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Thursday, March 6, 2008

Is Gold/Money a Better Investment than Stocks?

I've read a lot of articles comparing an investment in stocks to an investment in gold. The value of the US stock market is shrinking, if you price it in gold instead of Federal Reserve Points. I decided to perform my own calculation. I used and as my source for the price of gold. I used Vanguard's S&P 500 index fund (VFINX), with dividends reinvested, as my measure of the value of the US stock market.

In the table below, the first row indicates the price on January 1, 2008. The "1 Yr % Gain" indicates the gain in the previous 12 months. VFINX is the closing price of Vanguard's S&P 500 index fund, adjusted for reinvested dividends. I did't include the sharp increase in gold's price since January 1, 2008. If you include that, the disparity is even more dramatic!

DateVFINX Adj Close1 Yr % GainGold1 Yr % Gain

Looking at the above table, gold has dramatically outperformed the S&P 500 for six of the last eight years. Comparing a buy-and-hold gold investment to a buy-and-hold S&P 500 investment, you needed to buy the S&P 500 index in 1996 to have outperformed gold. If you bought VFINX anytime after that, gold would have been the superior investment.

The stock market undergoes sharp declines from time to time. After 1998, the Federal Reserve Point denominated price of gold hardly ever decreased. The Federal Reserve is always printing new money, even when the stock market goes down.

The result for 2007 is most astonishing. The price of gold went up 32.4% while VFINX only went up 5.4%. If you include the gain so far in 2008, gold looks like a much stronger investment than the US stock market.

There has massive central bank manipulation of the gold and silver price. Central banks have exhausted their gold and silver reserves. They are losing their ability to keep the price of gold down. When comparing a gold investment to a stock investment, it isn't valid to go back further than 5 years. Central banks have only recently started losing their ability to manipulate the gold price. If you look at the last 5 years only, gold has returned 26.6%/year while VFINX has returned only 16.3%/year! That's a substantial advantage for gold, over a nontrivial timeframe.

There are two drawbacks of an investment in physical gold. First, you need a safe place to store it. Second, when you need to buy something, you cannot walk into most stores and purchase something with gold. There is no convenient way to trade back and forth between gold and Federal Reserve Points. I don't trust the GLD or SLV ETFs. The only gold or silver investment I trust is physical metal in my possession.

Looking at the above chart, I am really concerned that a gold investment will substantially outperform the stock market over the next few years.


Anonymous said...

It might over the next few years, but look at the overall percentage gain for say $10K invested in 1989 and left alone.

In stocks you would be sitting on a 257.16% increase

in gold you would be sitting on a 88.91% increase

257% gain and the sky is falling?

Which would you rather earn on your money?

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Anonymous said...

A lot of people don't realise this but gold has outperformed the benchmark S&P 500 and Dow Jones since 1971!

That is definitely a long enough time-frame to eradicate short term bubbles, and it includes the huge price increase and subsequent sell of at the start of the 80's.

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