as geopolitical uncertainty and inflation increased worldwide.

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, stock returns blow gold away.

Turning to bonds, the average annual rate of return on investment-grade corporate bonds going back to the 1920s through 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 $2,000 per ounce as of Q1 2022, a price appreciation of approximately 5,700% can be deduced for gold. From 1971 to Q1 2022, the DJIA has appreciated in value by around 4,500%.

$2,075

Gold reached an all-time high of USD $2,074.88 in August 2020 amid the COVID-19 pandemic before cooling off. It again rose above $2,000 in March 2022 in response to the Russian invasion of Ukraine, but it did not yet surpass the 2020 high.

What Is the Average Return on Gold Investments?

Gold returns vary depending on the time period under consideration. Between January 1971 (when the dollar became unlinked to gold) and December 2019, gold had average annual returns of 10.6%. Over the same period, global stocks returned 11.3%. The annual average return of gold in 2020 was 24.6%, which was the second-highest return among a range of assets that year, followed by silver which had the highest.

Why Is There Less Investment in Gold When the Stock Market Generates High Returns?

In general, gold performs relatively poorly when stocks are in a bull market. One reason is that gold is not an income-producing asset, nor does it represent growth in a particular company or sector. Rather, it is valued for its relative scarcity and its socio-historical precedent as something of value. Thus, when the economy is growing and corporations are doing well, stocks tend to be more attractive to investors.

Does Cryptocurrency Outperform Gold?

Since Bitcoin (BTC) emerged in 2009, it has greatly outperformed most other asset classes, including gold. Due to its scarcity and fixed and diminishing rate of new supply, many have equated Bitcoin and other cryptocurrencies as a sort of digital gold. Time will tell if it continues to outperform.

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.

Article Sources
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  1. Yahoo Finance. "Dow Jones Industrial Average (DJI)."

  2. Trading View. "Gold Futures."

  3. Federal Reserve Bank of St. Louis. "Moody's Seasoned AAA Corporate Bond Yield."

  4. Congressional Research Service. "Brief History of the Gold Standard in the United States," Page 13.

  5. Federal Reserve History. "Gold Reserve Act of 1934."

  6. Federal Reserve History. "Roosevelt's Gold Program."

  7. MacroTrends. "Dow Jones - DJIA - 100 Year Historical Chart."

  8. Statista. "Average annual return of gold and other assets worldwide."

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