Don’t Let the Gold Bug Bite
By Don Chambers
Gold, like any other commodity, is a terrible investment when held physically (rather than with derivatives) and held over a very-long time horizon. Returns on physical gold inventories are destined to have negative real rates of return (i.e., adjusted for inflation) over very long-term horizons especially when storage costs are included. When opportunity costs are included (i.e., compared to investing in stocks), gold has been a poor performer in the past and will be a poor performer over future very-long periods of time.
For 100 years the US dollar price of gold was fixed at $20.67 per ounce (until 1933). Gold had a major run-up after coming off the gold standard in the early 1970’s. Gold prices since 1970 have risen about 8% per year (ignoring storage costs). But the S&P 500 (with dividends reinvested) is up over 10% per year since 1970. But even this 8% annual return since coming off the gold standard is not indicative of an equilibrium return that can be expected to be repeated. Much of it was caused by the price of gold catching up to offset almost 140 years of price controls. From the mid-1970s to 2019 the rise in gold (before storage costs) has been less than 5% annually. Going back 140 years the annual nominal return (before storage costs and inflation) is only 3%.
The poor performance of gold over long time periods is not peculiar to gold. As time passes free societies become more efficient at meeting material needs. So long-term commodity prices do not tend to keep up with inflation. Highly valuable commodities from many centuries ago are relatively cheap today including spices, oils, wood, metals, silk, pigments, and paper. Sure, gold is precious now. But gold’s upside is limited, its return volatility is high, its dividend yield is negative (storage costs) and its future long-term performance is destined to be lower than that which can be obtained in the long run by investing in well diversified equity portfolios.