Showdown: Gold v Stocks!

Gold lovers are often accused of mining their data to “prove” that gold is a great asset.  Clearly two can play that game though.
This Bloomberg piece goes to the heart of why we remain gold bullish.  So much ignorance/misunderstanding toward the yellow metal is one of the three bullish “M’s” of gold that we cited in our article here. 

Bloomberg astutely shows that from 1981 to the present, gold has only increased by 44% in dollar terms, while the S&P 500 has increased 22-fold including reinvested dividends, or 2,100%.  Wow, impressive stuff.  But let’s take it back to 1971 when Nixon said adios to gold convertibility at a ratio of $35/oz.  On that basis the metal has returned about 3,200% as of November 2009.  One fund manager opined to the Bloomberg journalist that “the history of gold in regard to inflation shows that it’s not a great hedge.” Well, let’s look at it.  Since gold has been allowed to float (relatively) free from government control in 1971, it has risen 3,200% while official US CPI over the same time rose 430%.  Even if we argue that US CPI is as much as 50% understated, gold still beat inflation by a factor of 5. 

Meanwhile US stock markets went sideways/lower for the whole of the 1970’s. 

So, stocks thumped gold from ‘81, but gold trounced (derivative of troy-ounced?!) stocks from ‘71.  Hunan Action recently did a study on the real rand returns of gold vs real rand JSE Alsi returns (South African stock market).  On a long-only gold buy-and-hold basis vs a long-only Alsi buy, hold and reinvest dividends basis, stocks beat gold since 1990 by about 20%, but gold beat stocks since 1995, 2000, and 2005.  Since 2008 and Jan 2009 stocks beat gold again, but barely. 

The moral of the story is pretty clear.  The ‘stocks-always-beat-gold’ thesis that fund managers and investors always like to sprout is complete bunk.  

When an economic and monetary system is being run on a truly sound and prudent basis, productive, real company performance will obviously outstrip gold in nominal paper money terms.  But when governments are confiscating wealth through taxation, monetary inflation and zombie-company bailouts, company performance dives through the floor and gold soars.  Just ask a Japanese equity investor what a great bet the Nikkei has been for the past 22 years, or ask those who lived through the ‘70’s if they think stocks are always a good hedge against inflation or whether it’s possible to get a decade of zero capital appreciation. 

Bloomberg quotes another asset manager: 

“Gold is a useless asset to hold long term,” said Charles Morris, who manages more than $2 billion at HSBC Global Asset Management’s Absolute Return fund in London. 

Such authority!  What the Bloomberg article criminally fails to mention is that Mr. Morris has been alive for 327 years and was one of the chief dissenters to the adoption of Isaac Newton’s ill-fated gold standard in 1694. 

Back to sanity though, Morris, like thousands of investment hotshots, is wrong on both accounts.  Gold is not useless and nor is it an asset. 

It is a tremendous store of real value that is also fantastically liquid.  It is a transitory good that is used to facilitate storage of value when capital is flowing in between assets, when returns elsewhere are too volatile and uncertain, or when owners of capital are undecided where to invest.  Its function as the world’s best real money makes it a refuge during an onslaught of inflation .  In fact, finding another good as convenient, liquid and stable a store of real value is nye impossible.  The more we want stability of real value, the more we sacrifice liquidity and flexibility.  The more liquidity we desire, the more stability in real value we have to give up.  Gold’s unparalleled excellence in this balancing act seems to be all too easily lost on our fund managers. 

Comparing gold’s “return” with other assets like equities is a fools game.  Not only does gold regularly outperform those assets in paper value terms, but gold itself is very different in nature and purpose than equities or anything else.  It ignores that decisions of capital allocation are not absolute or zero-sum.  It ignores gold’s true nature.  It ignores history.